A Cautious Yes On Brexit

Richard Epstein*

Richard Epstein

Richard Epstein

Thursday’s vote on Brexit will perhaps be the most consequential decision that Europe has faced in several generations. The most recent polls suggest that the outcome is very close, with a small but uncertain majority in favor of staying. Last week’s polls taken after the senseless assassination of Labor MP Jo Cox, a strong supporter of Great Britain retaining its place in the European Union, point to a surge in favor of exiting for reasons that are hard to unpack. The issue is one on which I have previously equivocated. Now, after much unhappy reflection, I think that on balance a vote to leave the EU is the right choice—in part because the established leadership of both the Conservative and Labour parties is urging the opposite course.

A decision to leave or remain has vast ramifications for many aspects of British life: economics, energy, the environment, immigration, a system of weights and measures, and much more. Making a vote is a black and white yes/no decision in a world filled with grays, given that there are major advantages both ways. Staying in the EU assures England access to continental markets, which is why many, but by no means all, large firms and banks support remaining. But at the same time, staying in the EU subjects England to vast amounts of regulation from the powerful Brussels bureaucracy, which extends its tentacles with each new decree into every nook and cranny of British and European life, as Diana Furchtgott-Roth notes. Today, more law in Great Britain comes from Brussels than London.

The EU’s power rests on the critical notion of harmonization. The union subjects all member nations to uniform rules and regulations in order to ease the burden on cross-border transactions. Uniformity surely has some advantages, but to classical liberals like myself, the advantages come at far too high a price. To see why, it is critical to see how a federal system should work, which is best exemplified in the American Constitution—not as it is interpreted today, but as it was understood in 1787.

Generally speaking, economic and social activities—including manufacture, agriculture, and mining—take place at discrete locations that are usually under the jurisdiction of a single state. These states are certainly capable of engaging in abusive activities toward their own citizens, but firms and individuals hold the right to exit a state that imposes stiff regulations on its members and move to one where the regulations are less punitive. Exit—and equally importantly, the threat of exit—imposes a huge discipline on local governments who know they will pay a heavy price if they impose unwanted taxes and regulations on their local citizenry. People leaving badly governed states like California, Illinois, and New York are putting real pressure on local governments to mend their ways, without having to identify the particular shortcomings that take place. Knock out the exit right and one reduces the internal pressures for economic and social reform. In practice, the United States Congress has done less than it should to preserve open markets, which is why the Supreme Court’s efforts to prevent the state balkanization of national markets under the so-called dormant commerce clause is among the court’s greatest initiatives, notwithstanding the shaky textual foundations of that doctrine.

The European Union has a very different constitutional tradition, given the historical separation, both by politics and languages, of the various nations. As in the United States, the right of internal movement of persons really matters. But, also as in the United States, the question of immigration from abroad poses genuine challenges, for no nation or federation can afford to have an open borders policy and still retain its national integrity.

At the same time, it is important not to ignore the economic forces that are driving Brexit. Open borders for trade are essential to economic development. The movement of people across national lines is a much more complex problem than the movement of goods, but this personal freedom also turns out to be pro-competitive by allowing people to move across borders in search of greater economic opportunity. Speaking more generally, the nation that uses force to contain its citizens has confessed to the deficient nature of its economic and political order, especially since the cost of leaving one’s nation is exceptionally high. Exit rights force governments to reform themselves at home by whatever means it takes to keep the local environment more attractive.

But all of these calculations have changed in light of the mass migrations out of the Middle East, which make open borders a far more difficult issue. It is thus no accident that Andrew Roberts’s impassioned plea for Brexit plays the immigration card. In his view, Angela Merkel invited many young Muslim refugees to settle in Germany, and under the current system, they can migrate to Britain once they get a European passport. There seems to be little doubt that this helps explain the current sentiment in the UK in favor of Brexit. Indeed, it threatens to unravel the rest of the EU as well.

