Tag: European Union

The French Government, the EU and Utilitarianism

Apparently, the EU’s vaccine disaster came about because of pressure from the French government on the European Commission not to buy more than 300 million doses of the BioNTech vaccine (BioNTech had offered up to 500 million doses to the EU in the first round) – despite the fact that this vaccine had already demonstrated 95 percent efficacy in clinical trials at the time and was already on its way to regulatory approval.

Why only 300 million? – Apparently, because the EU had ordered only 300 million doses from the French company Sanofi (whose vaccine will, if at all, be ready at the end of 2021). Hence, ordering more than 300 million doses from (German company) BioNTech was apparently not acceptable for the French government.

All of this is, of course, a familiar theme, having repeated itself over and over again in Europe’s recent history: the French government (mis)using the European Union to advance the (perceived) French national interest, thereby harming all Europeans, including the French.

The idea of a common currency, for example, was hatched up by the French in order to put an end to the recurrent devaluations of the French franc against the Deutsche Mark, which were hurting French pride. The result (the Euro) has been a disaster for everybody, including the French.

Public policy should be focused on maximising aggregate utility rather than being motivated by aspirations for national supremacy as an end in itself. One can only hope French elites will understand this sooner rather than later, otherwise the disasters will keep coming.

John Locke and the Case against Brexit

John Locke – commonly known as the “Father of Liberalism” – was born in Wrington, England, on August 29, 1632.

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In his Two Treatises on Civil Government (1690), Locke refuted the idea of absolute authority. Although his immediate target was monarchical power, his argument applies to any form of absolute authority. Authority – whether that of the monarch or Parliament – must always be limited by law.

… Which brings us to maybe the best argument against Brexit: the fact that in Britain the concept of Parliamentary Sovereignty still enjoys widespread support.

Parliamentary Sovereignty is the idea that Parliament can do anything in its legislative capacity  – “Sovereignty” means unrestrained power – and that individual rights and the courts must yield to that democratic imperative.

Membership of the European Union implied an end to Parliamentary Sovereignty because the British Parliament was now bound by European law. After Brexit this check will be gone.

… Nevertheless, I’m slightly more optimistic than pessimistic about the long-run effects of Brexit.

Let’s hope the best.

Spontaneous Order versus Centralized Design – Or: How to make Brexit Really Worthwhile

Brexit constitutes a shift in the direction towards more local autonomy and governance diversity. Since, in general, smaller political entities tend to be governed better than larger ones, one may expect Brexit to have a positive effect on the efficiency of the framework of rules governing British society.

So far so good. But simply shifting powers from politicians and bureaucrats in Brussels to politicians and bureaucrats in London will unlikely lead to the dramatic improvement of the legal and regulatory framework that would be needed to significantly raise standards of living in Britain – especially given the fact that Brexit also means losing the benefits of the European customs union.

Regarding the production of rules the central issue is not “London versus Brussels” but “centralized design versus spontaneous order”.

Whether rules are made by Parliament and regulatory agencies in London or by the European Commission and regulatory agencies in Brussels, in both cases they are the product of a centralized ordering authority rather than the result of a decentralized and market-responsive evolutionary process.

The traditional argument for a spontaneous order over centralized design is that, under conditions of dispersed knowledge, only a decentralized and evolutionary process leads to the discovery of the relevant knowledge. In other words: a spontaneous order is able “[…] to make use of knowledge which nobody possesses as a whole” (F. A. Hayek in Law, Legislation and Liberty, Volume 1: Rules and Order).

The argument for the superiority of a decentralized spontaneous order over central planning is evident to most people when applied to the production of ordinary goods and services. But the same argument can also be applied to the production of laws and regulations.

The intuition is straightforward: as individuals discover new rules that work better than the existing ones, the new rules will be adopted unless the transactions costs associated with switching to the new rules are prohibitive. Superior efficiency of the framework of rules is the result of such a discovery process.

Turning to a large extent the production of laws and regulations in areas that up to now have been largely controlled by the European Union over to the private market rather than merely to politicians and bureaucrats sitting in London would give Britain the opportunity to embark on this discovery process.

