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Archive for the ‘Europe’ Category

Thanks to the glorious miracle of capitalism, I’m writing this column 36,000 feet above the Atlantic Ocean.

I’m on my way back from Europe, where I ground through about a dozen presentations as part of a swing through 10 countries.

Most of my speeches were about the future of Europe, which was the theme of the Austrian Economic Center’s 2019 Free Market Road Show.

So it was bad timing that I didn’t have a chance until now to comb through a new study from three scholars about the economic impact of the European Union. As they point out at the start of their research, EU officials clearly want people to believe European-wide governance is a recipe for stronger growth.

The great European postwar statesmen, including the EU founding fathers, clearly…envisaged the establishment of a common political and economic entity as a guarantor of…domestic economic progress. …Article 2 of the foundational Treaty of Rome explicitly talked about “raising the standard of living.” … in practice EU today mainly emphasizes growth, as is evident from its most ambitious recent policy agendas. In 2000, a stated aim of the Lisbon Agenda was to make the European economy the “most competitive and knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.” And all seven of the Flagship Initiatives adopted as part of the Europe 2020 Strategy were about growth—smart, sustainable, and inclusive.

Here’s a bit of background on their methodology.

…the focus of the present paper will be on prosperity as the key outcome that the EU will be measured up against… Our approach in the present paper is to use different empirical strategies (difference-in-differences type setups and standard growth regressions); slice the length of the panel in various ways (e.g., dropping post crisis observations); look at different samples of countries (e.g., a global sample, the sample of original OECD countries, the sample of formerly planned economies, and the sample of EU member countries); pay attention to spatial dependencies; and, finally, require manipulability of the treatment variable.

And what did they find?

It seems that the European Union has not triggered or enabled better economic performance.

The conclusion that emerges upon looking systematically at the data is that EU membership has no impact on economic growth. …We start by simply looking at the comparative performance of the EU and the United States, which is the comparison that Niall Ferguson makes. The IMF’s World Economic Outlook Database provides real GDP growth rates going back to 1980 for the EU and the US. These are plotted in Figure 1. The EU only managed to outperform the US economy in terms of real GDP growth in ten out of the 35 years between 1980 and 2015. …With these growth rates, the US economy would double its size every 27 years, whereas the corresponding number for the EU is 36 years. This hardly amounts to stellar performance on part of the EU.

What makes this data so remarkable is that convergence theory tells us that poorer nations should grow faster than richer nations.

So EU countries should be catching up to America.

Yet the opposite is happening. Here’s the relevant chart on US vs. EU performance.

The scholars conducted various statistical tests.

Many of those test actually showed that EU membership is associated with weaker performance.

…we basically measure pre- and post-entry growth for the EU countries up against the growth trajectories of all other countries. …EU membership is associated with lower economic growth in all columns. …where we use the maximum length WDI sample (i.e., 1961-2015), EU entry is associated with a statistically significant growth reduction of roughly 1.8 percentage points per year. When we remove the period associated with the sovereign debt crisis in the Eurozone (i.e., 2010-15), the reduction remains significant but is lower (1.27 percentage points per year). Finally, when we remove the global financial crisis of 2008-09, the reduction (which is now statistically insignificant) is 0.5 percentage points per year. Using GDP per worker growth from PWT gives roughly similar results… Consequently, in a difference-in-differences type setting EU entry seems to have reduced economic growth.

Moreover, a bigger EU (i.e., more member nations) is associated with slower average growth.

Last but not least, the authors compared former Soviet Bloc nations to see if linking up with the EU led to improvements in economic performance.

…we ask whether growth picked up in the new Eastern European EU countries after accession vis-à-vis growth in 18 formerly planned non-EU countries. …Of the 11 accession countries, not a single one had higher average annual real GDP per capita growth in the period after the EU accession as compared to the period before.

Ouch.

These are not flattering results.

Here’s a look at the relevant chart.

These findings leave me with a feeling of guilt. For almost twenty years, I’ve been telling audiences in Eastern Europe that they probably should join the EU.

Yes, I realized that meant a lot of pointless red tape from Brussels, but I always assumed that those costs would be acceptable because the EU would give them expanded trade and help improve the rule of law.

I’ll have to do some thinking about this issue before my next trip.

P.S. In case you’re wondering why I’ve been telling Eastern European nations to join the EU while telling the United Kingdom to go for a Clean Brexit, my analysis (at least up til now) has been that market-oriented nations are held back by being in EU while poorer and more statist economies are improved by EU membership.

