The exit of Great Britain from the European Union is a clear demonstration that history is not linear. Countries may go in one direction and then in another. Many people also believe Brexit shows that countries can retrogress after having reached the pinnacle of civilization. This is certainly true. It happened with Rome, for instance. But I argue that this is not the case of Britain with Brexit. In fact, it might be the best thing for Great Britain in the long run.
Certainly, what the British voted for goes against the grain of conventional wisdom. For many centuries, we have believed that countries get better as they become bigger, or part of a bigger political entity. In this way, many people think that modernization in Europe began in the 17th century with the integration of the many feuds of France into a unified kingdom under Louis XIV.
The unification of the United States created a country that was not just big, but great. Germany became a power to reckon with only after its unification, carried out in the Palace of Versailles in 1871. And Europe had seemed to be reestablishing the grandeur it lost during the course of two world wars by coming together in the European Union. Now Britain spoiled the inexorable march of progress by voting itself out of the European Union. Or, at least, that is what the overwhelming majority of people in the world seem to be thinking.
Is the majority right?
What did Britain vote for?
The almost universal disdain for what Britain did on June 23 is based on four mistaken perceptions. First, most people seem to believe that the country voted against free trade and globalization. This voters did not do. They voted against being members of the European Union (EU), an institution bent on creating something like the United States of Europe, establishing a common European sovereignty over all its members. Voters have not said that they want to isolate Britain. On the contrary, they have said that they want to remain a globalized country and very close to Europe.
Second, most people got the impression that the voters who wanted to get out of the EU were primarily manual laborers, people with lower-than-average education, those who live outside fashionable London, and the elderly. This characterization is not entirely true. Many young, well-educated, fashionable Londoners and southerners voted Leave. Moreover, in any case, the implied idea that the opinions of voters who fall into the former categories should somehow be disqualified is relevant only if the decision had been made not in a full democracy but in one in which the votes of the younger, richer, more intellectual Londoners had extra value.
The third perception is that the people who voted Leave did so because of truly disreputable motivations (besides destroying free trade), particularly anxieties about immigration. Some people voted for this reason, which in any case is a valid one. But many others voted because they felt that Britain was losing something very valuable in its subordination to an increasingly powerful bureaucracy in Brussels. Maybe this explains the predominance of older people among those voting for leaving. They are the ones who remember how it was before Brussels. But, in any case, there is no statute of limitations on age in the British democracy.
Fourth, most people think that by opting out of the EU, Britain was condemning itself to a depressive economic condition, quite inferior to the bright future it would have in the EU. But this is not necessarily so. For instance, the consulting company PwC projected two scenarios differentiated by the relationship that the UK would keep with the EU in the future. In the worst case, by 2030, British income per capita would be 2.7% lower that that which it would have if it remained in the EU. In the best case, it would be 0.8% lower. This, of course, is equivalent to zero difference when projecting 14 years into the future. Besides, PwC notes that most of the difference between the Leave and Remain options was attributable to problems of uncertainty in the very short run after a Leave vote—something that could be managed today.
These calculations, quite representative, show that the result should not be judged on flimsy economic projections. It is too important to leave it to the economists. It involves many other dimensions that could really make the difference.
Political sovereignty is not necessary for free trade
The EU has at least two dimensions. One of them involves territorial sovereignty. The other does not.
The first includes the power of the European Commission to impose laws and regulations on all the persons living in the territory of the EU. It requires acknowledging the authority of Brussels.
The second includes four freedoms for all members of the EU: free trade of goods and services, freedom of establishment, free movements of capital, and free movement of citizens. These freedoms set a limit to what the Brussels bureaucracy can do in the territory.
Political integration is not necessary to create a territory in which the four freedoms are respected. In fact, it is much easier to create such a territory if political integration is not required. Do you think it reasonable that the United States should have to become a member of the EU and adopt all the EU laws and regulations in order to have free trade with it? Or, alternatively, that the EU should become a state of the United States?
This archaic way of thinking is what the UK voted to leave.
Archaism and modernity
The technological revolutions of our times, connectivity and globalization, have made the interconnection between territorial sovereignty and trade obsolete. There was globalization during the Industrial Revolution, but it was essentially different from our modern kind. In those times, coordination required geographical closeness. For this reason, businesses had to operate in a single location and then trade in either raw materials or finished products.
Today, connectivity has made possible the coordination of complex tasks at a distance. This has led to a different kind of globalization. The lines of production have been broken globally. Some parts of the same product can be produced in one place, where there is a competitive advantage to make it, and other parts in different places, in such a way that the production of one country has become embedded in that of the others.
Thus, in the old times, blocking the entrance of British products to the EU would have hurt mostly British businesses and workers. Now it would hurt Europeans as well. Many British companies are owned totally or partially by European enterprises and the other way around. The products of some are the inputs of the others, in such a way that many products are partly British and partly German, and French, and Italian, and so on. If the Europeans put some tariffs on British goods and the British on European goods, both the British and the European economies would suffer greatly.
After 43 years, the production lines of Britain and the continent are interwoven in all kinds of products. That is, in the new world of connectivity, free trade is not a privilege given to foreigners. It is in the interest of the continental Europeans to have free trade with Britain, and with the rest of the world.
Is the doomsday scenario inevitable?
Most people seem to assume that the British have initiated a process that will ultimately lead to a breakdown of its economic, cultural, and political links with Europe, and, it would seem, to the sinking of the British Isles into the cold North Sea. They awakened the Furies, and now they have no other option but to suffer the consequences.
