In the lead-up to the referendum on the EU, leading Brexiteer Iain Duncan Smith stated that the British people had had enough of experts, and was roundly rebuked for saying so. How could you possibly not listen to expert opinion on an issue that was so inherently complex and contained such far-reaching consequences?
Among these experts we’d heard the institutional views of the OECD, the World Bank, the UK Treasury and numerous think-tanks; and the personal views of Barack Obama, Christine Lagarde, plus virtually every British politician you thought had been put out to grass. Expert opinion was coming out of our ears. But was IDS right to call a halt?
Most commentators – especially those on the remain side of the argument – focused on the economic consequences of leaving the EU. And their message boiled down to one thing: the sky would fall in. This was echoed by a large posse of economists who wrote to the broadsheet newspapers forecasting doom and disaster if the UK voted to leave. I’m not the first person to point out that this was pretty much the same gang who urged the government of the day to join and then stay in the forerunner of the euro, the ERM. Anyone remember interest rates of 15% as we vainly attempted to shadow the deutschmark? Not to mention the national sigh of relief when Norman Lamont ignored these experts, abandoned this lunacy, and things returned to normal within days. Yet inside only a few years the usual suspects were telling us that we’d be crazy not to join the euro. So, did IDS perhaps have good reason for his scepticism?
In the interests of balance, let me tell you a short story. Not all economists sing from the same hymn sheet. In the mid 1990s, I was on the faculty of a major business school in London. One day I was chatting with an economics professor in his office. We got onto the subject of the euro, which was yet to be launched. “It’s a political project,” said my colleague. “It doesn’t make sense from an economics perspective.” He jumped out of his chair and drew on his whiteboard. “Look,” he said. “These European economies are at different stages of their various cycles – and you’re trying to bolt them together. Once you abolish flexible national exchange rates I just can’t see how it’s going to work long-term, unless you transfer huge amounts of money from north to south or have mass unemployment. Or both.”
He was – is - a Greek national. And I doubt whether he’s got much satisfaction from being eventually proved right.
The topic of the euro is obscured by technical argument and, frankly, economists’ mumbo-jumbo. As a simple non-economist, this is how I make sense of this “project”. Suppose you are a manufacturer with an excellent credit rating. One day you assign your own credit rating to some of your customers who have up till now enjoyed a relatively poor credit rating. Why would you do that? The only answer I can see is to boost short-term sales, but any sane business owner would know that sooner or later those chickens would come home to roost, in the form of debt defaults, bankruptcy and so forth. By analogy, therewith the euro zone. Behind the euro stands the ECB and, behind the ECB, as bank of last resort, the Bundesbank. In effect the creation of the euro zone conferred Germany's credit rating on other EU members, specifically weaker economies such as Greece. Not surprisingly these customers filled their boots, given this opportunity to purchase capital goods on extended credit and at artificially low exchange rates. Lo and behold the chickens have come home to roost, and we ain't seen nothing yet. It is hard not to see German policy-makers as cynically complicit in this, boosting the country's balance of payments in the short term but storing up trouble longer term. No wonder there are a lot of unhappy Germans now questioning the whole enterprise.
Moral of the story? Economics is not an exact science, and economists are no less prone to error than any other predictors of the future. If something sounds too good to be true, it usually is, and if something is incomprehensible let common sense and practical experience be your guides. Scepticism is a healthy thing!
By David Molian, visiting fellow, Cranfield University