When I was a little boy, my mother liked to quote the following quatrain (sometimes attributed to the New York wit Dorothy Parker):
See the happy moron,
He doesn’t give a damn,
I wish I were a moron,
My God! perhaps I am!
I often think of the happy moron when I settle down to the read the International Monetary Fund’s semiannual publication, the World Economic Outlook. Almost without fail, this publication acknowledges that its previous projections were too optimistic and need to be revised downwards. The Fund’s economists then proceed to make new projections, surely knowing that they too will soon need to be revised downwards.
The IMF’s intrinsic optimism matters because when it is pessimistic about something, it is likely understating the problem. So I started paying attention when the newly-released IMF report warned that a British vote to leave the European Union “could do severe regional and global damage.”
“Heightened uncertainty ahead of the June referendum” was, the Fund noted, already a “headwind” to UK growth. But a vote to leave the EU would cause “an extended period of heightened uncertainty that could weigh heavily on confidence and investment.”
You could, I suppose, dismiss all this as over-compensation. Perhaps, after years of Panglossian optimism, the IMF has decided to try Cassandra-like prophesies of doom. But the IMF is scarcely a lone voice. The Bank of England, Goldman Sachs, J.P. Morgan, and Deutsche Bank all agree: British exit from the EU (“Brexit”) would hurt the UK economy.
To the Brexiteers, this is just “Project Fear”: bankers joining forces with Prime Minister David Cameron to scaremonger. Leading “Leaver” Boris Johnson, the mayor of London, last week urged voters to say “knickers” to the pessimists.
To allay my own fears, I decided to read one of the most widely lauded pro-Brexit publications so far, Daniel Hannan’s “Why Vote Leave.’’ It surprised me. “Nothing will change” in the event of Brexit, according to Hannan. “The short-term effects will be slight.” And: “No jobs will be lost.” This, he explains, is because “on a technical level — certainly when it comes to trade — most existing structures will almost certainly be left in place.”
The central claim of “Why Vote Leave” — is that Brexit would liberate Britain from an undemocratic super-state run by bureaucrats in Brussels, yet leave it free to enjoy “the European free trade zone that stretches from non-EU Iceland to non-EU Turkey.” Though he does not make it clear which role model he prefers – Iceland, Norway, Switzerland, or Guernsey — Hannan is pulling a fast one whichever it is. Because access to the European single market is plainly limited for non-EU members unless, like Norway, they accept EU regulations.
You cannot have it both ways. Either, as Hannan promises, British business will be freed from EU regulations, in which case British exports to the EU will be reduced, or they will not, in which case all a Brexit vote achieves is to remove the UK entirely from the process whereby those regulations get made.
Hannan offers a cornucopia of post-Brexit benefits: new trade agreements with non-EU economies, cheaper food, and energy, and the end of Britain’s net contribution to the EU budget: $15.6 billion a year. He makes not the slightest attempt to estimate the value of the other benefits, so let’s work with that last one, though we should use the correct figure — according to the Institute of Fiscal Studies — is closer to $11.4 billion. That is approximately 0.4 percent of gross domestic product.
On the other side of the ledger, however, are some distinctly larger numbers. Let’s leave aside the trade question, since the size of the hit to British exports—half of which go to the EU—would depend on whether the UK opted to be Norway (accepting EU regulations) or not. Focus instead on capital flows. A very awkward fact for the Brexit campaign is that, in the last quarter of 2015, Britain’s current account deficit hit a record 7 percent of GDP. That needs to be financed. But the risk of Brexit is already acting like a flashing red light to foreign investors. According to a new study by the Center for Economic Performance at the London School of Economics, leaving the EU could reduce foreign direct investment in the UK by 22 percent and real income by 3.4 percent.
The most immediate effect of falling foreign investment would of course be on the pound, already down 12 percent against the euro since November. Could it fall further? You bet. A Nomura study estimates that sterling could depreciate by another 10-15 percent following a vote to leave.
Project Fear? No. This is the consensus view of the financial world, from the IMF down. Perhaps, as the old poem says, I am the one who is the moron. But I do care greatly about the economic future of my native land. And when I see the risks of Brexit being glossed over in ways that would disgrace an undergraduate essay, I feel anything but happy.
Niall Ferguson is Laurence A Tisch professor of history at Harvard and a senior fellow of the Hoover Institution at Stanford University.