This is a week where George Osborne has taken centre stage. He started with selective quotes from Emmanuel Macron the French economy minister. Macron told us on the Andrew Marr show that there would be a price for access to the Single European Market (SEM).
Macron told us some other things too. Outside, Britain would “killed” in negotiations with China over steel trade, likening Britain to “Jersey or Guernsey”. He told us we are “enshrined in the European Union”. He even told us of other “consequences” so that further European integration can been established.
No doubt these will be the subject of further debate. On this site we are preparing a piece about what sort of reform we can expect from the EU. However, Osborne was clearly selective in what he chose to focus upon. He followed up with ‘HM Treasury analysis: the long-term economic impact of EU membership and the alternatives’.
We might expect a document from HM Treasury to be authoritative, independent and thorough, using sound principles for research. The document can be seen in full here. The analysis poses 3 scenarios, membership of the EEA such as Norway, a bilateral trade deal such as Canada and as a separate World Trade organisation (WTO) member.
Osborne has also told us that Brexit campaigners are “economically illiterate and dishonest”. That adds a different angle to the Treasury piece, especially when considering what one of Britain’s great economists, Patrick Minford, has to say.
Economists, by trade, have a process. One of the first parts of the process is recognising perspectives. Assumptions are made. These should always be made explicit. If not, a search is required to identify underlying assumptions which may demonstrate a bias in perspective. Omissions are as much a part of a story as what is contained.
There are some tools which might help Osborne on the way. One of the great tools, again from a great British economist, John Maynard Keynes, is the simple model of how an economy works:
If we see that an economy has autonomous consumption, let’s simplify that as basic needs being satisfied for survival, income levels throughout the economy are affected by what else goes on in the world around. Extra spending power can come into an economy, some spending power goes out.
Withdrawals from the economy come from savings (S) and where there is a government, taxation (T). Injections come from government spending (G), investment. If the economy is open to trade, we pay for imports (M) but gain from Exports (X).
Keynes described the economy’s national income as C+I+G+(X-M). Injections into the economy have a multiplied effect on demand. Using an industry previously used on this site here, the car market, an increase in demand for a car generates increased demand for steel at one end, demand for fuel to drive the car, maintenance and the distribution to go with it.
Money changes hands and flows into the economy. In a year, a one time increase in demand for that car will be spent in buying materials, into workers’ pockets, into pubs, into food and so on. The effect of an increase in expenditure is multiplied.
The Treasury’s, or should it be labelled Osborne’s, document focuses on the effects n the economy of not being a part of the SEM. Assumptions are not always made totally explicit. There is a focus on exports to, rather than imports from the EU. The Treasury model appears incomplete.
In reality, Britain imports more from the EU than we exports. A German steel industry web site identifies some links in the jobs chain here. Of all cars sold in the UK in 2015, 85% are imported from the EU. With 150,000 BMWs sold annually in the UK, those sales translate into BMW jobs, steel jobs and in the supply industries. The same applies to the other EU countries and their own car industries.
If, and it is a big if, the EU were not to seek a trade deal with us, the net import bill that provides injections into the EU economy will also reduce. Conversely, withdrawals from our own economy also reduce. The retained income is kept within the circular flow, with extra incentive to produce and generate income within the UK.
There is a knock on effect in the UK. If tariffs make EU produced cars more expensive, the 2 million plus cars that we import will need to be supplied from somewhere. This provides opportunities for other car makers to invest, or even reinvest, in the UK. The same goes for Mediterranean wine, French cheese, pasta and so on.
It is noted that makers like Ford and General Motors have disinvested in the UK whilst we have been members of the European Union.
The Treasury report glosses over the nature of the EU which can be seen from other perspectives.
For some, the SEM is a free trade area. To others it is a customs union. Of course the EU is both. It is a single market for those in Europe. As members of the EU, currently we have to impose trade barriers against other countries from around the world.
The Treasury document fails to offer any sort of valuation of the benefit from being an economy with a global perspective. Reduced costs from being subject to world prices rather than EU prices. In many cases, world prices are lower, providing the opportunity to increase real incomes.
Similarly, whilst it has been an electoral issue, the cost of ‘red tape’ has not been assessed. Estimates of those costs vary widely, the House of Commons library seeming to put faith in the Open Europe valuation of £33.3 billion from the 100 most burdensome regulations.
The analysis is only “rigorous” because the treasury has told us so. Opinion is presented as fact. Probability of outcomes has not been quantified. Data sources have been highly selective.
Even the net contribution to the EU has been minimised, reference being made to the average net contributions from 2010-14. Furthermore, no assumption is made about what savings are spent on since they will be “decisions for the government at the time”.
In practice, investment in infrastructure projects which might be directed at British sourced steel, for example, could be targeted to have maximum multiplier effects.
Similarly, the impact of migration is a “stylised projection rather than a forecast”.
As a document, the perspective adopted combined with selective data becomes irritating. Omissions become glaringly obvious.
Since Osborne has accused those who disagree of economic illiteracy, for the time being we shall gloss over the restrictions on supply side policies of the VAT straightjacket imposed by the EU. Similarly, his rosy view of EU economic performance of peripheral EU economies as discussed here is a separate debate.
Instead, an appropriate place to end might be where we started, with Monsieur Macron. Our friends in the EU still want our money, whether it is in the form of EU contributions, our trade deficit or investment in the British economy for future returns. Macron confirmed the intention for EDF, the French state-owned energy company, to progress with Hinkley Point nuclear power station.
Even though our friends may no longer be our bedfellows, as traders, it is clear that we can still be of mutual benefit. Their cooperation with China over Hinkley Point may even prove him wrong, that the Chinese will not want to talk to us.
In the meantime, we are left to form our own conclusions as to who is “economically illiterate and dishonest”.