While few can predict how Britain would fare long-term, if we go it alone the immediate impact could be seismic.
The economics profession was, with some justification, condemned for failing to predict the financial crisis of 2008. It collectively was not paying enough attention to what was going on in financial markets, was too focused on its own unrealistic mathematical models, had forgotten the lessons of history. Where it was issuing warnings it was doing so in obscure journals and in terms that were not comprehensible to policy makers. All true, to some extent.
Today, though, virtually the entire profession is — clearly and loudly — ringing the alarm bells about the economic consequences of Brexit. In a recent poll by Ipsos MORI for the Observer, 90 per cent of economists said they expected Brexit to damage the economy. Just four per cent said it would be beneficial. That degree of unanimity on any poll of any group of people about just about anything is almost without precedent. A significant majority also said Brexit would risk a really big downturn. The overwhelming majority of the serious independent modelling work suggests Brexit would make us financially worse off, probably by quite a lot.
And believe me, right or wrong, they believe it. Many economists I’ve met in recent weeks have confided that they are quite literally losing sleep over this. There is a palpable fear that something really quite grim for the British economy could follow a Brexit. And before the cynics ask — no, this is not because they (we) are in hock to Brussels for funding. We’re not. And in any case economists, like bankruptcy and insolvency specialists, tend to do fine when the economy goes wrong.
But another Ipsos MORI survey suggests that two-thirds of Britons believe Brexit would not make them worse off. The warnings from economists appear not to be cutting much ice.
That might be to do with past failures — of economists, not pollsters. It might be, as Michael Gove would have it, that we are all just fed up with experts. After all, it was the same economic experts who told us we should have joined the euro, right? Actually, no. Monetary union happened against the advice of much of the economics profession. It is a rewriting of history to suggest the reverse. The UK avoided an historic mistake in part because its decision not to join the euro was guided by the economic analysis commissioned and produced by the Treasury. This was led by the same man, Dave Ramsden, who has overseen the Treasury analysis of the economic consequences of Brexit. Same people, same organisation. In my view, it was the correct analysis on each occasion.
That’s hardly a clincher for the current analysis being right but let’s at least put to bed the myth that all those suggesting Brexit would be costly supported joining the euro. By and large they did not.
So why do nearly all economists worry so much? The explanation lies in three words: uncertainty, investment and trade.
In the short run a vote for Brexit would create uncertainty. In the immediate aftermath the pound, and probably the stock market, would dive, making us all poorer. Investment and consumption would fall, and the economy would suffer. Even one of the few pro-Brexit economists — former Boris Johnson adviser Gerard Lyons — accepts that short-term uncertainty would lead to reduced growth in the immediate future. He describes it as being like the first part of a Nike swoosh — short-term pain for long-term gain. There’s no doubt we’d suffer in the short term.
What about the long run? If there is one thing that economics has taught us over the past two centuries it is that free trade and openness is good for growth. In any scenario for a post-Brexit UK, trade with the rest of Europe — by far our biggest trade partner — would become more costly than it is at the moment. And it would take years to sort out trade agreements with the EU and with the rest of the world. That would slow economic growth.
The UK would also become far less attractive to foreign investors seeking access to the single market. Trade and foreign investment are crucial drivers of growth and productivity, not just because of their direct effects but because both stimulate competition and productivity right across the economy. That’s why the best evidence is absolutely, unequivocally clear: we are much better off now than we would have been had we never joined the EU. Again these are just facts.
Of course we can’t be certain about the future. But I reckon that poll of economists gives us pretty good probabilities. Brexit would give us a 90 per cent chance of being worse off, five per cent chance of no change, five per cent chance of being better off. These are not good odds.
But that is not the end of the story. These big decisions are rarely straightforward in the way that the remain and leave campaigns would have us believe. Being in the EU means that we have no control at all over immigration from the rest of the EU. Even if we avoided it, it still means being part of a club that has made mistakes as costly as introducing the euro. It means sharing some sovereignty. It means being part of the absurdly wasteful Common Agricultural Policy.
It is simply childish to suggest that there is no trade-off, that one side has all the answers. It is just untrue to say that we can control overall immigration if we stay in. It is equally untrue to say that we would have more funds to spend on the NHS if we came out — we would have less.
We are a rich country. The UK is either the fifth or ninth biggest economy in the world (depending on how you measure it). We could cope outside the EU. We can choose to accept a fall in our living standards to regain some sovereignty. I can’t tell you how to trade these things off, how to make this choice. I can tell you that Brexit would almost certainly make us, economically, poorer.
This article was first published by the Evening Standard and is reproduced here in full with permission.