Photo credit (c) Michel Focard
6 Feb 2015
The British people deserve and demand a decisive say on our relationship with Europe. No one under the age of 58 has had one, and even many of those who did in 1975, justifiably feel the question turns out to have been a misleading one.
We face a number of apparent issues with the EU:
- Issues around immigration;
- Sometimes over-exuberant, restrictive regulations on business;
- The democratic deficit – with laws being visited upon us;
- Institutional failures – with EU accounts not being signed off[1];
- Of late, opposition from the left to a new key trade deal, the Transatlantic Trade & Investment Partnership; and
- Of course, the structural weaknesses in the Eurozone
We are facing the biggest national decision of my life time: whether to stay or leave. The debate has hitherto been conducted at the extremes – talk of 3 million jobs at risk on the one hand, or of there being no risk of loss of trade on the other. Both are wrong: some trade would surely be lost, but not all of it - the answer lies somewhere in the middle. And it’s not just intra - EU trade at issue, there is also the point around trade with third parties.
We now need a national debate and analysis of the extent to which we could have the trade benefits, and perhaps others, without the drawbacks. Perhaps Norway and Switzerland provide an attractive model?
So what have we gained from the EU? With a GDP totalling £11 trillion, the EU is the world’s biggest single market[2]. Its removal of tariff and non-tariff barriers for member countries has had a significant stimulus effect on trade - indeed the Department for Business, Innovation & Skills has estimated that EU countries trade twice as much as they would in the absence of the single market and that increased trade since the early 1980s may be responsible for 6% on per- capita income in the UK[3]. Over half of British trade is now with the EU[4], compared to just 13% with the US[5].
It is not just removal of tariffs that has supported this wave of trade. Roll out of uniform regulation has its annoying aspects of course, but it has also made it much easier for British firms to export to other members: British businesses now face one set of regulations instead of 27, and of course, the UK has had at least some say in what these are.
Equally important is the impact membership has had on trade outside of the Union. EU Agreements include, for example, a Free Trade Agreement with South Korea that eliminated 99% of duties in industrial and agricultural products; the TTIP currently being negotiated with the US which is predicted to increase national income by as much as £10 billion annually[6] and negotiations that are currently in progress with China – the EU’s second biggest trading partner, after the US[7]. Acting as part of a larger bloc has provided the UK with a stronger voice at the negotiating table, helping it to get a better deal for its consumers and businesses.
A final point on the economic case: the UK’s inflows of Foreign Direct Investment (FDI) are the third highest in the world. There are many things that affect FDI, but for us, the coincidence of
- The English language;
- A usually pro-business political culture and economic policy; and
- EU membership
plays a key role. Comments such as those of the Nissan Chief Executive about needing ‘to reconsider [their] strategy and investments for the future’ should Britain choose to leave the EU[8] cannot be dismissed or overlooked.
There are times when the EU plays a positive role beyond pure economics. This can be seen, for example, in:
- EU sanction programmes;
- The power of joint aid programmes;
- The introduction and enforcement of targets on greenhouse gas emissions;
- Bans on expensive mobile roaming charges; and
- Powers to bring criminals to justice with the European Arrest Warrant and other collaborative systems
These are all things that individual countries would be unable to do without a huge number of complex individual agreements.
But, and it is a big ‘but’, the EU has significant drawbacks for us as a country, drawbacks that desperately need to be addressed to enhance its worth and restore its efficiency, public acceptance and democratic legitimacy.
Areas of concern include:
- Damage to national sovereignty, manifested through issues such as loss of control over legislation and policy areas like immigration;
- Questions over the accountability of EU institutions; and
- Bureaucracy and costly red tape
A recent poll with the Institute of Directors revealed that 60% of respondents would only support the EU if it was reformed.
A recent report from the Mayor of London’s Office highlighted a significant divergence in the likely economic performance of London under different scenarios. It concluded that if the EU remained unreformed, the UK would be better outside it, if and only if we adopt an open, free trade, free market approach and maintain goodwill with the EU. But the best outcome of all was the one in which we stay in the EU and the EU reforms.
David Cameron has identified some key priorities for reform[9]; including reclaiming more power for national parliaments and liberating businesses from red tape. He has suggested a ‘red card’ system, whereby EU directives could be squashed if enough national parliaments objected to them. And he has stressed the need for better national control on immigration so that the EU supports the freedom of citizens to work, not claim benefits. Some steps have been taken already. For example, EEA migrants are unable to claim housing benefit and now have to be living in the UK for 3 months before they can claim income based Job Seekers Allowance, Child Benefit and Child Tax credit[10].
Immigration does of course have its upsides too. Immigrants from Poland and countries that joined the EU in 2004 have contributed almost £5 billion more to the UK economy than they have used in benefits and public services[11]. There are however clear downsides to high volumes of incomers. While the additional demands on the NHS can be overstated – immigrants tend to be young and therefore relatively light users of healthcare – there is pressure on public services, including school places. Perhaps most significant of all is the effect on demand for housing and therefore on house prices. According to the ONS, if net migration were zero, annual demand for new housing would be 149,000 rather than 232,000.
