“UK Independence”? Mind the facts

Blame it on all these meddling Brussels bureaucrats? At last night’s local elections in England, the “United Kingdom Independence Party” won a sizeable chunk of the vote. The anti-EU rhetoric fell on fertile ground.

But by claiming that Brussels is holding back the British economy, UKIP simply has its facts wrong. Britain’s problem is not Brussels. Britain’s problem is that, from 1998 to 2009, the country ran its own irresponsible macroeconomic policy. It did so in full independence. And it is now paying the price for it.

In international surveys of market openness and flexibility, the UK scores very well despite all the meddling from Whitehall or Brussels. See for instance our own “2012 EuroPlus Monitor” where we awarded Britain top honours for the openness and flexibility of its markets for products, services and labour, based largely on OECD assessments.

Britain’s problems do not lie in the regulations, over which Brussels has some say. The problem lies squarely in macroeconomics, over which Brussels, Frankfurt and Berlin have no say at all.  Thanks to Margaret Thatcher and John Major, Britain was in much better shape than the continent in 1998. But during the lifetime of the euro, Britain fully squandered that advantage, boosting the share of government spending in GDP from 39.3% in 1998 to 49.0% in 2012, while the Eurozone share crept up from 48.5% to 49.5%. With its spending spree, Britain pushed its debt-to-GDP ratio from 47% to 90% over that period while Eurozone debt merely rose from 73% to 91%. British inflation and fiscal deficits are now far above those in the Eurozone. Adjusting for a British one-off gimmick relating to the transfer of postal pension assets and for one-off recapitalisations of banks in the Eurozone, Britain had a deficit of 8.1% of its GDP in 2012 versus 3.1% for the Eurozone.

Britain’s PM Cameron and his Chancellor Osborne took on a bad fiscal legacy in 2010. With some austerity and pro-growth structural reforms, they have the right recipe to clean up the UK’s macro mess. Unfortunately, any perceived risk that the UK may eject itself from the common market after an EU referendum in 2017 could scare away the inward investment which the UK needs to regain its macroeconomic balance. For the sake of the greatness of Great Britain, let’s hope that UKIP’s “Little England” message does not make too much headway in the future.