What would really happen if Britain left the European Union?by John Springford , Simon Tilford / December 10, 2015 / Leave a comment
Published in January 2016 issue of Prospect Magazine
The referendum on whether the UK will leave the European Union is likely to turn, in the end, on whether its interest in free trade with the continent will outweigh public hostility to unimpeded immigration from there. It may be a close call.
Britain’s political elite has long prided itself on its embrace of globalisation, but that consensus is fraying. The Conservatives remain rhetorically committed to free trade, but the party is increasingly hostile to the EU for overriding British law. Many Labour politicians—especially the current leadership—are suspicious of free trade, thinking rules are written for the benefit of global corporations and at the expense of workers’ rights, public services and the environment. Both parties seek to soothe hostility to immigration by promising to restrict flows of people or curbing access to welfare, but the rise of immigration from eastern Europe, the surge of refugees across the EU’s borders and the eurozone’s manifest failings all combine to make Brexit a real possibility.
Yet even if these are the strongest impulses within the “yes” and “no” camps, the arguments will—and should—turn as well on the impact that withdrawal will have on many different aspects of life in the UK. Very little is yet spelled out about some of these. Here, we set out 12 things that voters in the UK really need to know about Brexit before the day of the vote.
1—How much money would Britain save?
The UK handed over £19.2bn to the EU last year. But with the EU’s payments to British farmers, regional development funding and the British rebate, its net contribution to the EU budget was £9.8bn, equivalent to around 0.6 per cent of GDP, and hence a little less than the foreign aid budget (which is now 0.7 per cent of GDP).
If Britain were to quit the EU entirely, and settled for the same access to EU markets as, say, the United States, it would save 0.6 per cent of its GDP. But the EU would demand budget contributions if Britain wanted more than that. For example, if the UK were to withdraw to the European Economic Area (EEA) and pay into the EU budget on the same basis as Norway, it would reduce its net contribution by around a tenth. If it succeeded in negotiating a series of bilateral agreements with the EU similar to Switzerland’s, Britain’s budget contribution would fall by a little over a half. In short, the more unimpeded its access to the single market, the more the UK would have
2—How would Britain trade with the EU?
One option would be EEA membership—the so-called Norway option—which would give Britain trade with the EU almost as unfettered as it has now, but with next to no say over EU regulation. Another might be a more limited set of bilateral agreements, like those agreed between Switzerland and the EU. The Swiss goods trade is unimpeded with the EU, in exchange for signing up to the relevant EU rules, but it has more limited access to those areas of the single market whose rules it cannot stomach, such as financial services—which would pose a threat to the City of London. But the Swiss can negotiate their own trade agreements, unlike EU members—or, in fact, Turkey, which has a customs union with the EU. Such an arrangement would give the UK access to the EU’s goods markets, but not those in services, in return for signing up to all of the relevant rules and abiding by EU trade policies with non-EU countries.
A fourth option would be a free trade agreement such as those that the EU has with South Korea or South Africa. Most trade with the EU would be tariff-free, but the big barriers to trade caused by “behind the scenes” protectionism—discrimination against foreign companies’ bids for public contracts, for example—would go largely untackled. Britain would be free to determine its own trade policies with non-European countries. But the more comprehensive the trade agreement, the more EU regulation the UK would have to abide by.
And finally, the UK could trade with the EU under World Trade Organisation (WTO) rules in order to regain as much sovereignty as possible. But our exporters would face EU tariffs, and would have to comply with EU product standards if they wanted to sell their wares on the continent.
In short, if Britain leaves the EU, it will face a difficult choice: access to the single market, but less influence over the rules that govern it; or freedom from the rules, but loss of access to the market.
3—Would Britain curb immigration?
The impact of Brexit on immigration would depend on the trade arrangement Britain negotiated with the EU. EEA membership would require Britain to remain open to immigrants from the EU, as would a Swiss-type agreement. As a big reason for leaving the EU would be to curb immigration, it seems unlikely that Britain would opt for either of these two arrangements. The Swiss and Turks have similar market access—in goods, but not services—but Turks are not automatically allowed to work in the EU, while Switzerland, a rich country, must comply with free movement rules. Therefore the EU would probably insist that a customs union with Britain came at the price of continued free movement. (And it is unlikely that Britain would want such a customs union in any case, since it would have to abide by the “acquis communautaire,” the accumulated legislation that makes up the body of European law, and would want the freedom to negotiate its own trade deals with non-EU countries.) If Britain were to opt for a free trade agreement it might have some scope to control immigration from the EU. But the more comprehensive the free trade deal, the less scope the UK would have to cap migrant numbers.
The only situation in which Britain would certainly be free to limit immigration is if it opted to trade under WTO rules, which would maximise economically damaging trade barriers with the EU. Britain would face an invidious choice: damage its economy by leaving the single market entirely, or allow free movement to continue.
4—Would Britain be freer to trade with the rest of the world?
