Why the United Kingdom should not leave the European Union

Why the United Kingdom should not leave the European Union

Opinion piece (Constructif)
02 March 2015

With the prospect of a British in-or-out referendum by 2017 and the eurosceptic UK Independence Party (UKIP) polling around 15%, the future membership of the UK in the European Union (EU) is in doubt. Exit supporters argue that Britain should be able to restrict immigration as it sees fit; spend its net contribution to the EU budget elsewhere; shift its economic focus to regions beyond Europe and be freed from EU regulation. None of these arguments is convincing, however: the economic case for British membership remains overwhelming. Politically, too, the UK would lose out from leaving the EU – just as the rest of Europe would if Britain left. The eurozone in particular should help Britain make the case for the EU at home.

Start with immigration. Opponents of EU membership argue that immigration, especially from Central and Eastern Europe (CEE) after 2004, has depressed wages of British workers and been costly for British taxpayers. Both claims do not hold water. The effect of immigration from CEE on wages has been estimated in numerous studies, and found to be non-existent or very small. Immigrants from Western Europe have on average higher qualification than native Brits, and are thus likely to increase the overall productivity of the British economy.

Even if we assume that immigration has a negligible effect on wages and employment, the fiscal implications are clear: immigrants contribute more to public coffers than they take out by means of public services because immigrants tend to be younger than the population overall. The effect is sizable: one study finds that EU migrants pay 34% more than they take out.

Of course, having more people in the country puts pressure on public services and housing – if supply remains constant. But there is no reason to keep supply constant. Economists and businesses rightly criticize British land and housing policies as one of the main constraints on the UK economy. And just as the cutbacks to public services, these policies are entirely a domestic choice. Blaming immigrants for overstretched public services, the congestion in housing markets, or, as UKIP leader Nigel Farage has recently done, on roads is dishonest.

Saving the British net contribution to the EU budget, currently 0.5% of British GDP, is the most apparent benefit of leaving the EU. But could Britain really use these funds for other purposes if it left? The answer depends on whether Britain wants continued access to the single market along Swiss or Norwegian lines. In that case, it would be mandated to contribute to the funding of various EU programmes, as a price for access to the single market. If Britain negotiates a similar deal as Norway, the net contributions would fall by a mere 9%.

Access to the single market is the single most important issue to consider for Britain. According to CER calculations (see report), the EU has boosted Britain’s goods trade by 55% compared to what one would expect given proximity and the size of the respective economies. Professional and financial services exports, Britain’s comparative advantage, have also benefited from access to the single market, even though there is still huge potential in further services liberalisation. Inside the EU, Britain could be a champion of this liberalisation process, which is likely to be very slow without the UK pushing it. And it is in part because of access to the single market that Britain is the single biggest recipient of foreign direct investment (FDI) in the EU. Without British access of the single market, some of that investment will go to the rest of the EU instead.

What options does Britain have to secure access to the single market, after leaving the EU? First, it could join the EEA like Norway, maintaining full access to the EU but also having to contribute significantly to the budget. What is more, Britain would need to accept immigration and regulation but lose any influence on either. This option is therefore hardly what exit supporters have in mind.

The ‘Swiss’ option, an EU a la carte, if you will, sounds attractive but comes with strings attached. The Swiss still have to accept free movement of labour and regulate most of their markets according to EU rules in order to gain access. Importantly, they have so far failed to negotiate access to the single market in financial services, Britain’s biggest comparative advantage.

A simple free trade agreement (FTA) would equally not set Britain free, as it is hard to escape the EU’s orbit. British exporters would still have to follow EU product standards, for example. In addition, a deeper trade agreement that includes services would be hard to negotiate, given the British trade surplus in that sector. But of the various exit options, it is probably is the best – if the EU is willing to go along with it.

Some argue that access to the single market is less important as Britain should shift its economic focus away from a stagnating Europe towards the more dynamic economies of Asia, the Americas and Africa. This argument assumes, first, that a country cannot have both at the same time, flourishing trade with the EU and emerging economies; and second, that the EU prevents Britain from accessing these more dynamic markets. Both claims are wrong. Germany, for example, successfully exports to the EU and emerging markets, despite being in the EU. In fact, the EU is part of the reason for that success. Because Europe has a large weight in trade negotiations, access to foreign markets via FTAs is easier to negotiate for the EU than for a single, and by comparison small, European country.

The bonfire of regulation, that exit supporters expect, is highly unlikely to happen regardless of which route the UK decides to take after leaving the EU. By comparison with other OECD countries, the UK is one of the least regulated economies – despite being inside the EU. In product market deregulation, it is second only to the Netherlands (also a member of the EU); Britain’s labour markets are as deregulated as those of the US, Canada, Australia and New Zealand, according to OECD indicators. Unless one assumes that the UK is much more liberal than these countries, the level of regulation will remain roughly the same.

The UK is part of Europe, and the economic case for staying in is overwhelming. In shaping its future, Britain should work together with the EU, inside the EU, to improve the wellbeing of its citizens. Politically, the combination of the most outward-oriented European country, Britain, and the size and might of the EU, works to the benefit of both and will continue to contribute positively to the EU’s and Britain’s standing in the world.

British politicians should make the pro-EU case more forcefully at home. But the rest of the EU could help them – the eurozone in particular. After all, a key piece of evidence for eurosceptics is the continued stagnation of the eurozone economy, and the resulting weak trade growth with the continent. The eurozone should embark on an aggressive growth programme that combines monetary, fiscal and structural reform policies. This is just as much in the eurozone’s self-interest as it is in the British to stay in the EU.

Christian Odendahl is chief economist at the Centre for European Reform.

The original French version of this article can be found here:

http://www.constructif.fr/bibliotheque/2015-3/le-royaume-uni-doit-rester...