Poll results have started to come in in this week's historic vote on Brexit— British exit from the EU. And it's looking like there's a real possibility that the United Kingdom will vote to leave. Many people view this as a disaster for the European Union.
But Andrew Lilico, a British economist at the consulting firm Europe Economics, argues that it's more complicated than that. He views the creation and expansion of the EU over the past half-century as a great accomplishment with benefits for both Britain and continental Europe. But he now believes it would now be better — for both Britain and the rest of the EU — for Britain to leave.
Why? Lilico believes that British exit from the EU became inevitable as soon as soon as the UK refused to join Europe’s common currency project. The euro has been an economic disaster, creating shockingly high unemployment rates in peripheral EU countries like Greece and Spain.
Lilico argues that the euro can only work well if the eurozone becomes a single integrated superstate. And he argues that the UK’s presence within the EU has become the most important obstacle to deeper European integration.
We spoke by phone last week. The interview has been edited for length and clarity.
Timothy B. Lee: A lot of Brexit supporters are critics of the EU. But you argue that the EU has been good for both Europe and Britain. So why get out now?
Andrew Lilico: We've gained considerably by being in the EU, but the sorts of gains we've made are gains we can't repeat from here.
Some of the key advantages have been geopolitical. Within the EU, we were able to participate in absorbing post-fascist states like Spain, Portugal, and Greece as liberal democracies. The EU united Western Europe against the Warsaw Pact. It absorbed post-communist states into the family of liberal democracies. Those are enormous gains. Setting aside a few remaining details, like absorbing Albania and Serbia, the vast majority of that project is complete.
Along the way Britain converted our European partners to a regulatory and economic philosophy that was aligned with ours. The EU embeds a very British, pro-market-oriented economic philosophy based on privatization, market liberalization, free trade, opposition to state aid, and opposition to protectionism. Those are also gains you can't make twice.
And as long as we remain within the EU, we are a blockage upon the EU achieving its proper destiny. The euro project was supposed to have the institutions to make it work. Because Britain is in the EU — and not part of the common currency — that has meant that the euro has not been able to take control of institutions properly. That has then turned into economic or political catastrophes in countries like Spain and Greece, where we've had 20 to 30 percent unemployment.
Once we withdraw, the EU will be able to become a unified state. It will allow the EU to grow faster, which will be to our advantage as well.
TBL: Walk me through the logic here. How does a British exit help the rest of the EU get where it needs to be?
AL: In order for the eurozone to work properly as an economic unit, it needs a proper system of fiscal transfers.
When a country has economic shocks, it can offset them by the population moving around. This happens within the US and within the UK. But this doesn’t happen very much between eurozone states. That means asymmetric economic shocks get entrenched and you end up with high unemployment in some areas.
If you want to have things function and maintain social cohesion, you don't want vast population movements. You need fiscal transfers. That means regional subsidies, benefits payments, tax breaks to allow individuals to keep going in tough times.
The EU has a system like this, but it's very small: half a percent of GDP. In the UK it's 3 to 8 percent of GDP, something like six to 15 times as big. If you're going to make the euro function, you're going to need much larger transfers from the richer parts of Europe — like Germany and Northern Italy — to poorer parts — like Greece, Southern Italy, and Spain.
So they need eurozone-wide taxes, a eurozone treasury, an elected eurozone president, a eurozone parliament, and eurozone civil servants to manage expenditures.
It's going to be difficult to introduce those kinds of things with new treaties. But actually, you don't need new treaties, because the EU already has most of these things. We don't need a eurozone parliament, you have the European Parliament. We don't need a eurozone president because we have the president of the European Commission.
The reason this hasn’t happened is the eurozone is connected to a set of non-eurozone countries. Of these countries, all but two — the UK and Denmark — have a commitment to join the euro in the end.
Once the UK is out, there will be enormous pressure on other countries to say when they will be joining. Countries that refuse to join will get rolled together with Norway (which isn’t in the single market but has a free trade arrangement with the EU). Then the eurozone can take full control of the EU's institutions and be able to function properly to make it work as a currency union.
TBL: What makes you confident this will actually happen? Given the level of turmoil in the eurozone lately, will European countries really be prepared to give up even more power to Brussels?
AL: This kind of deep political integration is the official plan, as stated by the EU authorities. There have been public commitments by French President François Hollande, German Chancellor Angela Merkel, and the prime minister of Italy. The Future of Europe Group and all kinds of other bodies have declared that the ambition is much deeper integration.
People sometimes call it the United States of Europe. Ultimately I think that will occur because it's such a cool idea. And European officials understand that the eurozone has enormous problems. People worry that the next downturn could cause the entire system to collapse. So they know they have to do something.
