Open Europe Blog

Mind the counterfactual

As we’ve argued before, whenever anyone makes a claim about the cost or benefits of the EU, look out for the counterfactual – i.e what would be the case if the UK weren’t an EU member.

The classical “3 million jobs would be lost if the UK left the EU” claim is one of the most conspicuous examples of a rogue statistic without any credible counterfactual attached to it.

Of course 3 million jobs wouldn’t be lost over night if the UK left the EU, because all trade with Europe wouldn’t suddenly disappear (even North Korea trades with the rest of the world). But, as we also have argued, Better Off Outers who believe a world of unilateral trade and pareto optimal regulation would ensue on the day after the UK left the EU are also making huge leaps of faith. 

On that note, UKIP’s Tim Congdon takes issue with something we said in a blog last week in his latest group email. When highlighting problems with the CBI’s recent cost-benefit analysis we were a bit loose in our critique of Congdon’s study measuring regulatory costs, pointing out similarities with UKIP’s own analysis (right) in terms of the counterfactual.

We argued that Better Off Outers have:

“Mastered the art of measuring EU costs with no reference to a counterfactual (see [Tim Congdon’s How much does the European Union cost Britain?] – for a fine example). To a large extent, the CBI study falls into the same trap.”

To be fair to Congdon he has described a counterfactual in his UKIP paper:

“The UK’s departure from the EU would allow us to adopt unilateral free trade, which economists tend to regard as the best policy.”

And in his email:

“In my study I estimated the costs of EU regulation and protectionism assuming that the EU would carry on pretty much as it had been doing for the last 20/30 years, and that the UK outside the EU would be lightly-regulated and pro-free trade.”

So, he does provide a counterfactual – apologies for saying otherwise. There is still a problem however: it’s a completely unrealistic counterfactual. The UK would not turn into to Hong Kong on Day 2. However much one would like to see all the costs of the EU to evaporate and for the UK to adopt unilateral free trade, with corresponding unilateral liberalisation on the EU’s part – covering everything from rules of origin for UK-exported cars to “passports” (if you can trade in one country you can trade in all) for UK-based fund managers. Do you really trust Whitehall and Westminster that much? Also, under article 50, the Mediterranean bloc could stop EU trade liberalisation for a very long time. Call us pessimistic but that’s life.

Bringing the point back round to cost benefit studies in general, contrary to what Congdon suggests in his email, we believe determining the counterfactual for the UK outside the EU is actually pretty difficult (see our report ‘Trading Places’ for a full discussion of this), and providing a quantitative assessment of it is even harder. As the Channel 4 fact check blog highlights, this difficulty has lead to a very wide range of estimates on the costs and benefits of EU membership.

In any case, our wider point still stands, that studies of this type are full of caveats which hamper their effectiveness, no matter how tempting putting a single number on the costs/benefits of EU membership sounds.

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