Hamish McRae: Why Brexit just isn’t worth the risk to UK

The three-month glide path to the referendum will be bumpy, as the so-called fear index, the Vox, signalled last week. It measures volatility, in this case of the sterling-dollar exchange rate, and it is back to the levels prior to the Scottish referendum. But that is short-term. Markets hate uncertainty. What can sensibly be said about the main issue? There are two insuperable problems about this debate. One is that many people have such strong views, one way or the other, they are not going to be swayed by economic arguments. So we will have more scare stories of millions of jobs being at risk were we to come out, and the visions of sunlit uplands of economic freedom if we did. If the decision is an emotional, rather than economic one, there is not much economists can say.

The other problem is the economic uncertainties are so huge that more or less any set of calculations is open to challenge. We have form on this. When the UK debated joining the euro, there were similar warnings from both sides. Big business, in the shape of the CBI and the heads of many large companies including Unilever, Nissan, Toyota, WPP and Virgin urged Britain to adopt the euro.

Smaller businesses and the Treasury were against. Remember George Brown’s five tests, which effectively ruled out joining? Last week Sir Dave Ramsden, chief economic adviser to the Treasury, pointed out at a seminar with Ed Balls that the tests look pretty good now. That was nice for Balls, who largely wrote them, but the whole experience does show how we should distrust experts on both sides.

The most calm and moderate assessment of the economics that I have found comes from Open Europe, a think-tank that is itself neutral on the issue but is broadly in favour of market solutions to economic issues, rather than regulated ones. The study was done a year ago and its conclusion was that at worst, were the UK to leave the EU, its GDP would be 2.2% lower in 2030 than it would have been were we to stay in. And at best it would be 1.6% higher.

Those are extreme results, and a more realistic range would be minus 0.8% to plus 0.6%. The worst case assumes that we don’t get a free trade deal with the EU and don’t open up our economy further to trade with the rest of the world. The best assumes we do get a deal with Europe and open up our economy further. There are many other assessments, some more negative as to the costs of Brexit, but the Open Europe proposition that the impact either way would not be huge seems to me a decent place to start. That does not, however, help much in the decision, so let me put forward another way of looking at it. It goes like this.

The UK will always be part of the European economic space, and the difficult issue for us is that Europe as a whole accounts for a smaller proportion of the world economy every year that goes by. So the question is how we should play our semi-detached role, focusing as much as we can on the rest of the world but not risking weakening our biggest market in the meantime. If you baulk at the idea of our being semi-detached, note that we are outside the two biggest centralising EU projects, the euro and the Schengen Agreement, and there is zero prospect of us joining either.

Given this, are we better to be just in the EU, as we are now, but opting out of its most important centralising projects? Or would we be better to be just out — perhaps as a member of an enlarged European Free Trade Area with Norway and Switzerland — but opting into EU agreements where it suits us? The first is vastly easier in the short term, and people who know more than I do about the detail of the deal David Cameron did with Europe seem to think it was a pretty good one. But we would, were we to remain, have a string of negotiations like that one every time we found some new EU policy to be unacceptable.

The option of being just out would mean the negotiations happen now, and we should not kid ourselves that they would be sweetness and light. We have a strong hand. For example, we are BMW’s fourth-biggest market after the US, China and Germany itself. Germany would not want to damage that. But Europe would be angry with us and might not act rationally. In the long run, Brexit might be cleaner but the path would be bad-tempered indeed.

A lot of people have asked me where I stand on this. I think on balance, the risks of Brexit are not worth the modest advantages they might bring. We have not exactly been held back by EU membership, or at least not much, and in any case we don’t know how Europe will develop. It may even become a more successful region, though I don’t expect so. Or in may break up. Meanwhile, however, being semi-detached is not too bad, and that I predict is how the wise British electorate will vote. You want a number? It will be 57% for staying in, 43% for getting out. So there.