This view assumes that in the next several years, the highest priority of the European community will be to punish the British. This could well be the attitude of the bureaucrats in Brussels, who are furious. Right after the results of the referendum were announced, the president of the European Commission said that the ties between Europe and the United Kingdom should be cut as soon as possible.
Such fury is understandable. Britain contributed 13 billion pounds to the maintenance of the Brussels bureaucracy. The bureaucrats would love to spend their anger charging high import tariffs on British goods and imposing plenty of capital controls to prevent British banks from operating with European customers.
But this is unlikely to be the attitude of the rest of the European population because, as previously noted, any cut made to British production would bleed into the continent. It is quite implausible as well that continental entrepreneurs, who export $571 billion to the United Kingdom, would say, Yes, it’s true, we should punish the British, I will support tariffs to British goods even if this means that the British will impose tariffs on mine. The economic authorities of the European countries, as opposed to the bureaucrats in Brussels, would also note that Britain imports from Europe are $180 billion greater than its exports to the continent.
Sensible people living the real life that exists outside the Brussels ivory towers are already calling for common sense. Markus Weber, the head of the BDI, the representative of German industry, said it very clearly: “Imposing trade barriers, imposing protectionist measures between our two countries—or between the two political centers, the European Union on the one hand and the UK on the other—would be a very, very foolish thing in the 21st century.”
So if Brussels bureaucrats intend to punish the UK, their reason for doing so is not to defend the interests of the Europeans. What, then, are they defending if they attempt to sink Britain, and good parts of Europe with it?
Captured by the bureaucracy
The Brussels bureaucrats want to make it difficult for Britain to access the European free market for two reasons: First, their comfortable lives depend on the association that people mistakenly make between access to free trade inside Europe and the taxes that fund bureaucratic positions and pet projects. Second, the bureaucrats have to make sure that those who opt out from the EU fail. If not, everybody would run for the exit.
This reasoning suggests an enormous weakness in the EU. It has become a club that keeps its members not because it provides great benefits in exchange for expense, but instead because it threatens them with terrible penalties if they leave. With their attitude, the bureaucrats are confirming what many supporters of Leave said: that the EU has been captured by a bureaucracy that doesn’t give a thought to hurting the European population (by breaking their economic ties with the British, for instance) for the sake of keeping their positions of privilege.
That the bureaucrats of the EU do not care about what their subjects think is evident in the next table, compiled with data from surveys conducted by the Pew Research Center in early 2016:
The lack of satisfaction with the EU demonstrated by these figures is striking. Among the polled countries, Sweden, the Netherlands, Germany, Spain, France and Greece were very close to the dividing line of 50% with unfavorable views of the EU, very close to what the UK had in terms of dissatisfaction before the referendum. The bureaucrats in Brussels have known this for many years. But they do not respond to public opinion in their actions, or their non-actions. They never imagined that a country would dare to opt out. Now Britain has done it, and Pandora’s Box is open.
The current panic will fade away. We should expect that, in the long term, Brexit will not destabilize the world. Europe is too mature to allow the fury of bureaucrats to determine the course of its history. After some ceremonial dances in Brussels, Great Britain and Europe will remain very close and enjoy mutual free trade.
For this to happen, however, some changes have to happen. The EU will have to understand that an unelected bureaucracy in Brussels cannot throw an entire continent and attached islands into a project that people do not want, or at least do not want in its current state. It should differentiate between the benefits of having access to the four freedoms and those that could come from having a proto-federal government and the bureaucracy it brings about. The bureaucracy must prove that it is necessary and efficient and responsive to the needs of the population. If not, people will refuse to pay for it.
If the EU does collapse in the wake of these events, the culprit will not be ignorant, ill-mannered, old British yeomen but the highly educated, refined, and out-of-touch-with-the-people bureaucrats in Brussels. And Europe will be all the worse for it.
It’s worth remembering that this not the first time the British have backed away from European schemes. In the 16th century, the country walked out of the Pope-dominated, European-wide Catholic world, defying predictions that this separation would mean their doom. In fact, the grandeur of England started right there. Great Britain also stood alone in Western Europe against Napoleon and, for almost two years, against Hitler during World War II. Thus, separation from the continent is not a novelty.
As a rule, the British have differentiated from the rest of Europe throughout their history, as when they opted for constitutional democracy in the 17th century when the norm in the continent was absolutism. Right at the same time, they opted for a free economy while Louis XIV was taking control of the French economy and establishing incentives like widespread subsidies and regulations, sure that this was the way to create industries.
The deep disdain that many continentals felt for this expression of provincialism was marvelously expressed by Napoleon, whose Continental System of European trade was the acknowledged antecedent of the EU. Trying to see the coast of England from across the Channel while planning to invade it, he called England “that nation of shopkeepers.” The shopkeepers then proceeded to put forward a navy that sunk in Trafalgar the two most powerful navies in the world, the Spanish and French together, and an army that defeated Napoleon himself in Waterloo. This stopped the unification of Europe under one single, talented leader.
In the aftermath, the Industrial Revolution soon became the biggest and deepest social, technological and political transformation in history. It brought about modern democracy and the possibility of sustainable growth. But it did not begin under the aegis of the bureaucrats who were working day and night in the continent with incentives and disincentives to bring it about. Embarrassingly, the Industrial Revolution began in England. And it began there 70 or 80 years before it started in most other countries. Even worse, it expanded to other countries only when they copied the shopkeepers, liberalizing their economies and reducing the power of their lofty bureaucracies.