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I’ve been waiting anxiously to write about Brexit, either to celebrate a “Clean Brexit” or to castigate Theresa May and the other politicians for a “Brexit in Name Only.”

Except Members of Parliament can’t make up their collective mind. They’ve been voting against good options and also voting against bad options.

So while we’re waiting for some sort of resolution, I’m going to augment our 2016 collection of Brexit-themed humor with some new items. We’ll start with this nice meme about the Queen deciding it’s time for a royal coup de grâce.

Next we have a new word for everyone’s dictionary.

One of the options being discussed in London is having another vote, which would be very consistent with the European tradition of requiring people to vote over and over again until they give the result desired by the elites.

At which point, as shown below, there are no more votes.

 

And I’ve saved the best for last, A satirist put together a clever song about the message British voters sent to the elite back in 2016 (warning: PG-13).

I especially like the references to the establishment’s hysterical doom-and-gloom predictions about what would happen (“Project Fear”) if voters opted for independence.

P.S. The supposed Conservative government in the United Kingdom is doing a terrible job of delivering Brexit, even though they should be embracing independence so they can reduce the burden of government.

P.P.S. Here’s my 2016 pre-vote column on the economic case for Brexit, and here’s my post-vote column on the hoped-for implications of the upset victory.

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My views on Brexit haven’t changed since I wrote “The Economic Case for Brexit” back in 2016.

It’s a simple issue of what route is most likely to produce prosperity for the people of the United Kingdom. And that means escaping the dirigiste grasp of the European Union.

The European Union’s governmental manifestations (most notably, an über-powerful bureaucracy called the European Commission, a largely powerless but nonetheless expensive European Parliament, and a sovereignty-eroding European Court of Justice) are – on net – a force for statism rather than liberalization. Combined with Europe’s grim demographic outlook, a decision to remain would guarantee a slow, gradual decline….Leaving the EU would be like refinancing a mortgage when interest rates decline. In the first year or two, it might be more expensive because of one-time expenses. In the long run, though, it’s a wise decision.

But if I was rewriting that column today, I would change the title to “The Economic Case for Hard Brexit.”

That’s because Prime Minister Theresa May and other opponents are pushing for a watered-down version of Brexit. Sort of Brexit in Name Only.

Indeed, Dan Hannan, a member of the European Parliament, explains in the Washington Examiner that the deal negotiated by Theresa May is the worst possible outcome.

This is the sort of deal that a country signs when it has lost a war. Under its terms, Britain will remain subject to all the costs and obligations of EU membership, but will give up its vote, its voice and its veto. …EU exporters will enjoy privileged access to the world’s fifth-largest economy. They won’t need to worry about world competition. …In the two-and-a-half years since the referendum, civil servants, politicians, financiers and politically-connected business cartels have worked assiduously to overturn to result. …Some, including George Soros and Tony Blair, sought to overturn the result outright with a new referendum. Others, more craftily, sought instead to ensure that, while something technically called Brexit may happen, nothing actually changes. Sadly, they have achieved something far worse than no change. Their deal — Theresa May’s deal — will leave Britain in a more disadvantageous place than either leaving cleanly or staying put. It keeps the burdens of EU membership but junks the advantages.

Brian Wesbury and Bob Stein, both with First Trust Advisors, point out that Hard Brexit is the best option. Trade would continue, but based on WTO rules instead of the EU’s free trade agreement.

Some analysts and investors are concerned about a “Hard Brexit,” in which the U.K. supposedly plunges into chaos as it crashes out of the EU without an agreement. …Count us skeptical. …Any harm to the U.K.’s economy would be relatively mild… It’s not like there would be no trade between the U.K. and the EU after a Hard Brexit. Trade rules would simply shift to the ones that apply between the EU and other countries under the World Trade Organization, like those that apply to EU-U.S. trade.

While WTO rules are quite good, they’re not as good as complete free trade.

But there would be pressure to move in that direction under a Hard Brexit.

…the EU would be under enormous pressure to lower tariffs and cut a new deal with the U.K. In 2017, the rest of the European Union ran a roughly $90 billion trade surplus with the U.K. So if a Hard Brexit makes it tougher for the rest of the EU to export to the U.K., every national capital in the EU would be flooded with lobbyists asking to cut a deal. Meanwhile, leaving the EU means the U.K. would have the freedom to make free trade deals with the U.S. and Canada, and any other country it wanted, without having to wait for the EU. Yes, a Hard Brexit risks some financial jobs, but the same argument was used when the U.K. decided not to join the Euro currency bloc, after which London kept its role as Europe’s financial center.

