For Britain’s Eurosceptics, there are few problems that will not be solved by leaving the European Union.
Boris Johnson says that it is only “by taking control of our laws that UK entrepreneurs can innovate" and that Brexit is an opportunity “to build a truly global Britain.” Michael Gove, another leading Brexiter, demands that Britain must make a clean break with the EU or risk becoming an outdated “VHS economy.” They see Brexit as a liberation, a way of unshackling Britain’s economy from the dead hand of EU regulation and freeing British firms to compete internationally.
This is nothing more than escapism. Nearly all of Britain’s actual problems, from its weak trade performance, low investment, poor infrastructure, yawning regional disparities, struggling public services, housing and skills shortages, are home grown. All of these short-comings are surmountable if we are honest about the origins of them rather than searching for scapegoats. All will be aggravated by leaving the EU. How Britain responds to this will determine whether any good can yet come from Brexit.
There is no doubting Britain’s sluggish export performance, and in particular, UK firms’ poor record of tapping into big new emerging markets. But this is not down to the EU’s failure to sign trade agreements with these countries. After all, German firms export five times as much to China than British ones. It’s similar story in Latin America and Africa.
The reason for Britain’s poor trade performance almost certainly lies in the country’s low level of business investment; British firms invest a lot less than their counterparts elsewhere in Europe (or the United States). It is hard to sell things in other countries if companies do not spend enough on new products and services or the marketing and distribution needed to persuade customers to buy them.
Britain’s low business investment also helps explain its poor productivity levels and related skills deficit. The British government does a passable job of educating Britain’s young, although there are big regional variations and overall levels of literacy and numeracy are weak relative to comparable developed economies. But the really serious problem is weak vocational training, and the failure of firms to invest sufficiently in their employees’ skills.
Why is private sector investment so low in Britain? Eurosceptics, at least of the right-wing variety, argue it is down to unnecessary regulation, excessive taxes and government “meddling” generally. But why would EU regulation hold back British firms, but not Dutch, German or Swedish ones? The reality is that for the most part, EU regulations are not a drag on the economy; they generate trade between the member states. For example, the EU’s drive to open up member states’ financial sectors to competition—which benefitted the UK disproportionately—would have been impossible without the EU setting common standards.
At the same time, the EU does not force Britain to adopt onerous regulations: the OECD’s indices of regulation show that Britain’s markets for goods, services and labour are among the least regulated in the developed world. Britain’s taxes are actually lower than in economically more successful countries such as the Nordics, Germany and the Netherlands, neatly serving to highlight the absence of any strong link between a country’s tax burden and its economic performance.
“Why would EU regulation hold back British firms, but not Dutch, German or Swedish ones?”The biggest single reason for low business investment is almost certainly corporate governance. Put simply, British firms pay much higher dividends than their counterparts elsewhere; too much money is being taken out of British firms and paid to shareholders. One reason for this is the incentive structures faced by British managers; their remuneration is more strongly linked to short-term share performance than elsewhere.
In this context, it is little surprise that the long-term performance of UK share indices has been so poor; British firms are not investing enough to generate the long-term value needed to underpin lasting growth in share values. Indeed, a sizeable chunk of the value-creation in Britain is done by foreign-owned business, be that in the automotive sector, finance or information technology. Brexit threatens to make Britain less attractive to these firms.
It is not just Britain’s private sector which is short-termist. Public investment is lower than in most other EU countries. There are many reasons why the UK is such a geographically-polarised economy, with just three regions—London, the south east of England and the east of England—wealthier than the EU15 average, and a host of regions with per capita incomes similar to Spain which are rapidly being caught by the best performing eastern European member states. But poor infrastructure is clearly one factor, as is well illustrated by the difficulties of moving people and goods between, say Liverpool and Hull.
Britain’s housing crisis reflects a failure to ensure that the supply of housing increases with rising demand for it, and a financial and tax system which encourages property speculation. The crisis in public services is complex, partly reflecting funding constraints and partly the imperviousness of producer interests to reform. Neither housing nor public services problems are down to EU migrants. Contrary to much of the received wisdom, they pay more in tax than they take out in public services. They do have some impact on demand for accommodation in property-constrained bits of the UK such as south east England, but then so do northern English people migrating south. The answer it to build more houses.
Many of Britain’s problems are relatively straightforward to fix; it is not a question of reinventing the wheel. But it will require learning some lessons from other countries, including our European neighbours. It is possible that the damage done by quitting the EU will leave Britain with no option but to do just that. The risk, however, is that the country doubles down on denial and casts around for more scapegoats.
