Why we must remain in the EU
This is not to say that the EU has no impact on the UK economy. It does and there are quite clearly costs and benefits to membership. The most apparent cost is the UK’s net contribution, which at around £8.5 billion is equivalent to 1.1 per cent of the government budget, or 0.5 per cent of national income.
There are costs associated with EU regulations in financial services, environmental policy, employment and consumer safety. But it would be foolish to assume these costs would vanish in the event of a Brexit. Indeed, the UK has been at the forefront of the recent regulatory drive on financial institutions, such as the ring-fencing of banks and new requirements on insurers. Similarly, Britain is, if anything, ahead of the pack in the level of state intervention in energy markets for environmental and other reasons. Thus a sizable chunk of onerous regulation is likely to remain in place even if we vote to leave the EU.
The same is true of the Common Agricultural Policy. This support programme for EU farmers raises the cost of food and closes off access for cheaper producers from developing countries. However, whilst a post-Brexit UK would no longer be bound by the CAP – there is a widespread consensus that a national scheme along the same lines would replace it. “Brexiteer” David Davis MP, among others made this clear in a recent speech. Moreover, for those worried about the ongoing burden of the CAP, there is reason for cautious optimism: its weight in EU GDP has dropped from 4.5 per cent to 1 per cent in the last 30 years. Much of this decrease has come from the removal of production quotas and price-distorting policies in favour of direct support, which is more economically efficient. Not enough to be satisfied, but progress nonetheless.
Finally, there are the costs stemming from the UK’s inability to sign trade deals independently. There is an extended view that Britain would have freer trade with more non-EU countries if it did not have to negotiate them together with the 27 other EU members. This is probably true, and open trade policies are indeed one of the key drivers of shared prosperity. However, one should not overstate the trade gains that are likely to come from Brexit. Half of UK trade is with its EU neighbours. Furthermore, EU membership has not prevented the U.S. from becoming Britain’s biggest export destination. Exports to China and other emerging markets have also boomed in recent years. There is reason to believe these healthy trends will continue with or without a Brexit.
Let us now turn to the benefits of EU membership. The first is Britain’s involvement in the single market for goods, services and capital. The key issue here, to my mind, is not the tariffs which UK businesses would be subject to if we left the EU. These would generally be low even without a formal trade agreement, given mandates by the World Trade Organization to which the EU is party. Rather, we should think about the many business and institutional ties that have been built over the years as a result of firms headquartered in the UK being able to sell freely across the whole of Europe. Economists often speak of transaction costs as a barrier to productive exchange, and uncertainty about rules and regulations is one important such cost. The fact that the single market guarantees access to the whole of the Union gives certainty to foreign and domestic businesses, thus making transactions more likely.
The single market is a particular boon for Britain, which due to its favourable business environment, reliable legal system and multiplicity of global trade connections is one of the biggest recipients of foreign direct investment in the developed world. Global firms routinely cite the UK’s role as a gateway to Europe as a major reason for their presence here.
The second key benefit the UK gains from the EU is the much-maligned free movement of people. The ability for EU citizens to study, work and retire all across the continent without the fear of visa and other bureaucratic troubles is an important driver of economic activity. Britain is one of the greatest beneficiaries, both because its dynamic and prosperous economy draws the best talent from across the continent, but also because free movement means Britons can reside, draw their pensions and use state healthcare wherever they want in the EU.
EU immigration – like most immigration – is hugely positive for Britain. Migrants do not only fill positions for which there are not enough native candidates. They also create demand for native jobs as consumers, and their net contribution to the exchequer has been estimated at £20 billion. Moreover, the Bank of England has shown that migrants have higher rates of both employment and self-employment. EU migrants are over- represented in high-value-added sectors such as finance and science. What is more, the UK’s comparatively low levels of red tape also mean many prospective entrepreneurs from France and southern Europe have set up shop here.
Eurosceptics argue that the EU makes it impossible for the UK to have more open immigration policies with the rest of the world. This is, first of all, misleading because the total annual number of immigrants admitted into each EU country is decided by national governments, so it is squarely the British government’s choice not to let more Commonwealth and other citizens in. Furthermore, this argument is based on the notion that immigrants are a net cost to the recipient country, which as we have seen is not the case.
It is claimed that we could have an equally open immigration policy that applied the same treatment to EU and non-EU nationals. But the reality is that there is significant political pressure to curb net migration figures, embodied in the failed Conservative pledge to cut the net number of annual migrants to the “tens of thousands” and in public support for parties such as UKIP, which have made a clampdown on migration one of their central planks. Brexit is therefore likely to lead to a curb on the number of people allowed into the country, with important consequences for business, tax revenue and, of course, migrants themselves, who are overwhelmingly productive, well-meaning and law-abiding people.
Finally, an important but often overlooked benefit of EU membership is that it makes bad economic policy less likely. EU competition law prevents member countries from granting favourable treatment via regulation and the tax system to domestic firms over competitors from elsewhere in Europe. EU rules on state aid strictly limit subsidies to ailing businesses. Additionally, a series of legislative measures aimed at promoting cross-border trade have made nationalisations and monopolies virtually impossible.
This may all sound abstract until one realises that senior Government figures were recently calling for state support and protection for the UK steel industry, in a bid to get the European Commission to relax rules about how taxpayers’ money can be used to bail out struggling businesses. On the Opposition benches, Jeremy Corbyn has made the renationalisation of the railways a central part of his policy programme and other figures on the Left have gone further in demanding more state intervention across the economy. Indeed, on both the Left and the Right there has recently been a drift towards a more interventionist state, with potentially very bad consequences for the dynamism and flexibility of the UK economy.
Whenever populist politics threaten the constitutional and economic stability of a member country, the EU acts as a helpful counterbalance and in some instances, as a barrier. That is no coincidence: many of the pro-market EU policies mentioned above were devised and implemented in the 1980s and 1990s under the leadership of the Thatcher government. It was a Thatcherite EU commissioner, Leon Brittan, who pushed through the rules on state aid. And many of the initiatives aimed at promoting competition and trade across the EU followed the successful example of the UK when it privatised and liberalised sectors that had previously been state-owned. Despite the bureaucratic growth and regulatory centralisation, the EU is still a force for good, not least thanks to British influence.
The UK has much to look forward to in the coming decades. It is set to become the largest economy in Europe by 2030, replacing Germany as the continent’s economic powerhouse. Moreover, its robust legal system, openness to trade and favourable business environment place it in an enviable position to take advantage of globalization and the rise of new technologies. Brexit offers the prospect of some marginal, but hardly compelling, improvements in trade and regulation. But this will likely come at the expense of deep commercial ties to Europe, a highly beneficial open immigration regime, and effective constitutional barriers against harmful economic policy. When we take the latter into account, leaving the EU is no longer an attractive proposition.
Diego Zuluaga is the IEA’s Financial Services Research Fellow and Head of Research at EPICENTER. This article was first published by Boisdale Life.