For what it’s worth, I’m more interested in whether we can get a really good trade deal between the US and UK following a Hard Brexit.

Regardless, any possible slippage on trade between the UK and EU would be more than offset by the likelihood of better policy in other areas.

…there’s another basic reason why a Hard Brexit would be in the long-term interests of the U.K….any organization powerful enough to overrule the democratic process in the U.K. regarding economic laws and regulations…is also powerful enough to impose anti-free market policies… And, over time, since men are not angels and power corrupts, any international body with such power would gravitate toward policies that aggrandize the international political elite… In fact, the EU has already issued rules that stifle competition, like setting a standard minimum Value-Added Tax rate.

Felix Hathaway from London’s Institute of Economic Affairs, debunks Project Fear in an article just published by Cayman Financial Review.

…the only option ahead with a clear path, and requiring no new legislation in parliament, is some form of ‘Hard Brexit.’ …By Hard Brexit I mean the U.K. leaving the EU on March 29 without a withdrawal agreement. Unlike most other options, this does not require the cooperation of the EU to proceed. In this scenario, the U.K. leaves both Single Market and Customs Union of the European Union at 11 p.m. on March 29, 2019, along with leaving the various political institutions of the EU and the jurisdiction of the Court of Justice of the EU. …many of the more alarming warnings of no cooperation at all can be dismissed as fanciful. A more believable ‘no deal’ Brexit might look as follows. …the Commission is doing all it can to publicly rule out this sort of “managed no deal,” yet in doing so has stated that it would unilaterally extend agreements in selected sectors, including for financial services, following a WTO exit. …one could reasonably expect further agreements, possibly at the 11th hour in March… These would likely cover citizens’ rights, road haulage, and facilitated customs checks for certain classes of goods, and would be negotiated with the member states with which the U.K. does the most business.

For what it’s worth, I think vindictive EU bureaucrats probably want to inflict some needless harm, even though it will hurt them as much – and maybe more – than it would hurt the UK.

But Felix is right that common sense – sooner or later – will lead to agreements to smooth over any bumps in the transition. Indeed, he just wrote another article demonstrating how this is already happening.

Here’s the most important part of his article, which I like because it echoes my arguments about the pressure for better policy in an independent United Kingdom.

Ultimately, the most significant factor will be domestic policy decisions by the U.K. government, particularly in areas of taxation and housing. This may be fairly unexciting news at the end of an article about Brexit, but if the U.K. is to succeed as a “free trading, buccaneering nation,” such success will depend in large part on the ability of companies to attract investment through low corporate taxes, and the ability of workers to move to where they will be most productive through further housebuilding in key areas. …perhaps as an unexpected consequence of the conversation surrounding Brexit,… A recent ComRes poll found that, although divided on almost every other aspect, a clear two thirds of voters agree that when Brexit is complete, “the U.K. should try to become the lowest tax, business-friendliest country in Europe, focused on building strong international trade links.”

And keep in mind that bureaucrats in Brussels are pushing to make the European Union more statist (which, sadly, is contrary to the continent’s historical tradition), so it’s becoming ever-more important to escape.

This is why what happens with Brexit is among my greatest hopes and fears for 2019.

Let’s close with a bit of humor.

The Cockburn column in the Spectator mocks the New York Times for its anti-Brexit fanaticism.

The Times usually supports democracy in backward and violent states, but it hates Brexit. No news is too fake for the Times to print when it comes to Brexit. This week, the Times hit new heights of fantasy. ‘Roads gridlocked with trucks. Empty supermarket shelves. An economy thrown into paralysis,’ a would-be novelist named Scott Reyburn wrote earlier this week. His story, ‘As Brexit Looms, the Art World Prepares for the Fallout’, was recycled as a front-page item on the Times’s international edition. …Britain is in a ‘crazed Brexit vortex’, adds Roger Cohen, holder of the Tom Friedman Chair in Applied Chin-Stroking. …Yes, the British government are useless. But nobody in London is stockpiling food. Nobody is fighting in the streets, as the French are every weekend. The markets factored in their Brexit uncertainty two years ago. The supermarkets and roads are as jammed as ever. …The economy is doing much better than the Eurozone, which is slipping into recession. Polls show the British, who the Times characterize as sliding down a neofascist vortex, to be more welcoming of immigration than any other European people.

Bad journalism from the New York Times is hardly a surprise.

I’m mostly sharing his column because this satirical paragraph got me laughing.

