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Bad for the Economy, Bad for Britain

The EU  faces a new test of confidence. Italy  is poised for a referendum on constitutional change that gives the government more power. If Italians vote ‘No’ to change,  the prime minister, Matteo Renzi will resign.  The way could then be open for victory for the Eurosceptic  Five Star Party, intent on leaving the Eurozone with its failing economic policy and high joblessness.

European Union membership has done considerable damage to the UK economy and to the reputations of the many economists who have slavishly recommended its economic ways. It has directly caused a major recession in the early 1990s in the UK, thanks to its European Exchange Rate Mechanism scheme. It aided and abetted the banking crash and Great Recession of the last decade by adding the imperfections of the Euro to the poor banking regulation which the ECB shared in common with the US and UK authorities. Many economists have gone on taking a rosy view of the Exchange Rate Mechanism, the Euro, Euro banking regulation and the single market without asking why so many people are unemployed and the growth rate of the Euro area is so low.

For my entire adult life I have found myself in disagreement with much of the UK establishment and the economics profession about three great issues – the Exchange Rate Mechanism, the Euro and banking regulation. In the 1980s as Chairman of a large quoted industrial company I was so worried about what the ERM would do to our employees and customers that I took the company out of membership of the CBI in protest at their support for this job destroying proposal when they were urging it on in the government. Later as a government Minister, I fought a lonely battle with the brave Nicholas Ridley to try to prevent the then government plunging us into the high inflation and recession that the ERM was likely to bring about. The economics profession kept their forecasts rosy and claimed that the ERM would curb prices and lead to better growth! Predictable disaster followed.

Then came the long battle to keep the pound. I was more successful with this, with more good allies who agreed that UK membership of the Euro would be bad news for our economy and might even destroy the whole Euro scheme, given the size of our banking sector and economy relative to the rest. I used to argue that the Euro was an ERM that it would be difficult to get out of. Why would we want to inflict on ourselves the austerity of the Euro scheme when we had suffered so much before we escaped from its progenitor, the ERM? How could we avoid the likely boom bust cycle that an inflexible exchange rate would generate?

The Euro proved to be just as bad for many of its member economies as I feared. Vast swathes of the Euro area’s economy are laid waste by the austerity policies, and by the lack of proper mechanisms to transfer large sums of money from the surplus countries led by Germany to the deficit countries of the south and west. There has been a long running rolling crisis for the Euro area’s banks and for financing the deficit countries. None of this has been good for the reputation of the many economists who told us what good news the single currency would be, and how it would transform the subject economies in a favourable way. They did not predict 25% unemployment with 50% youth unemployment in several countries when they set it up, and now seem surprisingly relaxed about those results.

Now we have to debate much of this all over again as we leave the EU. Some say the single market is a precious gem, essential to our prosperity as a nation. They have not studied the evidence. The UK’s growth rate was slower from 1972 when we joined the EEC up to 1992 when the single market was “completed” than it had been in the postwar decades before. The growth rate slowed again after 1992 when the EU claimed it had completed its single market. Of course the advent of the full single market in goods came at the same time as the full impact of the ERM recession was felt. The UK has run an almost continuous large deficit on trade in goods with the rest of the EU both before the completion of the single market and afterwards. One of the costs of joining the EEC was the competitive shock administered to UK manufacturing which lost us factories and jobs in the 1970s.

To say the growth rate did not speed up when we locked ourselves into the single market is of course not proof that it was in itself damaging, but it is proof that all the EU policies taken together did not help us grow faster. What is so odd is how many so-called experts just assert that it must be good without examining the data or asking some basic questions. Logic suggests that having common standards and specifications helps manufacturers by allowing them longer production runs and permitting more standardisation of product. However, this is a benefit of the EU single market that all exporting countries to it benefit from, whether they are in the single market or non-members. Evidence also shows that the single market in energy, for example, is damaging to European competitiveness because it gives us much higher energy prices than our US and other competitors.

In the referendum, the establishment was most upset that Mr Gove and Vote Leave questioned the accuracy of many economic forecasts by the great and good. Today those errant forecasters have another set of questions to answer. Why did they think the UK would experience a drastic slowdown or recession this winter? Why did they revise all their 2016 forecasts down so much? Why are they now having to raise their 2016 forecasts to pre-vote levels or higher? Why did they suspend all the usual considerations from looking at money and credit growth, consumer expenditure, renal and new homes demand? No wonder so many members of the public now distrust the official forecasts. They have made three catastrophic errors in the ERM, the Euro and the banking crash. As I point out in my new Politeia piece, Brexit Benefits: Prosperity not Austerity – Britain’s New Economy, they have now just reminded us how wrong they can be by their silly 2016 forecasts for the UK after the vote.

Sir John Redwood MP

Sir John Redwood has been Member of Parliament for Wokingham since 1987 and is a former Secretary of State for Wales, having held a variety of ministerial roles in the 1980s and 1990s. A former Head of Margaret Thatcher's Policy Unit, he is Chairman of the Conservative Parliamentary Economic Affairs Committee and wrote We Don’t Believe You: Why Populists and the Establishment See the World Differently (Bite-Sized Books, 2019). His Politeia publications include How to Take Back Control: Trading Globally Through the WTO (2018) and Trading Truths: The Treasury, Trade and the City (2016).

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