Europe is heading in the wrong direction. Britain should strike out and go it alone, says Roger Bootle.
Should Britain leave the European Union (EU)? This is a subject you are going to be hearing an awful lot more about over the next few years. And I suspect that this week’s interviewee – Roger Bootle of Capital Economics –will be one of the best voices to listen to during the debate.
Bootle, who founded Capital back in 1999, last year released a new book, The Trouble With Europe (the updated paperback edition has just been released), in which he argues that the EU – far from helping Europe move forward – is the “most important thing that stands between Europe and success”.
He started, he tells me, with a relatively open mind: he has long been sceptical about the EU, but “hadn’t sat down and worked out the costs and benefits… I hadn’t really got stuck into the arguments.” He finished it feeling rather differently.
Everyone, on all sides of the debate, appears to feel that whether we stay or go is of “major importance to the British economy in the sense that it will cost us squillions and squillions and either wipe off or add 5%-10% of our GDP”.
Weighing the costs of Brexit
But in fact the “net balance of advantages and disadvantages is fairly small”. There isn’t really an economic case to make in the medium term (although there would be “short-term disruption”) – there is only a political one. So if we think for political reasons we should be out, “we can do it”. Long term, however, whether we stay or go “is not marginal”. That’s because “I see Europe going largely the wrong way” – towards over-regulation and over-integration. The costs of that will grow – and at the same time Europe is “fading in relative importance in the world”.
So it might be better for the UK to “take another direction”, one that allowed it to deregulate and focus on the growing parts of the world. But, I ask, leaving the EU doesn’t in itself mean that the UK would deregulate, would it? As a nation we are pretty keen on regulation ourselves and even post-“Brexit” the UK would have to adhere to EU regulations if it wanted to trade with the EU.
The first point is plausible, says Bootle, and if the UK matches EU regulation, it would mean that one of the “big positives” of leaving just doesn’t happen. However, that said, if we can restrain ourselves, then in terms of trading with the EU, we need only regulate the “tiny minority” of businesses that trade with the EU to EU standards. Right now, “sandwich sellers in Dagenham have to comply with regulations about working hours… whereas if we weren’t in the EU that wouldn’t apply”.
The eurozone can’t be fixed
I wonder if there is anything that can be done in the eurozone that might make a difference. Not really, says Bootle. The problems with this “complete disaster” are twofold. First there is the “horrendous, really horrendous” state of the economies on the southern periphery – note that Greece “has lost 25% of its GDP in the last six to seven years”. But the second aspect – “which isn’t fully appreciated” – is the fact that some of the northern countries, such as Germany and the Netherlands, do “too much saving”.
The Germans have always had a tendency to run up surpluses (ie, not to spend all of their export earnings), but in the past currency moves would have stopped things getting extreme (a surplus would have pushed the currency up and exports down as their prices rose).
The key point is that the euro has “locked together these two groups of countries that behave fundamentally differently. In the old days the exchange rate acted as a flex, a hinge, enabling those two sorts of countries to work together. Without it, well, you’ve got this ghastly stagnation.”
OK. So would the EU have worked well without the common currency? Better, says Bootle – but “if you look at the historical record it’s quite clear that Europe was not doing that well before the euro came into existence”. Things were good in the late-1950s and into the 1960s, which is why in the UK we thought “we’d better hitch ourselves to that wagon”. But “more or less as soon as we joined” growth started to deteriorate. For the last 20 to 30 years, “performance of the eurozone, compared to other countries… has been deteriorating”.
A few things “just might” hold things together. In the eurozone, more expansionary policies from Germany would help along with “a lot more activism and QE (quantitative easing) by the European Central Bank”. And within the EU “a whole host of things… could be done to make things a lot better”.
The problem is that they just aren’t very likely: that’s because “there is no doubt what this game was about from the beginning”. It has been about full political union. “That’s been the principle driving everything.” But “I don’t think that’s a desirable principle to adopt. I don’t think it can work. I think it’s a recipe for a political nightmare”. If this was “an association of similar countries who are getting together for trade and friendship” it would be different. But it isn’t.