The scene that met Cockburn’s eyes upon exiting the terminal at Heathrow reminded him of his days as a foreign correspondent during the Lebanese civil war, or a night out in south London. A dog was eating the innards of a corpse, because supplies of Romanian dog food have broken down. A naked fat man had carved off a slice of his own buttock and was roasting it over a burning tyre, because imports of Bulgarian lamb are held up at Calais. A woman offered to prostitute herself for an avocado, and to sell both of her blank-eyed children for a packet of French butter. There were no black taxis either, because London’s notoriously pro-Brexit taxi drivers had all joined one nationalist militia or other. Finally, a black-market cheese dealer with a rocket launcher affixed to the back of his pickup agreed to take Cockburn into the city. They bribed their way through the checkpoints with wedges of brie. Or not.

Speaking of laughs, Hitler parody videos have become a thing.

Here’s a new Brexit-related installment in the series.

Not as clever as the first Hitler parody I shared as part of my collection of Brexit humor, but it has some funny moments.

And if you have time, this Brexit tapestry is quite amusing.

P.S. There are some anti-Brexit people who support free markets, which is rather baffling since I can’t imagine why they would want the U.K. to be part of a bureaucracy that tries to brainwash children in favor of higher taxes. Indeed I was only semi-joking when I wrote that Brussels was “the most statist place on the planet.”

P.P.S. Though there are many reasons to question whether U.K. politicians can be trusted to adopt good policy.

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There’s a very strong economic argument for Brexit which is partly based on an independent United Kingdom having more leeway to adopt pro-market policies.

This case for Brexit is also based – indeed, primarily based – on the fact that the European Union is a slowly sinking ship thanks to horrible demographics and economic weakness. I think the Brits made the right choice (assuming Prime Minister May doesn’t sabotage the process) in voting to get in a lifeboat.

By the way, the chronic stagnation in Europe is largely the fault of member nations.

For instance, I don’t blame the euro (the common currency used in 19 nations) or the European Commission (the easy-to-mock Brussels-based bureaucracy of the EU) for the bad policies adopted in nations such as France, Italy, and Greece.

That being said, the European Commission and its political supporters want the power to make things worse. Actually, they want two powers to make things worse.

  1. The first bad idea, generally supported by the French and Germans, is to give Brussels direct fiscal powers. This almost certainly would mean E.U.-wide taxes imposed by Brussels, presumably accompanied by expanded levels of intra-E.U. redistribution.
  2. The second bad idea, also supported by France and Germany, would be E.U.-wide rules to force national governments to adopt bad policy. This almost certainly would mean greater levels of tax harmonization, presumably accompanied by mandates to expand the welfare state.

I’ve written before about the first bad idea, so let’s focus today on the threat of Brussels-mandated tax harmonization.

The main obstacle to this bad idea is a “unanimity rule” that basically prevents further centralization of tax policy unless every member nation concurs.

This rule is what saved the E.U. from prior attempts to force member nations to adopt anti-growth policy.

…efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there was an effort to require a minimum corporate tax rate of 30 percent.

But the bureaucrats in Brussels have not given up.

Politico reports on the latest effort to weaken fiscal sovereignty.

The European Commission…is set to unveil a communication…that will call on the bloc’s leaders to consider moving to qualified majority voting in EU taxation policy. That system would allow a tax initiative to become EU law as long as 16 out of the 28 countries agree on it. Any tax-related decision currently requires unanimity, leaving many tax proposals doomed to fail. The tax veto has undermined the bloc’s policy ambitions…the…veto…has left several tax files gathering dust on Brussels’ shelves, like the financial transactions tax, which the Commission first proposed in 2011. …The communication is set to suggest introducing qualified majority “step-by-step” for tax… The French commissioner discussed the plan over a lunch with EU ambassadors… “Ireland, Malta, Sweden and Cyprus were against it,” one diplomat that received a debrief on the meeting said. “The rest were cautious and few were for it.” France, Spain, Italy and Portugal were among the few that spoke in favor of the plan. …The Commission is determined to make its case. …The tax veto has…deprived national coffers of billions of euros, according to the draft communication… The digital and financial transaction taxes alone would have generated over €60 billion a year in revenue, the document says.

I do give the European Commission credit for honesty.

The bureaucrats are openly stating they want to get rid of the unanimity rule so that politicians in 16 member nations can force all 28 member nations to have high taxes.

You may be wondering, incidentally, why the European Commission, and the pro-tax governments like France want one-size-fits-all rules for the European Union? Why not have a let-a-thousand-flowers-bloom approach so that all 28 nations to make their own choices?

