Brexit from the Austrian Economics Perspective

Patrick Barron, a free market (Austrian School) economist and CC of DE Treasurer, gave an August 17 talk on the British decision to exit the European Union. Many people were surprised by this outcome, he noted, but in hindsight they probably should have seen it coming.

Going back to the beginning, the UK decision to join the European Common Market in the 1970s was not controversial. The advantage was elimination of trade barriers with the countries of continental Europe; no major drawbacks were perceived.

British sentiment shifted in later years, however, as the ECM morphed into the European Union with a common currency (the UK and several other countries opted to retain their own currencies rather than joining the Euro bloc) and a supranational bureaucracy (the growing cost of which had to be covered by member states) with authority to promulgate EU economic policies.

The rationale for this closer association seemed commendable, namely integrating the economies of the European countries to such an extent that future wars between them would become unthinkable, but the economic benefits for the UK grew increasingly unclear. British critics noted that more and more of the country’s economic regulations, down to and including such matters as no roadside stands for farmers, were being written in Brussels rather than in London. Also concerning was the requirement for unhindered movement of people within the EU, especially after waves of refugees began arriving from the Middle East as a result of the civil war in Syria.

Although free trade with the other European countries remained a plus, it was a two-edged sword. The EU is a customs union with relatively high tariff and regulatory barriers to trade with other countries. As an EU member, the UK was not free to negotiate advantageous trade arrangements with the rest of the world, e.g., couldn’t even import wheat from Canada (a British Commonwealth country) without imposing the EU tariff.

Having agreed to submit membership in the EU to a national referendum, then Prime Minister David Cameron campaigned hard for a vote to continue the arrangement. Advance reports suggested the vote would be close, but the government’s position was expected to prevail. In the event, however, the British voted against the EU, and by a clear-cut margin (52%-48%) at that. To their credit, British politicians on both sides of the issue have taken the position that the people have spoken and it’s time to move on rather than endlessly stringing out the negotiations and/or angling for another vote.

The specific terms of withdrawal still need to be worked out with the EU, which in theory could subject British goods to standard EU tariffs and trade barriers, but may not find it advantageous to do so. No doubt there will be some disruptions involved, and it may not be immediately obvious whether the UK will come out ahead as a result of this decision.

The proof of the pudding, suggests Mr. Barron, is how things will look ten years from now. As a believer in free markets, he’s optimistic.