16 January 2019

Why an accidental Brexit could be the best thing for the UK


For months, ministers were resolute.  Britain, they insisted, must remain aligned to the rest of Europe.  It would spell ruin if we were to simply leave, they said.  And they kept on saying that, until the day we actually left.

I refer not to what might happen in a few weeks’ time when Britain is scheduled to leave the EU, with or without a withdrawal agreement, but to the UK’s departure from the European Exchange Rate Mechanism (ERM) almost thirty years ago.

Then, as now, we were told that crashing out would have calamitous consequences.  Unless our exchange rate with the rest of Europe was managed, it would ruin the economy, they insisted.  The then Prime Minister, John Major, popped up – much as he does today – to warn that we could not manage on the outside.

Of course, we now know Britain did depart from the ERM.  It was all very unplanned.  And for many people trying to run businesses or pay a mortgage, wildly fluctuating exchange rates and interest rates at the time, did have consequences.

But far from spelling economic disaster, leaving the ERM marked a key moment in Britain’s economic recovery.  Output rose.  Unemployment fell.  Trade increased and living standards improved.

I do not claim that our unmanaged departure from the EU in a few weeks would be as straightforward as exiting the ERM.  Forty years of entanglement with the EU as a supranational rule-making body means there will be all kinds of collateral complications.  The ERM was, after all, merely a means of price fixing, which could be stopped fairly simply.

No, my point is a broader one about how – especially when it comes to Europe policy – those that govern us can end up doing the right thing by accident, rather than design.

Almost as soon as sterling crashed out of the ERM, politicians, pundits and officials who had spent years insisting that we peg our currency to that of our EU trade partners appeared to forget that that had been their previous position.  When the Bank of England – emulating an idea from the Reserve Bank of New Zealand – moved to a system of inflation targeting, the great and the good convinced themselves (and occasionally their biographers) that this idea had been their intention all along.

Politicians would like us to imagine that they arrive at their various policy positions through careful deliberation.  As the ERM experience shows, they can end up in the right place by accident  Might we be about to see something similar happen?

If we were to leave the EU without arrangements to manage our relations with the EU via some giant blueprint, I think there is a good chance that we end up with a series of sensible trade arrangements that many in in SW1 will in time claim as their own.

Imagine, for example, that you are a minister in late March, and there was – for whatever reason – still no grandiose agreement with the EU.  As a minister you might have hoped that there would be a zero-for-zero tariff agreement – we don’t impose tariffs on them, and they don’t impose them on us, in a basic free trade agreement on goods.  But say it’s the end of March and that’s looking unlikely.

Do you, for example, insist that UK companies that import from the EU start paying tariffs?

Ministers would be daft to try.  Why?  First, we don’t apply any such tariffs today, so why start.  Even if ministers aren’t persuaded by any intellectual arguments in favour of free trade, practical considerations make it unlike that they would impose tariffs on imports from the EU.

But what about EU tariffs on UK exports?

The bad news is that there is not a lot we can do to prevent the EU imposing an import tax on its own consumers.  The EU is, after all, an inherently mercantilist project.

But the good news is that the UK and the EU would each be in the WTO, so any EU tariffs would be relatively low, averaging less than 3 percent.  In those sectors – the car industry and agriculture – where tariffs are higher, ministers could offer various sorts of offsets to UK exporters.

“But what about tariffs from the rest of the world?” some will say.  “Under WTO terms, if there’s no zero-for-zero arrangement with the EU, and we opt not to tax EU goods – even if they tax ours – we surely have to offer similar terms to the rest of the world?  What would ministers do about that?”.

Again, it is possible to see how even the most low voltage sort of minister might end up doing the right thing by simply following the path of least complication; scrapping tariffs on (non-agricultural) goods from the rest of the world.  Like when we left the ERM, what was once unthinkable, could just sort of happen.  It’s not as though tariffs raise a significant share of the Government’s overall tax revenue.

What is done by accident in politics often turns out to be better than things that are done by design.

If there was no agreement in place at the end of March, ministers have already indicated that they will take a pragmatic approach to regulation.  If the EU rules out any sort of reciprocal recognition of standards, we can still recognise EU standards unilaterally.  If it is already legal to produce and sell products in the UK, if they have been approved in the EU, so why stop?

Ministers might from there then stumble into doing something even more sensible, and extending the idea that we might accept other regulatory standards elsewhere.

If the European Medicines Agency or the American FDA or the Australian TGA had already approved a drug for use, do we really need a UK regulatory agency to go through the whole approvals process again?  A UK agency might instead try to focus on approvals where other regulators were being unduly slow to approve new life-saving treatments.  Think of it as a system of regulatory competition, with the interests of consumers safeguarded.

Almost by accident, we could end up moving to a system of genuinely global free trade.  Unlike the Trans-Atlantic Trade and Investment Partnership, this sort of trade deal agreement is not full of top down, prescriptive regulations, introduced at the behest of lobbyists and vested interests.

It’s not only trade policy that could be changed by default, rather than design. It’s possible to envisage how practical considerations simply force ministers to come to a series of rather sensible ad hoc arrangements with the EU in all sorts of different areas, including defence and security.

Is any of this really going to happen?  No one knows right now, partly because ministers don’t even know their own minds.  But that is the key point.

If back in 1992 Parliament had been asked to vote on remaining in the ERM, MPs would have voted overwhelmingly in favour of staying inside.  Like today, they’d have insisted that an effective exit would be unthinkable.  But the unthinkable just sort of happened.

Today, a different generation of ministers, many of whom had hardly even heard of the EU customs union until the referendum campaign began, spent most of it telling us that to leave it would be unthinkable.  Since then they have put every effort into telling us that leaving it would be impractical.

There is a good chance that such people will soon be explaining to us that the kind of liberal trade arrangements that then unfold were their intention all along.

We must applaud them enthusiastically when they do.

Douglas Carswell is a former MP. He was a member of the Vote Leave campaign in the 2016 EU referendum.