Once again, they are brutally honest. They unabashedly state that they want harmonized rules so they can eliminate tax competition (the left fears a “race to the bottom“).

Speaking of which, the bottom line is that Europe will decay and decline much faster if the European Commission is successful in its latest effort to kill the unanimity requirement. The last thing the E.U. needs is more taxes and higher spending.

P.S. There already are rules for harmonized VAT taxation in Europe, which predictably has enabled ever-higher tax rates.

P.P.S. The European Commission even tries to brainwash children into supporting higher taxes.

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Less than 10 years ago, many European nations suffered fiscal crises because of a combination of excessive spending, punitive taxes, and crippling debt.

The crises have since abated, largely because of direct and indirect bailouts. But the underlying policy mistakes haven’t been fixed.

Indeed, the burden of government spending has increased in Europe and debt levels today are much higher than they were when the previous crisis began.

Unsurprisingly, these large fiscal burdens have resulted in anemic economic performance, which helps to explain why middle-class French taxpayers launched nationwide protests in response to a big increase in fuel taxes.

The French President, Emmanuel Macron, capitulated.

But some have suggested that Macron’s problem is that he wasn’t sufficiently bold.

I’m not joking. Led by Thomas Piketty, a few dozen European leftists have issued a Manifesto for bigger government.

We, European citizens, from different backgrounds and countries, are today launching this appeal for the in-depth transformation of the European institutions and policies. This Manifesto contains concrete proposals, in particular a project for a Democratization Treaty and a Budget Project… Our proposals are based on the creation of a Budget for democratization which would be debated and voted by a sovereign European Assembly. …This Budget, if the European Assembly so desires, will be financed by four major European taxes, the tangible markers of this European solidarity. These will apply to the profits of major firms, the top incomes (over 200,000 Euros per annum), the highest wealth owners (over 1 million Euros) and the carbon emissions (with a minimum price of 30 Euros per tonne).

Here are the taxes they propose as part of their plan to expand the burden of government spending.

I’m surprised they didn’t include a tax on financial transactions.

And here’s a video (in French, but with English subtitles) explaining their scheme.

To put it mildly, this plan is absurd. It would impose another layer of government and another layer of tax on a continent that already is suffocating because the public sector is too large.

I’m not the only one with concerns.

In a column for Bloomberg, Leonid Bershidsky points out why he is underwhelmed by Piketty’s proposal.

The reforms proposed by Piketty and a group of intellectuals and politicians — notably Pablo Iglesias, leader of Spain’s leftist Podemos party — include the creation of a European Assembly. It would have the power to shape a common budget and impose common taxes… Piketty advocates four measures that would collect a total equivalent to 4 percent of Europe’s GDP… What is being proposed is essentially a return to the fiscal policies of the 1970s, which provoked Astrid Lindgren to write her satirical essay “Pomperipossa in Monismania.” In 1976, the children’s author was confronted with a tax bill of 102 percent of her income. …Hit them with new taxes and watch them flee to the U.S. and Asia. They won’t stay like patriotic Lindgren, whose essay helped to topple the Swedish government in 1976. And no amount of government funding…will repair the damage that envy-based taxation can wreak on economies already finding it hard to innovate.

Let’s not forget, by the way, the many thousands of French households who also have suffered 100 percent-plus tax rates.

But let’s not digress.

Writing for CapX, John Ashmore explains why Piketty’s plan will make Europe’s problems even worse.

…a group of politicians, academics and policy wonks spearheaded by…French economist Thomas Piketty…have put their names to a new Manifesto for the Democratisation of Europe. …For the most part, the manifesto reads like a souped up version of the kind of policies we’ve heard time and again from leftwing politicians. …The details of today’s ‘manifesto’ make Labour’s Marxist Shadow Chancellor John McDonnell look like a moderate centrist. Where Labour advocate putting corporation tax back up to 26 per cent, Piketty and co want it hiked to 37 per cent. And while we Brits spent plenty of the Coalition years discussing whether income tax should be 45p or 50p in the pound, the Manifesto goes all guns blazing for a 65 per cent top rate… these measures are projected to raise 800bn euros, equivalent to four times the current EU budget. …that would be a huge transfer of power, not from the rich from the poor, but from taxpayers to politicians.

A 65-percent top tax rate? At the risk of understatement, that’s a recipe for less entrepreneurship and less innovation.

Moreover, based on America’s experience during the Reagan years, it’s safe to say that actual tax receipts would fall far, far short of the projection.

