September 22, 2023

Leftover lies are crumbling as the German economy collapses

Demonstrators with EU and Union signs and flags gather in Parliament Square in central London - ISABEL INFANTES/AFP

Demonstrators with EU and Union signs and flags gather in Parliament Square in central London – ISABEL INFANTES/AFP

Apparently it is fine to trumpet when “Brexit Britain” is doing badly, but unacceptable to point out when other major economies are doing worse. Our neighbors’ problems are no cause for celebration, but context is important.

If you want to choose the “sick man of Europe”, try Germany. The latest data show that the EU’s largest economy has contracted each of the past two quarters as consumer spending collapsed under the weight of high inflation and the slump in real wages.

This continues a trend. Since the vote to leave the EU in 2016, the UK economy (measured by GDP) has grown by 5.9 percent. German GDP has only increased by 5 percent.

Other European countries are not in much better health. The French economy has grown by 8 percent since 2016. This is partly due to embracing more business-friendly policies, including corporate tax cuts (unfortunately abolished in the UK). But it also reflects massive state intervention during the energy crisis, which has paralyzed the main supplier (EDF) and left the French taxpayer with a huge bill. France’s credit rating was downgraded by Fitch last month, warning that French public finances are “weaker than those of competitors”.

Italy has posted the fastest growth of major European economies since the pandemic. But this strong performance was flattered by a construction boom, fueled by subsidies and tax breaks, which has now reached the wall. The recovery should also be seen in the context of the lost decade of growth since the global financial crisis: the Italian economy is still 3 percent smaller than at the beginning of 2008.

The failure of their predictions means that the remaining doomsayers had to fall back on three other types of evidence. The first is to instead compare the UK’s performance to other major European economies in terms of trade in goods, business investment or inflation. If you carefully select the numbers and time frames, it is possible to paint a bearish picture. But there are alternative explanations (such as the different effects of Covid and the energy crisis in each country) that have little to do with Brexit.

The second trick is to rely on forecasts from agencies such as the IMF and the OECD. There are many problems here. One is that these like-minded organizations have a negative view of Brexit, so this will no doubt be reflected in their projections. It is also telling that the IMF has already had to revise its growth forecasts for the UK for 2023 by a full percentage point – and is now predicting that the UK economy will grow faster than Germany, France or Italy in the next five years.

The third approach is to run mathematical models to prove that the UK economy would have done better (or less badly) had we stayed in the EU. These models – such as the “double” published by the Center for European Reform (CER) – are based on proven methods and should be taken seriously. However, given the major global shocks of recent years, it is difficult to construct a robust counterfactual. The results also typically fail a simple “smell test”: the CER model suggests that the UK economy would have grown nearly twice as fast since 2016 if we had voted Remain.

Others have argued that food price inflation in the UK would have been a third lower without Brexit. But food prices have risen about as much in the UK as in the euro area since 2019, and much more in Germany.

Net migration to the UK hit a new record last year. Whatever else you may think of it, people clearly want to live, work and study in “Brexit Britain”. Maybe they don’t believe the doomsayers either.

Julian Jessop is an independent economist

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