So who leaves first? And what happens? Bootle is the expert on this – he won the Wolfson Economics prize for figuring out the best way for Greece to leave in 2012. If he were advising the Greeks – who have been “almost primitive” in the way they have run their public finances – he would advise them to go. That they don’t seems to him an economic form of Stockholm Syndrome.
Something similar happened in the UK when we were forced out of the Exchange Rate Mechanism in 1992. “The news readers were practically wearing black armbands… but… we now know that was the beginning of our escape from recession.”
And Italy? “The fundamentals in Italy are not that much better.” It has had “next to no growth” since the euro began. The likes of Spain had their boom years – Italy, with its “essentially sclerotic” economy, never did. “It’s not an immediate candidate for departure”, but if it came out of the euro and the new lira “fell 30% or 40%, I think you wouldn’t see Italian industry for dust… exports would soar; the economy would take off. Why aren’t they doing it?”
I wonder about contagion. If Greece does leave, what happens to the markets? Not much in the immediate term, says Bootle. The thing that would be a danger to the eurozone is Greece leaving and it not being a disaster (Greece could bounce back – just as Iceland did – once it is free of the single currency). Then no one will want to take “Mrs Merkel’s medicine” and the eurozone is done for.
We move on to the UK. It is in “reasonable shape”, says Bootle, with the key plus point being that, with wages finally rising and energy prices “pretty low… people should now get steadily better off”.
Does that mean we have to worry about inflation? Not “for years still”. It will come when the authorities actually want it – when, to deal with the public debt, they stop targeting 2% inflation and “aim for 3%, 4% or 5%”. It is hard to stop at 5%. And that takes me to UK house prices.
We agree that both Capital Economics (which was very bearish on house prices in the run up to the financial crisis) and MoneyWeek were right on the subject: London aside, there has been a proper crash in the UK. But what happens next?
Bootle finds the subject depressing. It is “obvious”, he says, that “this is a problem about lack of supply on the one hand meeting artificially boosted demand on the other”. At some point, something other than fiddling has to be done. But either way, “when interest rates go up I think there’s going to be some serious, serious problems in the housing market because there are lots of people struggling to make their payments even now with very low rates”.
So just because housing has been “a fantastic investment in the last 20 to 25 years, don’t assume that it’s going to be that over the next ten or 20 years”. But when will rates rise? “I think they’ll start to go up probably next year, but not by very much.” That, I guess, means that Bootle’s own money is not invested in a buy-to-let portfolio. It is not.
How is it invested? Cautiously – and not necessarily in a way he would recommend to others. He owns a “substantial” part of Capital Economics, which takes care of the equity part of his portfolio, and makes him risk-averse with the rest. So there are short-dated government bonds for safety and large-cap equities, which he expects to offer a reasonable long-term return.
Which ones? Big pharma and – based on his view that the pound is “much too high” – export firms. So, in a nutshell, I say, “own lots of a company that you founded. Don’t have any houses and buy large-cap equities in the UK that are export-orientated?” “That’s about right,” says Bootle.
Who is Roger Bootle?
Roger Bootle, 62, is one of Britain’s best-known economic forecasters. After doing a degree in PPE, followed by further graduate studies in economics at Oxford, he briefly became a lecturer in economics. He then went to work in the City as a professional economist for Capel-Cure Myers and Lloyds Merchant Bank. He spent nearly a decade at HSBC, from 1989 to 1998, eventually becoming the group’s chief economist. At the same time he was on the government’s panel of economic forecasters.
In 1999 he set up his own economic consultancy, Capital Economics, which he still owns a majority stake in. He has published several books, most notably Money for Nothing (2003), The Trouble with Markets (2011) and The Trouble with Europe (2014). He frequently appears on the radio and television and has a regular column in The Daily Telegraph.