Britain would be better off without the EU's 'ever closer union'

When the Treaty of Rome was signed in 1957, bringing into being what was then called the European Economic Community, subsequently to evolve into the EU, the world was a very different place. It was 12 years after the end of the war and the continent was plagued by memories of that terrible conflict – and fears of a perhaps still more terrible one yet to begin. There was no internet – indeed scarcely any computers – no mass air travel and no sign of what we now call the emerging markets. For the world economy, China was then about as significant as the Isle of Wight.

Yet this Treaty established the guiding force for today’s EU. In particular, the signatories pledged to work towards an “ever closer union”. This ambition is still driving the EU today.

At the time, it was widely believed that to succeed you had to be a member of some large bloc or other. In fact, the world is full of small countries that do very well indeed without submerging their identities into a large bloc. Within Europe, Norway and Switzerland are outside the EU (although they maintain close relations with it). Both are extremely prosperous. On the world scene, my favourite example is Singapore, which now has a higher GDP per capita than the UK.

Moreover, those countries which do belong to some bloc or other do not follow the objective of “ever closer union”. The members of the North American Free Trade Agreement (NAFTA) – the United States, Canada and Mexico – do not even have a currency union, never mind the other conjugal blessings that are sought on the continent – namely fiscal union, banking union and political union.

Indeed, it is striking that NAFTA isn’t even a customs union in the way that the EU is. It is, as the name suggests, a free trade area. Moreover, its members are free to conclude other such agreements with other countries. In fact, the EU is about the only significant Customs Union on the planet. Funny that.

While the prime moving forces behind the formation of the EU were undoubtedly political, there was also a substantial economic element. It was widely believed that the dismantling of barriers between countries would enhance trade and hence spur prosperity. This in turn would raise Europe’s economic weight in the world and hence increase its influence and improve its security.

Nothing wrong with that – except that trade has since taken off on a global basis and in terms of relative economic rankings the EU has been slipping down the international league tables. This is not accidental. The economic thinking of those who forged the union and those who have and still do want to take us “ever closer” was driven predominantly by the importance of size and uniformity. This is not altogether stupid. After all, there are plenty of examples in the economic world where size brings marked advantages – what economists refer to as economies of scale.

But there is also a rather important concept in economics called competition. We are used to the idea that competition between companies brings benefits but competition between governments can also be beneficial.

The trouble with Europe is that the EU’s drive towards ever closer union brings with it an urge to harmonise and integrate – and that brings a welter of regulation. Although a good deal of what holds European countries back does not originate from the EU itself but rather from their own governments, much of their agenda is pursued because it seems to be in line with the direction of travel in the EU. If they were in competition with other European countries without the smothering influence of the EU, they would be forced by normal economic forces to contain their ambitions – and foster prosperity.

The EU pulls off a remarkable feat. It is both too small and too large at the same time. It is too large to make a well functioning integrated political unit, but it is too small to make an integrated economic unit on its own. For the latter, the only unit that makes sense is the world – and of that, countries inside and outside the EU are already members.

Roger Bootle is managing director of Capital Economics