I suspect this hypothetical dialogue will look vaguely familiar to many readers:
Europhile: ‘The global economy of the future will be dominated by big blocks. The USA, China, India, Brazil. We can’t survive on our own in this world. We’re simply not big enough for that.’
Eurosceptic: ‘Are Singapore, Hong Kong, Switzerland or Liechtenstein big blocks? Is Iceland?’
Europhile: ‘That’s different. Also, you have to see: almost half of our exports go to the EU.’
Eurosceptic: ‘So? I’m not arguing for a withdrawal from the European market. I’m only arguing for a withdrawal from the EU as a political entity.’
Europhile: ‘You can’t have one without the other.’
Eurosceptic: ‘Switzerland can.’
Europhile: ‘That’s a special case. Besides, if we withdrew, we would still have to observe their technical standards.’
Eurosceptic: ‘And when we export to the Philippines, we have to observe Philippine technical standards.’
Europhile: ‘But that’s different, because… because…’
The reason why this dialogue is not working is that the two opponents are holding very different assumptions, without making them explicit.
The Eurosceptic’s assumptions are perhaps best explained by reference to a paper which appeared a while ago in the American Economic Review. It models the ‘optimal’ size of a political entity as a function of two countervailing forces, assuming, initially, a world dominated by high trade barriers.
The first force is economic productivity, which increases with the size of the country. This is because under conditions of heavy trade impediments, the boundaries of a market largely coincide with political boundaries. Small states are not economically viable, as they imply small market size, which limits the scope for specialisation and division of labour.
The second force is the political cost of heterogeneity, which also increases with the size of a country. This is the cost that arises when a heterogeneous population has to agree on a common policy mix. The optimum, in this model, is the point where the marginal benefit of market size is equal to the marginal cost of political heterogeneity.
Now suppose trade barriers are reduced. This shifts the equilibrium: it is now possible for people to be part of the same economic area, without having to be part of the same political entity. They are able to trade with one another without having to agree on politics. This means that the economic benefits of large markets can now be reaped without incurring the political cost of heterogeneity. Consequently, the optimal size of a political entity falls: ‘[T]rade liberalization and average country size are inversely related. Thus, the globalization of markets goes hand in hand with political separatism.’
This is an exact reversal of the conventional rationale for EU-federalism, which holds that globalisation makes larger political entities necessary. Au contraire: it is the very globalisation that makes smaller political entities viable.
But the critical assumption here is that having a common polity is not, in itself, desirable. It is a price to be paid in order to gain market access; and while that price may be acceptable, it would always be preferable if the benefits could be had without it. The ideal situation, in this model, is a huge common market with lots of small polities.
This model would have looked very different if it had been constructed by committed Europhiles. In that case, the formation of a joint polity would not have been modelled as a cost at all. On the contrary: it would itself have been the main benefit. For many Europhiles, the supposed economic gains are at best an add-on, and more likely, they are a post-hoc rationalisation.
If so, it would explain the Europhiles’ frequent refusal to contemplate the possibility of economic integration without political integration.
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