Leaving Europe is an industrial problem, not an economic one

An interventionist industrial policy is needed to steer Britain through

 

In the early 1990s I was invited to talk to some A level economics students about the EU single market. My talk was similar to the presentations I was giving to local government audiences at the time. Afterwards, the teacher told me that my material was not economics but ‘industrial organisation’ — a different A level altogether.

I mention this because I believe that the economic warnings of the dangers of Brexit are missing the real risks. The economic models are too focussed on the trading relationship between Britain and the EU. I believe that we should be more concerned about the sheer complexity of the regulatory environment that creates the single market and the risks of unintended consequences from a rush to adapt them to a Britain outside the EU.

Macro models

The economic analyses predict that GDP at some point in the future will be less than it otherwise would be. Various macroeconometric models produce different estimates of the loss of national output: three per cent, six per cent, nine per cent, a bit more or a bit less.

The methodological problems of these kinds of models have been debated a great deal since 2008 and so I will leave that aside. Politically they all suffer from the boiling frog problem. The fabled frog which would not sit in boiling water fails to notice when the temperature rises gradually. If GDP fell suddenly by even three per cent people would notice.

The frog would exit the pot. If GDP continues to grow but by a bit less so that in fifteen years it is a few percent less that it might have been, the frog will stay put. No-one lives the counterfactual.

Indeed the only way to confirm that the lower than expected GDP was the result of Brexit would be the same macroeconometric models that made the original prediction.

While macroeconomics deals with aggregates, the real risks lie in the details. Every industrial sector will face challenges which depend on existing regulations and how they are adapted for an ex-member state.

Industrial policy

As I explained to those A level students, in 1985 the European Commission set out a list of some 300 legislative acts needed to complete the single market, all be in place by 1992. The aim was to create a regulatory framework which would transform the organisation of production across many sectors to gain the advantages of a large market. This programme built on the existing mass of rules and they have been revised, replaced and added to since then.

These rules set the terms under which markets operate and over time the production of goods and services in the UK and across Europe has been shaped by these institutions.

Key sectors like motor vehicles, pharmaceuticals, foodstuffs, chemicals, finance and transport were affected. Later additions included the ‘network’ sectors like energy and telecoms. Each sector is fashioned by its own set of regulations, changes to which impact on the cost structure, sources of competitive advantage and investment decisions.  Some rules matter to a specific sector — like cabotage in road haulage or landing rights in aviation, for example. Others are more diffuse, such as who certifies compliance with product standards.

The UK intends to comply with these rules by incorporating them into UK law through the great repeal bill (GRB). The bill can give EU firms the rights they need to operate in the UK. The reciprocal rights are not so easy. EU law-making does not have a mechanism equivalent to the GRB.

None of the problems facing each sector are insoluble, but solutions take time. The EU gave itself seven years to complete its original single market programme, which gives an idea of the timescale. The complexities and the scope for accidents are huge.

More than trade

After many years in the single market it is not just trade with Europe that has changed but Britain’s industrial organisation has been moulded by membership. The single market was never just a matter of exports and imports; its purpose was a much fuller economic integration built on a platform of shared economic institutions.

The impacts, sector by sector, are impossible to calculate or even anticipate. However if there is an economic blowback from Brexit it is more likely to come from a visible problems in one or more sectors.

Finally, Britain’s industrial structure will eventually adapt but we need an active, interventionist industrial policy to steer through the difficult period of adaptation.

Jos Gallacher has lived in Brussels for 15 of the last 18 years. He has been active in the Labour Party since 1979 and currently represents Labour International on Labour’s National Policy Forum.

See: Brexit cannot become an all-purpose alibi for Tory incompetence

 

3 Responses to “Leaving Europe is an industrial problem, not an economic one”

  1. David Jackson

    Industrial base in the UK was impacted back in the 50s with lack of investment and thinking outside of design brilliance our current production thinking is based on imported technology. Thatcher delivered the final blow in the early 80s to industrial base with an over valued currency and she turned economy to reliance on services. This took 66 years to achieve how long would it take to developers a “German” model of industrial efficency assuming the political will and understanding is there and not short term investment mentality of a quick return?

  2. NHSGP

    I believe that we should be more concerned about the sheer complexity of the regulatory environment

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    Cut the Gordian knot.

    That means a massive repeal bill.

    Take one example, insurance regulation. Here’s its just the capital requirements. 804 pages of law. Every month Junker signs an order predicting interest rates in 150 years time.

    They you dig into the details. Greek government bonds have zero risk. They will never default. Why? Its’ politics. The bottom tier of French government, also completely risk free. Why? If the true risk was applied no one would buy the debt.

    Inflation – the major risk – completely ignore.

    It’s regulation that has been corrupted by politicians and does not protect the public.

    Or MIFID II, if you look the details in imposes huge costs. Millions. For what? I doubt the regulators will ever look at the reports, because they are not in a position to process the data. Just a huge payday for auditors.

    The US is getting a bit more sensible and is about to cancel Volker. Millions lost in costs to the banks to be paid by the customer. But at least Trump has the right idea about government over reaction.

  3. NHSGP

    model of industrial efficency assuming the political will and understanding is there and not short term investment mentality of a quick return?
    ===============

    Short termism.

    You mean spending all the pension contributions because you want it now

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