The split in neoliberalism on Brexit and the EU

Keshia Jacotine - MPhil Candidate at Monash University and Visiting Scholar at Queen Mary, University of London

This split came to the fore a year ago in the run-up to the UK’s referendum of EU membership.  In this piece, I will explore the arguments made by self-identified neoliberals (or liberals as some choose to describe themselves) from UK think tanks, the Adam Smith Institute (ASI) and the Institute for Economic Affairs (IEA) for and against Brexit.  I will also discuss how political economy scholarship provides an explanation on why neoliberal thought is split over the issue of Brexit and why some neoliberals may see the EU as being protectionist whilst others may view it as a problematic yet pragmatic mechanism which allowed the UK to pursue economic liberalisation.

The neoliberal case for Brexit

The neoliberal case for Brexit boils down to one main argument; the current structure and institutions of the EU is not economically liberal enough and hinders the UK from pursuing further liberalisation of its economy.  While the Single Market has facilitated free trade for the UK, the IEA argued that these were not ‘good’ free trade agreements, pointing towards the absence of agreements with major economies such as Japan, Canada and the United States, and that Brexit would be an opportunity for the UK to embrace openness through free trade agreements with the previously mentioned countries.

Neoliberal ‘Leavers’ also believe that the EU and the eurozone hinder opportunities for competition and freer trade.  A commonly cited example is the Common Agricultural Policy (CAP) which some view as an example of creating protectionist, interventionist and unfavourable conditions for competition while failing to increase efficacy or lower prices for consumers.  Another point of contention for neoliberal Leavers was the EU’s labour laws; they have argued that further harmonisation with these laws in collaboration with ‘Social Europe’ would hinder the progress of economic liberalisation in the UK with damaging  regulations being forced upon the country.

These arguments can be explained by the ‘Varieties of Capitalism’ theoretical framework.  The Anglo-American model of neoliberalism first embraced by Margaret Thatcher in the 1970s and 1980s is inherently different to the German-led ordoliberal architecture of the eurozone as well as the social market economies of states such as Greece.  An example of how this clash between different models of capitalism manifests itself is the decision by the UK to opt-out of the EU’s Fiscal Compact in 2012 due to the effect it would have on the UK’s autonomy over its banking sector.

As acknowledged by Roland Smith for the ASI, the liberal case for Brexit (he refers to the liberal case as opposed to the neoliberal case) does acknowledge that at the time of the UK’s accession to the EU, it appeared that the EU (then the European Economic Community) was a pathway to further economic liberalisation.  As part of the globalised movement towards free trade in the 1970s, it appeared that the idea of a Single Market void of tariffs and taxes was a way forward for the ailing British economy and a practical move towards greater economic liberalisation.  However, like many other Brexiteers,  neoliberal supporters of Brexit believe that the current structure of the EU and the Eurozone does not reflect the vision first held in the 1970s as its enlargement has come at the cost of autonomy over economic decision making.  Thus, the neoliberal case for Brexit boils down to this: while the EU helped the UK liberalise its economy, there is now a fundamental clash with the UK’s Anglo-American model of capitalism; the UK’s model is now more liberal than any of its continental counterparts and so for the UK to continue to liberalise its economy, it had to leave the EU behind.

The neoliberal case against Brexit

However, there is not a united position amongst self-identifying neoliberals/liberals on Brexit.  Some neoliberals campaigned against Brexit as they viewed the EU as providing the most pragmatic way to facilitate free trade and freedom of movement, two hallmarks of a free market.  The IEA even went as far as to suggest that Hayek would have voted to remain as EU resembled the utopian vision he wrote about in the Road to Serfdom, as it ‘relentlessly’ erodes national protectionism and serves to raise living standards across Europe – including those of the poorest regions in the least developed member countries.

Diego Zuluaga of the IEA argued that the Single Market enabled the UK to attract banks and businesses, and that freedom of movement greatly enriched the British economy citing evidence from the Bank of England that migrants have higher rates of employment and self-employment.  According to Zuluaga, another way in which the EU aids the creation of a freer market is through state aid; this strictly limits subsidies to ailing businesses, and the EU’s set of legislative measures aimed at promotion trade across member states have made nationalisations and monopolies ‘virtually impossible’.  There was a pragmatism underpinning the neoliberal case against Brexit; there are acknowledgments that the EU is not perfect and that some protectionist elements do exist, but it is seen as the most realistic option for the UK to facilitate free trade and continue to liberalise its economy.

Is the EU truly neoliberal?

Theoretically, scholars would argue that the EU is not inherently neoliberal but rather ordoliberal; the German model of capitalism.  There are parallels between the two schools of thought; both champion free trade and movement however, ordoliberalism is best described as being ‘disciplinary neoliberalism’.  It is a market orientated philosophy but with a constitution on how the market should operate.  There are still rules involved, and potential punishments when members do not adhere to these rules; an example of this is the Stability and Growth Pact which determines that when eurozone members are in risk of breaching the growth targets and overheating their economies, they are to be sanctioned by the Council of Ministers.

In their respective arguments; both sides of the neoliberal debate on Brexit recognise that the EU is not inherently or completely neoliberal in its nature.  The neoliberal Leavers argue that policies such as the CAP prevent further economic liberalisation while neoliberal Remainers argue that the EU is not perfect but rather pragmatic; there are still protectionist and anti-competitive elements at play but overall this remains the best option for the UK to retain the progress made towards economic liberalisation.

In light of the first anniversary of the referendum and official Brexit negotiations beginning earlier this week, it appears that both sides of the economic liberal debate on Brexit have accepted the result. They recognise that the UK is leaving the EU and are now focused on new opportunities for the UK to pursue further economic liberalisation and free trade.  In the aftermath of the referendum, the ASI immediately pushed for Britain to pursue the ‘EEA Option’  – that is, membership of the Single Market without EU membership.  The IEA provided four paths for Britain after Brexit; the first being Britain to reassume sovereignty over its economy through negotiating free trade as a single actor. The second path would be to retain membership of the Single Market to take advantage of existing institutions and free trade agreements but also to join the European Free Trade Association (EFTA) which would recognise its role in a ‘new European settlement’.  Another option cited by the IEA would be for Britain to turn towards free trade agreements with the Commonwealth and ‘Anglosphere’ (Canada, Australia, the US and New Zealand), and the final path would be forming a ‘Global Free Trade Alliance’ (GFTA) with a number of different countries across the world.

While in the lead up to last year’s referendum, there was a split amongst neoliberals/economic liberals with regards to Brexit and how inherently neoliberal the EU was.  One year on and it appears both sides of this divide have come together.  Both sides of the debate that played out a year ago are now united in arguing that Brexit has provided Britain with new opportunities for freer trade and markets, without the constraints of the EU.