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Values Not Economics Should decide the UK’s Relationship with Europe by Professor Ashoka Mody

We summarise an article in the Independent written by Ashoka Mody visiting Professor at Princeton and former deputy director of the IMF’s International and European Research Departments. He is also author of the acclaimed recent book, ‘The Euro Tragedy. A drama in Six Acts’. Mody argues that the impact of leaving the EU will be minimal and accuses leaders of ignoring real issues of sovereignty and security to focus instead on scare tactics.. We present the opening paragraphs of the article and then summarise the rest with a link to the whole piece.

Ahsoka Mody writes :

The Bank of England’s prediction that civilisation will end with Brexit is merely an effort to outdo in shrillness similar analyses by the Treasury and the IMF.

All official agencies, trapped in an echo chamber, are competing to paint the grimmest picture of economic consequences of a British exit from the European Union. They are straining so hard because their projected costs of exit have no basis in economic theory or empirical findings.

“I don’t understand how you can get that kind of cost without making some big ad hoc assumptions,” tweeted Nobel laureate Paul Krugman.

When he uses the expression “big ad hoc assumptions”, he is saying the Bank is making up the numbers.

Mervyn King, who headed the Bank between 2003 and 2013, says he sadly “concurs” with Krugman’s assessment.

Krugman goes a step further: “I have worried in all this about motivated reasoning on the part of people who oppose Brexit for the best of reasons.”

Translation of “motivated reasoning”: officials are making up the menacing numbers because they believe that the UK should remain in the EU for non-economic reasons, which they cannot or are unwilling to defend.

The economics is straightforward. When trade barriers between the UK and the EU go up, British producers will sell less to the EU and will sell more within the UK and to the rest of the world.

No trade economist believes that the long-term cost of this shift in sales patterns is any more than 0.5 per cent of GDP. Throw in 2 to 3 per cent of GDP as temporary disruption costs. Estimates higher than that are ad hoc.

And ad hoc estimates can go either way. Britain’s trade with the EU is down to about 45 per cent from 60 per cent in 2000. Brexit will speed up that already rapid shift.

Scholars associated with the Federal Reserve Bank of Minneapolis, uncontaminated by motivated reasoning, conclude that stepped-up trade and investment with more dynamic economies outside the EU will give British producers greater access to cutting-edge technology and force them to become more productive. Such gains, in their view, will likely offset the costs of lost trade with the EU.

Thus, on balance, the net gains or losses from Brexit should be modest. The UK’s lacklustre growth since the Brexit vote is almost entirely due to the government’s gratuitous austerity………………

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Mody’s article continues by relating the EU’s aims in creating a ‘federation of Europe’,’ ever-closer union’ and Macron’s ‘European sovereignty’.  The most durable ambition ‘a common framework for economic development’ over-reached itself with the introduction of the the Euro in 2000 – a move supported not only by Tony Blair but also by the majority of UK academic economists.  One senior US economist, Andrew Rose published an admission in 2015 that he had been misled by undertaking a simple extrapolation of trends in small, mainly poorer economies.  Mody does not say so, but UK economists have done much the same in generating their exaggerated negative predictions for the economic impact of Brexit.

Mody continues by agreeing with the view of Harvard economist Dani Rodrick’s view that extending or contracting trade volumes  between countries which already undertake much trade with each other makes little difference to standards of living. Rodrik’s view is that trade deals are usually devised to advance the interests of companies not of workers. Almost 75% of EU rules originate with business lobbyists.

Mody concludes by saying that ‘ British leaders must pull themselves out from under the spell of story-telling  and focus on more important issues’.   In his view  instead of focusing on sovereignty and security ‘global leaders are  peddling frightening economic scenarios’. Failure to protect the most vulnerable at home  and to focus on more important issues will in his view leave tensions simmering.

 

Read the full Mody article at: independent.co.uk

About the author

Briefings For Brexit