Mises Institute | 1 May 2016
The United Kingdom (UK) is about to hold a referendum on June 23rd on whether it should leave or remain within the European Union (EU). Once unthinkable, the “Brexit” is becoming more and more plausible. It is seen by the mainstream media as a factor of uncertainty in Europe. For its critics, Brexit would lead to increasing nationalism and protectionism. Nevertheless, those same critics forget the European Union is not a free-trade area.
On the contrary, Brexit could open new perspectives for the old continent, not by bringing more protectionism but by bringing more competition between governments.
Europe Needs More Institutional Competition
Europe has a very long intellectual tradition in favor of institutional competition. One of the first modern thinkers concerned about it is the French philosopher Montesquieu. While comparing the European with the Asian political system, he notes in “L’Esprit des lois”:
In Asia one has always seen great empires; in Europe they were never able to continue to exist. … Therefore, power should always be despotic in Asia. For if the servitude there were not extreme, there would immediately be a division that the nature of the country cannot endure. In Europe, the natural divisions form many medium-sized states in which the government of laws is not incompatible with the maintenance of the state; on the other hand, they are so favorable to this that without laws this state falls into decadence and becomes inferior to all the others. This is what has formed a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce.
This European political fragmentation leads toward a jurisdictional, fiscal, and regulatory pluralism which is itself useful in opposing laws that are especially damaging to commerce. In the presence of burdensome laws, citizens may be prompted to “vote with their feet” by taking their capital and industriousness to a place where individual rights are better protected. This is a vital mechanism in order to increase general prosperity. Many economists and historians have shown institutional competition was one of the key factors of Europe’s accumulation of wealth. The historian Paul Kennedy wrote in his book The Rise and Fall of the Great Powers:
The political and social consequences of this decentralized, largely unsupervised growth of commerce … and markets were of the greatest significance. In the first place, there was no way in which such economic developments could be fully suppressed. … There existed no uniform authority in Europe which could effectively halt this or that commercial development; no central government whose change in priorities could cause the rise and fall of a particular industry; no systematic and universal plundering of businessmen and entrepreneurs by tax gatherers. … In Europe there were always some princes and local lords willing to tolerate merchants and their ways even when others plundered and expelled them.
This is exactly why the European centralization process is harmful. The European political integration is indeed a project against jurisdictional competition. Like many international organizations, the EU is a way for governments to mutualize their respective sovereignties and to cartelize their powers in order to increase their control over individuals. The problem is this kind of cartelization tends to increase the burden of public policy.
In the long run, the consequence of this lack of competition can only be less freedom, and therefore less prosperity. Under these circumstances, the Brexit would be a positive development. It would weaken the political cartelization of the continent and stimulate indispensable competition in Europe.
Brexit Does Not Threaten Free-Trade in Europe
The “In” campaigners’ arguments are contradictory. The Economist, for instance, has on one hand warned in several articles a Brexit could undermine free-trade across Europe. But on the other hand, one of the arguments used against those complaining about EU regulation for member states is that any country which wants to trade with the European Union must comply with them. Even though this last argument is partly incorrect, it amounts to an admission that the EU is more a protectionist alliance than a free-trade area. A genuine free-trade area would not impose regulatory barriers to impede international competition.
After all, as George Stigler showed in his famous article “The Theory of Economic Regulation,” government regulations are a way to satisfy rent-seeking special interests which try to impede free enterprise and competition to enhance state-granted monopoly power.
The EU: A Force for Regulated Trade, Not Free Trade
The European Union is a powerful regulatory power and should not be underestimated. Brussels didn’t become the second world capital of lobbying after Washington D.C by accident.
Brexit is unlikely to undermine free-trade in Europe any more than the EU already does. Leaving the European Union does not necessarily mean less international trade and more protectionism. In fact, Brexit is an opportunity for British people to get rid of the EU’s regulatory burdens, the EU common tariff and trade policies, and the highly protectionist common agricultural policy. The UK might then be free to favor a genuine free-trade with Europe and the entire world. This is particularly true when one considers free-trade does not require any intergovernmental agreement. Free-trader schools of thought have always been categorical on that matter. As Vilfredo Pareto stated in the article “Traités de commerce of the Nouveau Dictionnaire d’Economie Politique” (1901) :
If we accept free trade, treaties of commerce have no reason to exist as a goal. There is no need to have them since what they are meant to fix does not exist anymore, each nation letting come and go freely any commodity at its borders. This was the doctrine of J.B. Say and of all the French economic school until Michel Chevalier. It is the exact model Léon Say recently adopted. It was also the doctrine of the English economic school until Cobden.
Free-trade is a domestic issue which consists in abolishing unilaterally every kind of tariff and non-tariff barriers against products wherever they come from.
Brexit’s Symbolic Reach
The European Union pretends to be a rational and inevitable project. Its legitimacy derives from the idea that globalization requires large political entities to guarantee high standards of living and to address modern issues. A Brexit would undermine this Euro-constructivist ideology by increasing the number of small and wealthy countries in Europe and in the world. It would increase the regionalist and localist pressures at the European level, but also within the nation-states themselves — if one considers the case of Scotland, Catalonia, Corsica, Flanders or some northern Italian regions.
One might be skeptical about this perspective given the fact European regionalist and secessionist movements are not always liberty-friendly. They remain indeed often collectivist and nationalist. Many Euro-skeptic movements are part of the far right.
The European Free Alliance, for example — the political party which contains several regionalist movements across Europe — sits with the European Greens at the European Parliament. But, the fact remains that the more institutional competition there is in a geographical area, the more political leaders are constrained and the less they can adopt statist policies in the medium and long term.
In their book How the West Grew Rich published in 1987, Rosenberg and Birdzell wrote: “It may be that a prerequisite to sustained economic growth is an economy trading across a geographical area divided among a number of rival states, each too small to dream of imperial wars and too fearful of the economic competition of other states to impose massive exactions on its own economic sphere.”
While Europe is facing what is perceived as a long and unresolvable economic and social crisis, the British people — by exiting the EU — could help the old continent to restore the institutions which made its historical prestige and prosperity possible.