Yet even if immigration is kept to one side, the economic issues tend to favor Brexit, given the massive overreach of the EU. The great post-war achievement was the formation of the European Economic Community (EEC), or European common market, which went into operation in January 1958 and whose initial members were Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. The point of a common market is to allow free movement across national borders of people, goods, services, and capital. A common market with such modest aspirations leaves each nation free to organize its internal production as it sees fit, knowing that its comparative advantage lies in keeping those regulations that foster commerce and eliminating those that do not. The common market may require that nationals from other states be allowed to cross borders for purposes of trade, but it does not give them the right to become citizens or permanent residents of other nations.

So understood, a free trade zone like the EEC has two enormous advantages. First, it is capable of long-term operation among countries that have very different ways of doing business, because it is unnecessary, indeed impossible, to impose a uniform set of regulations on all nations with their very different histories and institutions. Second, a common market is capable of relatively straightforward expansion to include other nations with divergent traditions, who can also gain the benefits of free trade across national lines. There is no need to jigger other rules to take into account any set of unique circumstances. The admission of Great Britain into the EEC in 1973, done only with much uneasiness, was in fact possible only because of the then-limited nature of its European commitment. There was no need to develop a common currency, so exchange rates could vary as a rough measure of the relative efficiency of the different national economies.

On this view, the great blunder of the EU was the shift from a free trade zone to a broader social and economic union, with its all-powerful Brussels bureaucracy, and with the ratification of the Treaty of Maastricht in 1993. A robust EU was created to “harmonize” the laws of the various nations not only on trade but also on agriculture, fisheries, and regional development. The EU has continued to expand its membership so that today it includes some 28 nations. The Euro in turn became the single currency for 19 members of the European Union by 2002 while Britain retained the pound.

The combined EU polices represent a fatal overreach. The larger number of nations meant greater heterogeneity among its members. Yet, at the same time, the central government in Brussels sought to do more than had ever been done before under the dangerous banner of harmonization. There are of course two ways to harmonize—up and down. But the bureaucrats in Brussels displayed strong social democratic tendencies toward central planning, and thus harmonized up on the naive assumption that the more regulation that was done in labor and capital markets, the better. The synergy between regulation from the center and labor market rigidity in France, Italy, and Spain has taken its toll. The monetary tensions between Germany and Greece have only made matters worse. Centralized control meant that unwise interventions could not be confined to particular countries, but could take hold across the entire EU simultaneously

The rest, alas, is history. In the short run, weak exit rights have hamstrung efforts to rationalize European labor and monetary policy. Chronic high levels of unemployment and low levels of growth followed. Notwithstanding the grim economic news, the case for choosing to remain in the EU rests largely on three pillars. First, many members of the Labour party want to stay in the EU because they support aggressive control over labor and capital markets. Second, the Conservative party leadership wants to stay because it values the access to large markets for goods and services in the EU, which they fear a Brexit success will close. And third, some worry about the high costs of transition should the separation take place.

The better responses are these. First, Labour is wrong about the EU move toward regulation just as it is wrong about favoring heavy economic regulation at home. That Labour wants to stay in is a good reason to go. The same can be said about Barack Obama’s misguided anti-Brexit stance. Second, the constant movement toward greater regulation retards the development of the internal British market. It also reduces the value of trading inside the EU, and it increases the cost of trading with nations outside of the EU. In the long term, these regulatory costs are likely to grow, while the costs of transition are likely to recede. Brexit should be understood as a way to recreate a little England in a global economy—a way for the country to reconnect with the rest of the world.

Typically, Brexit is discussed solely in terms of its impact on Great Britain. But Brexit also impacts the nations that remain inside the EU. The conventional wisdom is that Brexit will hurt the EU economically. But perhaps not, if Brexit will spur the remaining members of the EU to rethink their positions. Free trade is a winner for all sides, whether Great Britain remains in the EU or leaves it—and the EU would cut off its nose to spite its face if it imposed sharp trade sanctions on the British. The EU should realize that it needs Britain as much as Britain needs it. So perhaps it will acquiesce to keeping trade barriers low. If it takes that course, then Brexit could mark the first step of many toward a return to a European common market. Of course, the cynics will say that the EU is incapable of reaching that level of rationality, in which case, the British should leave so that they don’t go down with the ship as the EU continues to flounder.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.