But the higher spending would be real, as would the inevitable increase in red ink. And it’s worth noting that the Manifesto proposes to subsidize the debt of bankrupt welfare states. Very much akin to the eurobond scheme, which I pointed out would be like cosigning a loan for an unemployed alcoholic with a gambling addiction.

P.S. During my recent trip to London, I repeatedly warned people that a real Brexit was the only sensible choice because the European Union at some point will fully morph into a transfer union (i.e., a European budget financed by European taxes). It was nice of Piketty to issue a Manifesto that confirms my concerns. Simply stated, the United Kingdom will be much better off in the long run if it escapes.

P.P.S. Let’s not forget that Piketty’s core argument for class warfare has been thoroughly and repeatedly debunked. Indeed, only 3 percent of economists agree with his theory.

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I just spent several days in London, where I met with journalists and experts at think tanks to find out what’s happening with Brexit.

By way of background, I think voters in the UK made the right decision for the simple reason that the Brussels-based European Union is a slowly sinking ship based on centralization, harmonization, and bureaucratization.

Membership already involves onerous regulations, and remaining a member of the EU would mean – sooner or later – sending ever-larger amounts of money to Brussels, where it then would be used to prop up Europe’s failing welfare states.

Getting out may involve some short-term pain, but it will avert far greater pain in the future.

At least that was the theory.

The reality is that the Tory-led government in London has made a mess of the negotiations. The newly announced deal isn’t a real Brexit.

Writing for the Telegraph, Dan Hannan, a British member of the European Parliament, sums up why the deal is a joke.

The deal, as one Italian newspaper puts it, represents “a resounding victory for the EU over Her Majesty’s subjects”. Yet there was nothing inevitable about this climbdown. On the contrary, there is something extraordinary, awe-inspiring even, about the slow-witted cowardice that led British negotiators to this point. …there is something extraordinary, awe-inspiring even, about the slow-witted cowardice that led British negotiators to this point. …the disastrous acceptance of the EU’s sequencing, which meant that all British leverage, including the exaggerated financial contributions, would be tossed away before the EU even began to discuss trade. …Can you blame Eurocrats for gloating? They sensed right at the start that they were dealing with a defeated and dispirited British team, whose only objective was to come back with something – anything – that could be described as a technical fulfilment of the referendum mandate. …we have ended up with the sort of deal that a defeated nation signs under duress. Britain will be subject to all the costs and obligations of EU membership with no vote, no voice and no veto.

But it gets worse.

Unbelievably, Britain has given the EU a veto over whether it can leave these arrangements: unlike EU membership itself, we have no right to walk away. Brussels will run our trade policy, our economy, even elements of our taxation for as long as it likes. As the usually Euro-fanatical Bloomberg asked incredulously last week, “Once Britain has acceded to this, what reason is there for the EU to agree to any other kind of deal?” …Leavers never did “own” this process. From the start, it has been controlled by those who wished it wasn’t happening, and who defined success as salvaging as much as they could of the old dispensation.

That final sentence is key. Theresa May was not a Brexit supporter. She failed to play some very strong cards and she basically worked to come up with a fake Brexit.

It remains to be seen, though, whether Parliament will approve this humiliating package. The House of Commons will vote in about two weeks and here’s how the UK-based Times describes the possible outcomes if the plan gets rejected.

Scenario 1: a second Commons vote The prime minister fails to secure Commons support for her withdrawal agreement… Her response is to…then bring…it back for a second vote…, as happened in America after Congress initially rejected its government’s bank rescue plan in 2008. …Scenario 2: change of prime minister May fails to get the deal through and either resigns, or faces a confidence vote among Tory MPs which, if she lost, would also see her step down. …The question for Tory MPs would then be whether to back the deal mainly negotiated under May… Scenario 3: a second referendum A defeat for May could result in a second referendum but only if she or her successor supported it. Tory policy is to oppose a second referendum. …Scenario 4: no-deal Brexit Tory Brexiteers in the cabinet and in the party would respond to a defeat for the May proposals by pushing for a no-deal Brexit, or a “managed” no-deal. …Scenario 5: the Norway option Though there is no parliamentary majority at present for the May deal, or for no deal, there could be for a closer relationship with the EU. This could take the form of…the EEA (European Economic Area), the so-called Norway option.

For what it’s worth, I fear “Scenario 1.” Members of the Conservative Party are like American Republicans. They occasionally spout the right rhetoric, but most of them are go-along-to-get-along hacks who happily will trade their votes for a back-room favor.

So I will be disappointed but not surprised if this deal is enacted. It’s even possible it will be approved on the first vote.