So the government has a clear idea about what reform should look like, but how possible is it? Murmurings from some political heavyweights in the EU have not been entirely encouraging. Francois Holland has stated that France “will not pay an extra price to keep the UK in the EU”[12] and Angela Merkel has said that she “will not tamper with the fundamental principle of free movement”[13]. But Frau Merkel has also recently suggested she would be supportive of some reform and expressed a keen desire for the UK to stay in the EU[14]. We also have history behind us: reform, pushed by the UK, has been managed before:
- We pressed for the single market and the principle of subsidiarity;
- We got an opt out from the single currency and the Schengen Agreement;
- The UK vetoed an EU fiscal treaty that undermined British interests[15]; and
- David Cameron successfully campaigned for an EU budget cut – the first in the union’s history[16]
The UK should not underestimate its political and economic clout– as the third largest economy in Europe it is a powerful engine of growth in what is currently a sluggish Europe[17], and always an important part of the market.
I am positive about enacting change but sense dictates that we should consider the alternatives in the event this isn’t possible. What would happen if we left? Well the good news is it would not be the end of the world, nor would it be the end of our relationship with our near neighbours across the channel.
In the short term, the UK would undergo a period of political, legal and economic uncertainty: there would be lengthy political and legal work for the UK to decide which EU regulations and directives needed to be kept, and which ones repealed.
Businesses and the markets don’t like uncertainty. There is a risk, during this period, that some businesses would decide to leave for more stable territory.
In terms of trade, there would be a sizeable job developing new trade agreements, both with the EU, and outside it. To put this into perspective, Switzerland, a much smaller and less complex economy, took more than six years to negotiate its first tranche of bilateral agreements with the EU.
What these future trade agreements might look like is a highly speculative and controversial topic in and of itself. Many point to alternative models like those of Norway and Switzerland. The reality is, neither are perfect, nor as straightforward as they look.
Norway’s EEA Agreement provides the country with access to the single market whilst allowing it to maintain the flexibility to pursue its own agenda on fisheries, agriculture and trade. This is not without cost. For this access, Norway has to make a significant financial contribution, to the tune of €600m a year[18], making it the tenth highest contributor to the EU. It also has to accept some EU rules to maintain access to the single market – unlike the UK, though, it has no say in rule development.
Switzerland said no to the EU and to the EEA agreement, electing for a series of bilateral agreements instead. But, whilst Switzerland has tariff free access in areas covered by bilateral agreements, like Norway it still has to adopt EU legislation to maintain access to the single market. Negotiating bilaterals is also very time consuming – Switzerland has over 120 with the EU alone; it took nearly a decade for Bilateral I to come into effect. Finally, even if we were able to convince ourselves this could work for the UK, there is no particular reason to believe the EU would accept it. Indeed, they are currently in discussion with Switzerland about changing the relationship.
And of course, relative to both Switzerland and Norway, our economy is much bigger, with a GDP more than twice the size of those two combined.
In 2017, if the Conservatives are elected, there will be a referendum. How would I vote and how would I campaign? I can honestly say that I don’t yet know. It depends on two things:
- The analysis and debate between now and then
- What it is possible to negotiate
I think David Cameron’s strategy is a wise one: EU leaders know about the referendum, and the risk of exit, which should help towards concessions. Moreover, the current turmoil means there will be change in the EU - an opportunity for us.
Exactly what change is needed? I can’t say that precisely. We do need to stop ‘bad’ immigration, but it may be possible to achieve this without going head to head with the fundamental principle of free movement. Much could be possible by making benefits more contributory, alongside what is already being done on benefits and health tourism. One thing we certainly need to guarantee is protection of key UK industries, including, for example, financial services and the defence industry, and we need to see where there is more potential for growth, including areas such as tourism.
The first-best solution is for Britain to be part of a reformed, liberal, pro-growth European Union. But we can’t guarantee that reform, and we have to be able to countenance the alternative. You’ll never get the best out of a negotiation if you don’t have another option. That option does exist, and we should not be afraid of a future outside the EU. I think we can agree this great nation achieved quite a lot before the EU was even thought of.
Text of a speech I gave at the Petersfield First Friday business group in February 2015
Notes:
[1] The Telegraph. (2014, November 4). EU auditors refuse to sign off more than £100billion of its own spending
[2] Euromove. (2011, December). The Economic Benefits to the UK of EU Membership
[3] Gov.uk. (2009). Literature review – economic costs and benefits of EU membership
[4] CBI. (2013). Doing things by halves?
[5] Euromove. (2011, December). The Economic Benefits to the UK of EU Membership
[6] Centre for Economic Policy Research. (2013). Estimating the Economic Impact on the UK of a TTIP agrrement between the EU and US
[7] European Commission. (2014, September 9). China.
[8] BBC. (2013, November 8). Nissan boss warns UK over possible EU exit
[9] Policy Research Unit. (2014). EU Renegotiation. Policy Research Unit
[10] Kennedy, S. (2014). Measures to limit migrants’ access to benefits. House of Commons
[11] The Independent. (2014, November 5). European immigrants contribute £5bn to UK economy but non-EU migrants 'cost £118bn'
[12] The Telegraph. (2014, December 18). France to block David Cameron's treaty change plan
[13] The Guardian. (2014, October 26). Angela Merkel opposes Cameron EU renegotiation plan
[14] BBC. (2015, January 7). David Cameron: I can fix EU 'problem'
[15] The Guardian. (2011, December 9). David Cameron blocks EU treaty with veto, casting Britain adrift in Europe
[16] The Guardian. (2013, February 8). EU budget cut ushers in austerity for first time in union's history
[17] Lyons, G. (2014). The Europe Report : A Win Win Situation
[18] CBI. (2013). Doing things by halves?
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