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15 September 2017

Brexit Is the Start, Not the End, of the Process

by Ryan Bourne

Originally published by Cato Unbound.

The Guardian labeled Daniel Hannan “The Man Who Brought You Brexit.” Perhaps more than anyone else, he shaped and propagated a center-right case for Britain leaving the EU, founded around the principles of economic liberalism and direct democracy, which resonated with common ground thinking among the Conservative Party grassroots.

Though ultimately the winning “Leave coalition” was broader in scope and message, Hannan’s well-built up case, his championing of a referendum and his role in building the architecture of the winning Vote Leave campaign, brought a respectability, intellectual coherence, and narrative crucial to victory. He and his message were the reasons why, overwhelmingly, British self-identified classical liberals and libertarians felt championing Leave came naturally.

So when Daniel Hannan writes about Brexit, he deserves to be listened to. His essay here does a good job in knocking back misconceptions about the campaign itself and its consequences.

Though the media portrayed the vote result as a huge surprise, the fundamentals always pointed towards Leave, and the nature of the debate made Leave’s simple arguments far more powerful. Not just because, as Hannan says, the public resented the EU’s journey towards political union, or David Cameron’s failure to negotiate meaningful reforms, or even the EU’s euro and migration crises.

The key point is that Britain was an anomaly in the EU anyway – making the relationship increasingly uneasy and unsustainable. The public knew it. Already outside of the euro and Schengen (the borderless movement area), Britain was less dependent on EU trade than other member states, had the lowest proportion of its emigrants in other EU countries, the lowest level of trust in EU institutions outside of Greece and Cyprus, and the lowest proportion of citizens identifying as “European.” Brexit, in other words, was not some freak act, but an earthquake which arose on a massive fault line.

The referendum simply gave the public the opportunity to make the leap for political freedom. As Hannan writes, polling suggests a desire for more Parliamentary sovereignty was the most important reason to do so. We can only second-guess why so many voters desired that repatriation of power.

The media like to portray it in economic terms, as a cry for help from the dispossessed, those who suffered under the path of globalization or others who longed for the end of so-called “austerity.” But neither of these explanations makes sense as a comprehensive answer. The old were most likely to vote Leave, and they had been insulated from government spending cuts. Homeowners and rich southeastern areas voted to Leave. Scotland, one of the areas which saw the biggest deindustrialization, voted to Remain. And both sides scrambled over each other to claim they were more “pro free-trade”– the Remainers arguing that a highly integrated single market was the world’s most comprehensive free trade area; the Leavers that the EU was an outwardly protectionist customs union.

Far from being “the economy, stupid,” Brexit was ultimately swung by a simple judgment: that British Parliamentary democracy was a better forum for decisionmaking than the backrooms of Brussels.

The UK government has by and large shown that it understands this and is committed to respect the result. It recognizes that leaving the legal jurisdiction of the ECJ and exiting too the EU single market and customs union is the only way to “take back control” of trade policy, public funds, immigration, and regulatory policy in any meaningful sense. Had Britain remained within the single market for anything other than a transitional period, the UK would have had to accept paying membership fees without being able to vote on the market’s regulatory provisions, and would have found it near impossible to agree to comprehensive free-trade agreements with third parties in services given its lack of regulatory control. Clearly, that was unacceptable.

Though economics was not the deciding factor in the referendum, it is clearly the area where bad negotiations could mess things up now. Theresa May’s government desires a comprehensive free-trade agreement with the EU to replace its current trading relationship, but this may take longer to agree than the 2-year formal negotiations allow. For that reason, most sensible Brexiteers accept the need for a period of transition – a glide path from one set of trading arrangements to another. The frequent question we “Economists for Brexit” get asked though is whether the UK can be an economic success outside of the European Union in the longer-term.

That this is even asked seriously is bizarre. Brexit is a constitutional decision to repatriate powers. Self-evidently, a range of economies outside of the EU are successful whilst running their own affairs. It takes some lack of imagination to believe the UK is currently the pinnacle of economic dynamism, and that no policy framework could, in the long-term, increase the economy’s size or growth rate relative to continued membership.

In fact, the opportunities from an EU exit are legion. Brexit enables the UK more flexibility to sign trade deals with countries towards which economic gravity is shifting; to scrap the 12,651 tariffs and many non-tariff barriers the EU currently imposes on our behalf; to revise highly damaging EU climate change, labour, financial, and clinical trials regulations; to scrap the EU’s Common Agricultural Policy and agricultural subsidies; and to translate Britain’s £11 billion annual net contribution into pro-growth tax cuts.

The economic consensus, of course, including Her Majesty’s Treasury, ignored all of these positive policy choices. Their modelling only included assumptions and scenarios which, to varying degrees, meant Brexit resulted in less free trade and open markets. When plugged into gravity models of trade based on backward-looking data, this led to large predicted long-term losses to GDP almost by construction. The daft short-term predictions of recession and rising unemployment stemmed directly from this. Consumers and investors, recognizing Britain would be poorer in the longer term, would supposedly rein in activity straight away.

Clearly, that hasn’t happened to anywhere near the extent forecast. The economy has slowed slightly since the vote, as predicted by many Leave economists, as a natural consequence of policy uncertainty. But the economy has proven remarkably resilient. People and businesses have seemed to shake off the implications of the referendum, suggesting they see the future risks as largely balanced. Perhaps they understand something that many economists seemingly do not: Britain’s future prospects will largely be determined by its own actions.

Whether British governments will use Brexit as an opportunity to pursue a free-market agenda is another question. Removing yourself from a club that binds and constrains members presents risks as well as opportunities. Vested interest groups will use Brexit as an opportunity to lobby for more protection, and Britain’s exit will significantly loosen restrictions on state aid and the ability of government to pick winners and losers.

The current political climate exemplifies these risks. The Labour party is led by an overt socialist, who is well-known to desire British single-market exit to pursue nationalization and a state-directed economy. Theresa May, the Conservative Prime Minister, though committed to free trade, talks often about the need for an industrial strategy and has of late excoriated big business and threatened to cap energy prices, harnessing the supposed Brexit dissatisfaction to push the most interventionist Conservative agenda since the 1970s.

A full Brexit dividend will not be achieved with either of these platforms, and it will be extremely disappointing if the government now decides to focus on additional migration control without other liberalizing policies.

Yet it’s important to remember that Brexit is a long-term decision, not an election. Libertarians in particular should have been concerned with the ever-growing concentrating power at a higher EU level, and its commitment to high levels of harmonized regulation under unresponsive government. This is the big picture reason why many of us campaigned as we did - one does not need a starry-eyed attachment to majoritarian rule to conclude that a British democratic system, taking more decisions closer to the people, would be preferable and more likely to self-correct in a way conducive to prosperity and freedom than an EU bureaucracy in Brussels.

Of course, there will be bumps and scrapes along the way. The EU negotiators are already showing they prize protecting the political project of the EU over economic mutual benefit, making a more disruptive Brexit likely. And outside, Britain will make mistakes, sometimes curbing freedom unjustifiably, as every government does.

If Brexit is to be a boon for the cause of liberty then the exit itself must be the start, not the end, of a process. For better or worse, Brexit broadens the scope of opportunity. Economic reality is a helpful constraint against the downsides. But it now requires a robust free-market domestic and trade agenda to make the most of it.

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