My preference is for “Scenario 4” leading to something akin to “Scenario 5.”

A report from the Adam Smith Institute offers a user-friendly description of this “Norway option.”

We cannot however be subordinate to a supranational institution… Nor should we make do with a semi-detached position inside the EU that also gives us semi-detached influence while still constraining the UK in the wider world. …we have to leave and reform the relationship in a characteristically British, outward-looking and open way. …The UK therefore requires something of a “soft” exit that maintains open trade but removes Britain from political union and from all that Britain has consistently struggled with – the Common Agricultural Policy, the Common Fisheries Policy, the hollowing out and the outsourcing of democracy, the constraints on global trade deals.

And what does that look like?

…the most optimal way to exit would be to take up a position outside the EU but inside the European Economic Area (‘EEA’), which very likely means re-joining the European Free Trade Association (‘EFTA’). As Britain is already a contracting party to the EEA Agreement there would be no serious legal obstacle and it would mean no regulatory divergence or tariffs but it would mean retaining freedom of movement for EU/EEA nationals. …Such a deal would require agreement from the EU and EFTA but both would have strong reasons for allowing it…with the UK on board, EFTA would instantly become the fourth largest trade grouping in the world. …In short, EEA countries have a market-based relationship with the EU by having full single market access. They are free of the EU’s political union ambitions, and can class themselves as self-governing nation states. …The EEA position also opens up the ability to make trade agreements with third countries (something the UK cannot do now), would provide the UK with the freedom to set its own levels of VAT, and would allow the UK to step away from its joint liability of EU debts. That would be very attractive to Britain seeking a liberal soft exit.

Here’s a table showing the difference between EU membership and EEA membership.

Sounds like the outline of a acceptable deal, right?

Not so fast. The crowd in Brussels doesn’t want a good deal, even though it would be positive for the economic well-being of EU member nations. They have an ideological desire to turn the European Union into a technocratic superstate and they deeply resent the British for choosing self-government and democracy.

As such, the goal is to either maneuver the British government into a humiliating surrender (Theresa May was happy to oblige) or to force a hard Brexit, which would probably cause some short-term economic disruption.

But there was also resistance on the British end to this option since it ostensibly (but perhaps not necessarily) requires free movement of people. In other words, it might mean unchecked migration from EU/EEA nations, which arouses some nativist concerns.

Since I mentioned that a hard Brexit could lead to potential short-term economic disruption, this is a good opportunity to cite a very key section of Mark Littlewood’s recent column in the UK-based Times.

The Treasury has suggested that GDP could fall by as much as 7.7 per cent if Britain exited the EU without a deal. However, is there any reason to treat this projection any more seriously than the Treasury’s view that the Leave vote itself would lead to a recession and a reduction in GDP by between 3 per cent and 6 per cent? Almost all official predictions relating to the economic impact of the Brexit vote have been shown to be enormously over-pessimistic. Why should one assume that present forecasts are not beset by the same flaws?

Amen. The anti-Brexit crowd (the “remainers”) tried to win by arguing that a vote for Brexit would cause an economic collapse. That “Project Fear” was exposed as a joke (and was the target of some clever humor).

And the new version of Project Fear is similarly dishonest.

In a column for CapX, Julian Jessop of the Institute of Economic Affairs has additional details.

The public is being bombarded with warnings of potentially devastating impacts on the economy, their security and their welfare if the UK becomes a “third country” at 11pm on 29th March 2019, without the Withdrawal Agreement and framework for a future relationship anticipated in Article 50. …the daftest headline…is that a “no-deal” Brexit means that the UK would run out of food by August 2019 (the 7th, to be precise). This relies on the bizarre assumption that the UK would no longer be able to import food, not just from the EU but from anywhere in the world, and that we would continue to export food even as our own people starve. …it is often assumed that the EU would ignore its other legal obligations, including WTO rules. …the EU would not be able to treat the UK any less favourably than other WTO members.. Relying on the courts to fix things is also ra.rely a good idea. But it is absolutely right that the EU can’t go out of its way to make life difficult for the UK either.

Run out of food? Good grief, I thought the global-warming Cassandras were the world’s worst when it comes to exaggeration, but they’re amateurs compared to the anti-Brexit crowd.

Anyhow, this column is already too long, but here are links to four other CapX columns for interested parties.

I especially like the last column. One of the behind-the-scenes aspects of the Brexit debate is that the eurocrats in Brussels are scared that the UK will become more market-oriented once it has escaped the EU’s regulatory clutches.

