Betting markets still think Britain will remain in the European Union, the increased popularity of the "leave" camp notwithstanding: They are now pricing only a 27 percent chance of a Brexit. But betting markets are not infallible, and the recent momentum in the polls suggests that this one is too close to call. Observers simply do not know how things will look if Britain leaves the European Union, but most studies have concluded that a Brexit would be bad for the British economy. But would it?
The prevailing wisdom says Britain would be worse off outside the common market, subject as it would be to EU common import tariffs. Our colleagues at ETM Analytics, however, believe that those concerns are misplaced. Europe is not, strictly speaking, a "free trade zone." Europe imposes extensive import duties, which by definition is not free trade. Internal EU commerce, moreover, is subject to onerous regulations on standards, packaging, safety, labor, logistics and so on. The European Union also engages in wide-ranging industry protectionism, which raises prices, lowers efficiency and hampers structural competitiveness. Britain would have the option to dismantle much of this stifling protectionism in a Brexit scenario.
The economic threat posed by tighter immigration policies is also cited as a reason against a Brexit. If Britain were to curb immigration, the argument goes, it would be less economically dynamic. And that's probably true, if it actually came to pass. But the British are not isolationists. Britain's demographics and economic ties with Europe — and, indeed, the world — demand a liberal stance on immigration. London is an international city that holds the rest of the country on life support. Having greater national control of immigration policy while maintaining a healthy openness seems well within the realm of possibility in the event of a Brexit.
That's not to say that a Brexit would guarantee success for Britain. The country has a gigantic current account deficit, the present extent of which has never ended well for economy or currency. Like the United States, Britain is also overleveraged and beset by a zero interest rate policy. It has a creaking welfare state, and its leviathanic National Health Service is an immense systemic burden. If Britain leaves the European Union but continues to look like the European Union, then a Brexit won't help. If Britain keeps the same EU-level tariffs and protectionist subsidies in place while facing higher EU tariffs after a Brexit; if it pulls up the drawbridge and massively curtails access to immigrants; or if it pushes financial services away from London, it will actually regress. But these outcomes are far more dependent on political choices than on the esoteric "inevitability" asserted by pro-EU campaigners.
