Mike Shedlock

Wolfgang Münchau writing for the Financial Times correctly asserts Lord Lawson is right – Britain does not need Europe

In discussing the pros and cons of Britain’s membership of the EU, the most important point to remember is this: the terms of an exit are freely negotiable. This means that the economic consequences will depend to a large extent on those exit terms.

In his article in the Times last week, Lord Lawson, a former UK chancellor, argued that the regulatory costs of the single market for the British economy exceed the economic costs of an exit. As a consequence he favours an exit. Is the analysis correct? Does the conclusion logically follow?

I do agree with most of his analysis, especially his point that, for the UK, the single market carries higher costs than benefits. For the EU as a whole, the single market has been a macroeconomic non-event. Its impact on aggregate gross domestic product is statistically imperceptible.

David Cameron, Britain’s prime minister, may also find it easier to negotiate favourable exit terms than a treaty change. The latter would be needed if he wanted to put substance to his goal of a fundamental change in Britain’s relationship with the EU. It would have to be agreed by all members, their parliaments, and it would need to pass in several referendums.

[Mish Note: This is why I said Cameron was being disingenuous about calling for a referendum. One of the conditions he placed on the referendum was successful renegotiation of a new treaty, something Cameron has to know is not going to happen, at least along the lines of what the UK wants. See Cameron Faces Cabinet Crisis of His Own Making; Purposely Self-Inflicted Wounds]

The legal basis for an exit clause is softer than for a treaty change. Article 50 of the Treaty on European Union, one of the two treaties known together as the Lisbon Treaty, provides the option of an exit.

Lord Lawson’s strongest argument relates to the changing nature of the EU. If Britain decided to remain a member, it would find itself pushed to the outside as the eurozone integrates. The financial transactions tax and banking union are two early examples of an integration that occurs without Britain’s participation. There will be many more. The euro is what splits the EU – or rather the British decision not to join it. The rest is an inevitable denouement.

The EU’s incipient banking union may be too slow to resolve the eurozone crisis, but potent enough to drive a wedge between the eurozone and the UK. A banking union means that the eurozone will ultimately end up with its own financial centre.

My overall conclusions, however, concur with his. There may be reasons why the UK may wish to remain a member of the EU. But whatever they are, they are not economic.

Problem Entirely in Cameron's Head

For some reason Cameron is wedded to the idea the UK belongs in the EU without ever adequately explaining why. Avoidance of nannycrat rules and regulations alone is well worth the cost (if any) of an exit. But there really is no cost, only benefits, if the UK negotiates a successful exit.

And the price for staying in will be expensive. Sooner or later the EU is going to impose a Financial Transaction tax that will be hard for London to avoid. There will be further rounds of inane rules and regulations on food, on energy, on imports, on everything.

Moreover, Cameron may lose the election to a Labor party that may embrace silly tax schemes as well as other inane ideas.

In short, there are all kinds of things that can go wrong if the UK stays in, and there is little that can go wrong if the UK negotiates reasonable exit terms. And it is actually in everyone's interest to do just that.

The problem is entirely in Cameron's head.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.