European Council President Donald Tusk said recently that Brexit might bring about the end of Western political civilization. I don’t think Brexit will do that. The thing that could bring about the collapse of the EU — which really could be a threat to Western civilization — is failing to sort out the eurozone's issues. But the issues with the euro can't be addressed while Britain is part of the EU. It would be much better if the UK would get out of the way.
TBL: The recent crisis in Greece suggested to me that there might be a lot of resistance to further eurozone integration. The standoff created a lot of resentment — especially between Greece and Germany. Many Greeks thought the Germans were too stingy; Germans thought the Greeks had been too financially reckless. Can European countries really move past those feelings and continue toward deeper integration?
AL: I don't know whether Greece can survive as a member of the euro. I thought that it couldn't, but if they were going to go, they would have done it last year.
Here's a key thing to grasp. Apart from Britain being in the way, the great threat to eurozone integration is the continued insistence by commentators that the only way to do it is for the Germans to pay everyone else's debts. Europe can only proceed to the fiscal union if it's absolutely understood that that doesn't mean them being responsible for other people's debts. The more people say that, the more fiscal union will be seen as a subterfuge to pay the debts of the Italians. Germans won't do it.
But that isn't what fiscal union means. For example, for much of the past century, regional subsidies have been sent to Liverpool. If you go back 250 years, people in Liverpool were sending money to London. In the future people in Liverpool will probably send money to London again. But that's completely different from saying the Liverpool council will do whatever they want, then if they go bust, London will pay.
It's the first one that makes a currency union work. The second one — saying Germans have to be responsible for everyone else's debts — is what makes the currency union collapse. It’s a really important distinction that a lot of people in Britain and American don't grasp.
TBL: Brexit opponents argue that the UK gets a lot of benefit from being the de facto financial capital of Europe. With English being the world’s most widely spoken language, a lot of companies have established London headquarters to manage their European operations, creating jobs for Britons. Should we be worried that Brexit will cost the UK this kind of economic advantage?
AL: A good example here is the Markets in Financial Instruments Directive. There's a principle being established that if you're a non-EU country and you have regulatory equivalence to the EU, then you can sell into the EU as if you were an EU member.
As globalization extends, many of the EU's external barriers are being reduced. Many global barriers are low already. The advantages of being inside become greatly reduced.
Some people may move some staff. There could be some nontrivial tax impacts depending on where your headquarters is. But the UK is going to remain an attractive location. The vast majority of key activities will stay in the UK where we have comparative advantages in financial services and legal services.
A key reason financial services are in London is you need a lot of smart, highly motivated people. They're not going to want to live in a place with 80 percent tax regime like France. Also, it’s got to be a fun place to spend money. It’s no coincidence that London and New York are fun cities to spend money in.
Frankfurt and Geneva are not fun places for clever, highly remunerated people to be. It's not impossible that there will be some relocation. I won't discount that altogether. But I think it's easy to exaggerate how much of that kind of thing there will be.
The UK will do some different things over the medium term. The UK has been big in financial and legal services since the 1980s. Perhaps in the future it won't be as big as I would expect, but if it didn't and we became more IT-heavy or big in space ports or whatever tomorrow's exciting new thing is, why is that a bad thing?
TBL: I think your pro-EU case for Brexit is really interesting. But this position also seems somewhat marginal within the larger Brexit debate. My impression is that most Brexit supporters hold the opposite view — that the EU is a disaster that has been undermining British institutions, and that the UK should get out before it does any more damage. Am I wrong?
AL: I think there's a variety of points of view. There are a number of people who think the EU has always been bad. But that's not most of the current opposition.
For example, there are nearly 130 Conservative MPs who have declared for leaving the EU. If you went back 10 years, you would have struggled to find more than 20 who even in private would have supported leaving the EU. Until very recently, it was believed that we could renegotiate and find a way to get along with our European partners.
Now that project has been explored and failed. It can't be done. Because there's not a way of making it work. So it's now time to move on.
That doesn't mean that those people have always been opposed. Neither does it mean that they feel the EU has served us badly for most of history. The majority of those who are in favor, in the press, opinion formers, have only come to that view recently. Most have wanted to renegotiate. Only when they've despaired of that as a possibility, that's when they said we'll have to leave.
It's also a post-euro thing. if you go back 10 to 12 years, people argued it would unsustainable if Britain didn’t join the euro. Those people were right. That didn't mean we had to leave immediately. We got an extra 15 or 20 years in the EU. That’s a long time — almost as long as we’ve been in [the EU] in the first place. But deciding not to join the euro started the clock ticking.