The Simple Way to Avoid any Disruptions to the Flow of Imports to Britain after a No-Deal-Brexit

The deal negotiated by Theresa May is dead. The EU is not going to yield so there will not be a new deal. Hence, many now see a No-Deal Brexit as the most likely outcome. And it seems that much of the British political establishment and the population at large is suffering from a severe panic at the thought of the impact of such a No-Deal Brexit on the flow of imports to Britain. 

The important thing to understand is that, when it comes to the flow of British imports, the big distinction is not between Brexit with a deal and Brexit without a deal but between

    1. a deal that would keep Britain in the European customs union
      and
    2. a No-Deal Brexit or a deal that would not keep the customs union intact. 

Let us for a moment imagine that Britain had achieved a complete free-trade deal (i.e. zero tariffs) with the remaining EU. Would such a free-trade agreement avoid any disruptions to the flow of imports to Britain after its exit from the EU? The answer is “No” – if the British government did not also commit to zero tariffs on imports from the rest of the world.

Here’s why: the EU is not a free trade agreement like NAFTA; it’s a customs union, setting common external tariffs, which means that once you’re in, you’re in: once goods are unloaded at, say,  Hamburg they can be shipped on to anywhere within the customs union without further customs checks.

In the case of Britain leaving the EU with a free-trade agreement EU products could enter Britain tariff-free. But if Britain charged tariffs on products from (all or some) non-EU member countries, this would mean that EU goods entering Britain would still have to face a customs inspection in order to make sure that they were actually produced in an EU member country rather than, say, Chinese goods unloaded in Rotterdam or Hamburg and shipped across the border to bypass British tariffs. So there would be much more friction compared to today.

And frictions, not tariffs, constitute the greatest concern for British businesses relying on supplies from the EU. The risk of customs delays would make “just-in-time” production infeasible for British companies currently relying on prompt arrival of parts from Europe. They would have to maintain higher inventories, which would substantially raise costs.

Furthermore, in the short run things may turn quite ugly. After almost half a century in the customs union Britain does not have in place the infrastructure needed for the customs inspections mentioned above. Hence the fear of massive delays and of shortages.

However, there is a simple way to avoid any disruptions to the flow of imports to Britain after Brexit with or without a deal: unilateral free trade.

In this case the tariff would be the same for all imports regardless of where they come from: zero. Customs inspections would be unnecessary. Brexit – with or without a deal – would not lead to any friction regarding imports.

Anti-Corn_Law_League_MeetingA meeting of the Anti-Corn Law League in Exeter Hall in 1846

Brexit and the Unforecastability of Demand-Side Recessions

Simon Wren-Lewis claims the Brexit slowdown is about to begin because its negative effect on the economy is no longer masked by unusually strong consumption. Hence, GDP is going to take a hit.

The thing is: all the effects the Brexit vote could conceivably have in the short-run pertain to aggregate demand (AD). Since AD is controlled by the BoE, there is no reason to assume that Brexit will have any short-run consequences on GDP – as I already pointed out immediately after the Brexit vote.

One may argue that at the Zero Lower Bound (ZLB) and under strict inflation targeting, the central bank might lose this control. But since monetary policy in the UK is not even at the ZLB, this theoretical possibility does not apply in the case of post-Brexit Britain.

In general, if the central bank is doing its job properly, any slow-down or reduction of GDP caused by demand-shocks is impossible to predict ahead of time.

Why has this basic fact been ignored by so many economists in the case of Brexit?

Well, most of the economists who have been predicting a negative effect of Brexit on GDP in the short-run believe that Brexit will have a negative effect on the long-run supply side of the British economy. Whether the long-run effect of Brexit will be negative or positive is debatable but taking a pessimistic view is certainly not inherently flawed.

Since economists are human and few humans are immune to the passions involved in political arguments, I guess that, being of the conviction that the long-run effects of Brexit will be negative, these economists have been tempted to loosen their intellectual standards and to sex up their arguments by making gloomy predictions about the short-run as well.

That so many economists have been making these predictions may make them seem respectable. It doesn’t make them well-reasoned or correct.

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