Martin Wolf: Our friends think Brexit is a mad idea

How might future historians judge a British to decision to leave the EU in the referendum on June 23rd?

It might well be seen as the moment when the west started to unravel. That is why Barack Obama, US president, is not merely entitled to present his views on "Brexit". As leader of the west, he must do so.

The choice the UK faces in June is whether to exercise its option to leave the EU now. So long as it is a member, it will always have this option. But it will not be granted the choice to rejoin after it has left.

The moment to exercise a perpetual option is when its value is not just high, but unlikely to become much higher. The UK should vote to leave if, and only if, it is sure it will be better off than if it postponed the choice. That is not the case now. It might never be.

Losses

Indeed, those in favour of remaining, like me, would argue that, far from bringing gains, exercising the option to depart would deliver immediate losses. This, proponents of Brexit complain, is "project fear". That objection is absurd. Avoiding needless and costly risks is how adults differ from children.

Possible economic costs of leaving are laid out in the Treasury's excellent analysis, published this week. It argues that the UK would be significantly worse off under any of the three most plausible alternatives to membership: membership of the European Economic Area (like Norway), a bilateral trade agreement (like Canada) or shared membership of the World Trade Organisation (like Japan).

Under the first, the loss, relative to a baseline of continued membership, would be between 3.4 and 4.3 per cent of gross domestic product by 2030; under the second, it would be between 4.6 and 7.8 per cent; under the third, it would be between 5.4 per cent and 9.5 per cent. Should we believe these numbers? No. But the direction is right and the magnitudes probably too small. In sum, the UK economy would be less open to trade and foreign direct investment than otherwise, if it left the EU. This would then damage its level of productivity and so its output.

Dynamic

Some proponents of Brexit argue that this is incorrect, because the UK economy would become more deregulated and dynamic outside the EU. Yet the UK is already one of the least regulated large high-income economies.

Furthermore, the worst UK regulations – those on land use – are homegrown. Again, the biggest intervention in the labour market in recent years has been the government’s decision to impose a big jump in the minimum wage.

Proponents of Brexit will also argue that the UK economy need not become less open. But this argument has a catch.

The more the UK wished to preserve its privileged access to the EU market (by becoming a member of the EEA) the less sovereignty it would regain. It would not gain control over immigration and would have to accept single market regulations without any influence on them.

If, to take an opposite extreme, the UK chose the WTO option in its trade with the EU, but decided unilaterally to keep its tariffs against the EU at zero, it would be obliged to offer the same deal to all other WTO members.

Such unilateral free trade is an option. But it would also remove virtually all the bargaining chips needed to negotiate preferential access to non-EU markets. This is quite apart from the fact that the UK would have far more clout in such negotiations if operating via the EU than if acting all on its own.

Exports

Another objection is that the EU is becoming a less important market for the UK. Yet the absolute increase in UK exports to the EU over the 10 years to 2014 was still far larger than to any other market even though the growth rate was far slower. This is because the base is so huge.

The UK is also the largest recipient of inward foreign direct investment within the EU. It is inconceivable that the attractions of the UK to investors would not be diminished if it did not have access to the EU market on a par with that of members.

These arguments, however, relate only to the long term. Despite absurd attempts to deny this fact, it is also true that nobody knows what would follow a vote for Brexit.

First, proponents of Brexit do not agree on which alternative to pursue.

Second, we do not know what the UK’s partners might want. Some foolishly assume that latter will be generous. But a partner who has been repudiated is unlikely to be generous in a divorce. Moreover, the overwhelming aim of the rest of the EU will be to keep it together. They will want to make any exit painful.

Finally, Brexit will mean a long period of turmoil and uncertainty. The financial crisis has shown how costly such uncertainty can be, not just for a few years, but far into the future.

For all such reasons, foreign friends are appalled by the potential damage done by Brexit – and not just to the UK, but more widely. Foremost among these is the US. It behoves those who prate of violated UK sovereignty to remember that, had the US not become engaged, the UK would now be a Nazi or Soviet satellite.

Burdens

US resources and will sustained the west during the second world war and the cold war. Pressed itself, the US desires a prosperous and outward-looking Europe, capable of sharing burdens in the decades ahead.

The US has long regarded the UK’s active participation in the continent, of which the latter will always be a part, as a vital interest.

The UK is not the great power of the past. But its actions still have consequences. It is not – and must not wish to be – a European Singapore. Only the west’s enemies would welcome such a folly.

How do most informed Americans, Australians or, for that matter, other Europeans, react when they see the UK considering the end of a relationship that gives it a voice in the direction of the continent, while being free from so many of the burdens and mistakes of our partners? They think it mad. Nicely, but firmly, Mr Obama should say so.

Copyright The Financial Times Limited 2016