And just as the EU has gone after Ireland and Switzerland for supposedly insufficient taxation, it also now is trying to hamstring the United Kingdom. All the more reason to escape and become the Singapore of Europe.

P.S. Donald Trump could help the United Kingdom by negotiating a quick and clean free-trade agreement. Sadly, that violates his protectionist instincts.

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The theory of “economic convergence” is based on the notion that poor nations should grow faster than rich nations and eventually achieve the same level of development.

This theory is quite reasonable, but I’ve pointed out that decent public policy (i.e., free markets and small government) is a necessary condition for convergence to occur.

The link between good policy and convergence explains why Hong Kong and Singapore, for instance, have caught up to the United States.

And the adverse effect of bad policy is a big reason why Europe continues to lag.

Moreover, it also explains why some nations with awful policy are de-converging.

Today, let’s look at convergence between Western Europe and Eastern Europe.

Here are some excerpts from a new study published by the European Central Bank.

This paper analyses real income convergence in central, eastern and south-eastern Europe (CESEE) to the most advanced EU economies between 2000 and 2016. …The paper establishes stylised facts of convergence, analyses the drivers of economic growth and identifies factors that might explain the differences between fast- and slow-converging economies in the region. The results show that the most successful CESEE economies in terms of the pace of convergence share common characteristics such as, inter alia, a strong improvement in institutional quality and human capital, more outward-oriented economic policies, favourable demographic developments and the quick reallocation of labour from agriculture into other sectors. Looking ahead, accelerating and sustaining convergence in the region will require further efforts to enhance institutional quality and innovation, reinvigorate investment, and address the adverse impact of population ageing.

The study is filled with fascinating data (at least if you’re a policy wonk).

This chart, for example, shows how many nations are converging (the dots above the diagonal line) and how many nations are falling behind (the dots below the diagonal line).

The yellow dots are Eastern European nations, so it’s good news that all of them are experiencing some degree of convergence.

But the above graphic doesn’t provide any details.

So let’s look at another chart from the study. The blue bar shows per-capita GDP in selected Eastern European nations as a share of the EU average. The yellow dot shows where the countries were in 2008 and the orange dot shows where they were in 2000.

The good news, at least relatively speaking, is that all nations are catching up to Western Europe.

But the report notes that some are catching up faster than others.

The developments were…heterogeneous within CESEE countries that are EU Member States. Some of them (the Baltic States, Bulgaria, Poland, Romania and Slovakia) experienced particularly fast convergence in the period analysed. At the same time, other CESEE EU Member States found it hard to converge… In fact, GDP per capita in Croatia and Slovenia diverged from the EU average after 2008… Given these heterogeneous developments, it appears that while in some CESEE countries the middle-income trap hypothesis could be dismissed (at least given their experience so far), in others the signs of a slowdown in convergence after reaching a certain level of economic development are visible.

My one gripe with the ECB study is that there’s a missing piece of analysis.

The report does a great job of documenting relative levels of prosperity over time. And it also has a thorough discussion of the characteristics that are found in fast-converging countries.

But there’s not nearly enough attention paid to the policies that promote and enable convergence. Why, for instance, has there been so much convergence in Estonia and so little convergence in Slovenia?

So I’ve tinkered with the above chart by adding each nation’s ranking for Economic Freedom of the World.

Lo and behold, a quick glance shows that higher-ranked nations (blue numbers indicate a nation is in the “most free” category) have enjoyed the greatest degree of convergence.

Here are some specific observations.

  • The Baltic nations are the biggest success stories of the post-communist world. Thanks to pro-market reforms, they have enjoyed the most convergence.
  • Romania and Slovakia also experienced big income gains. Romania is in the “most free” group of nations and Slovakia was in the “most free” group until a few years ago.
  • Poland has enjoyed the most convergence since 2008. Not coincidentally, that’s a period during which Poland’s economic freedom score climbed from 7.00 to 7.27.
  • Bulgaria also merits a positive mention for a big improvement, doubtlessly driven by a huge improvement (from 5.55 to 7.41) in economic freedom since 2000.
  • Sadly, Slovenia and Croatia have not experienced much convergence, which presumably is caused in part by their comparatively low rankings for economic liberty.

To be sure, there’s not an ironclad relationship between a nation’s annual score and yearly growth rates.

But, over time, poor nations that want convergence almost certainly won’t get the necessary levels of sustained strong growth without high scores for economic liberty.

P.S. Here’s some related research on this topic from 2017. And here’s a column on the evolution of economic liberty (or lack thereof) in Europe.

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