Assuming it rejected the EEA or a customs union, the UK would be free to negotiate trade agreements with countries outside the EU. But it would not inherit the EU’s existing bilateral trade deals: it would have to negotiate new ones. And it is far from clear that the UK would find it easy to forge new deals, let alone on as good terms. True, it would not have to compromise with 27 other member states, which have varying degrees of enthusiasm for free trade. But Britain’s economy is far smaller than the EU’s—and would be less of a priority for the US or China. What’s more, Britain is already very open to imports and inward investment, so it would have little to offer in return for its demand that other countries reduce tariffs and other trade barriers. It is hard to believe that the UK would have more success prising open India’s services market, for example, on its own than as part of the EU.
5—Would global companies invest elsewhere?
Britain is by far the EU’s largest recipient of foreign investment. A large proportion of inward investment into the EU comes from the US, and the UK is its principal host. And other EU countries now account for half of the stock of foreign investment in Britain, up from 30 per cent 20 years ago.
Some Eurosceptics argue that Brexit would enhance Britain’s attractiveness to foreign investors, because it would be freed from cumbersome EU regulation. However, despite its EU membership, Britain’s markets are freer of red tape than
anywhere else in the rich world bar the Netherlands, according to the Organisation for Economic Co-operation and Development (OECD). Regulation of Britain’s labour market is also far closer to the Anglo-Saxon norm than the Continental norm.
Leaving the EU would probably reduce Britain’s attractiveness. After all, many firms from outside the EU are seeking a European base to avoid the barriers they face when exporting from their home markets. Investors face similar issues: without unimpeded access to the EU’s single market, they might expand operations in other countries.
6—Would the City of London suffer?
Advocates of Brexit believe that even outside the EU, the City’s deep and liquid capital markets, legal regime, time zone, language and historic trading ties would give it a formidable advantage. This is probably true, at least in the short-term. Much of the City’s business is global, rather than merely regional. For example, it is the world’s largest centre for foreign exchange trading. And, like New York and Tokyo, London is a hub for trade in securities for firms from all over the world.
On leaving, the UK could try to bolster the competitiveness of the City by lightening regulation on the financial services sector. However, if it did, banks might move to Paris or Frankfurt. The EU insists that, in exchange for access to EU markets, countries outside the club must have regulation and supervision of their financial sectors equivalent to the EU.
7—Would farmers suffer?
The EU’s Common Agricultural Policy (CAP), despite recent reforms, is still a wasteful anachronism. The wine lakes and wheat mountains have gone, but Europe’s farmers still shelter behind tariff walls and receive cash handouts, which amount to two-fifths of the EU’s budget. If Britain left the EU, it could get rid of agricultural tariffs and cut subsidies, and the 99 per cent of Britons who do not work the land would benefit from lower supermarket bills (in 2008, the OECD estimated that the CAP raised European agricultural prices by 13 per cent). This would be welcome. Supermarkets could import more food from productive farms overseas, and some poorer countries would be free to sell more produce to Britain. Outside the EU, Britain could abandon the EU’s wrongheaded ban on most genetically modified crops, which would shrink the farm land needed by raising yields, and reduce environmental damage from pesticides. More of the British countryside could be turned into national parks.
But there are good reasons to question whether this would happen. Britain’s farmers hold sway over Westminster, through powerful lobbies like the National Farmers’ Union, and would aggressively campaign to retain tariffs and subsidies.
8—Which regions might lose out?
Around 40 per cent of the EU’s budget is spent on developing the infrastructure and industries of the Union’s poorer regions. Most of this money is now spent in central and eastern Europe, but some still flows to Britain. Wales receives the most per head—£83 per year (£254m per year in total)—while Northern Ireland receives £30. Together with agricultural subsidies, this is enough to make these regions net beneficiaries of the EU’s budget, while England is a big net contributor; Scotland pays in pretty much what it gets out. These regions would probably demand more Westminster spending to make up the shortfall after Brexit.
But some regions have more to lose from Brexit than others. For example, thanks to Nissan, 15 per cent of private sector sales in the northeast of England are exports to the EU. If Britain leaves the EU and fails to agree a free trade deal in goods, the northeast and other manufacturing regions will face EU tariffs, weakening their economies. Meanwhile, if Britain makes a deal on goods trade with the EU but no services agreement is struck, London would be more badly hit, because 8 per cent of London’s private sector activity comprises export of services, largely financial, to the EU.
9—Universities and science: does Brexit matter?
Britain’s universities receive a disproportionate share of European research funds (20 per cent, or £1bn per year, while Britain contributes 11 per cent of the EU’s budget), but after withdrawal Westminster could simply distribute some of the savings from its EU budget contributions to academic research. It could, that is—but it might not. Or the UK might continue to participate in EU research programmes; Norway and Israel do so despite being outside the club.
The biggest risk from Brexit to British universities is not financial. Academics now participate in a global labour market—and migration is crucial to the sector’s success. Italy’s universities have fallen down the world rankings in part because of discrimination against foreign academics. Theresa May, Home Secretary, has tightened immigration rules for dons and students from outside Europe—the latter now must have over £11,000 in their bank account to get a visa—in pursuit of a net immigration target of less than 100,000 per year. Universities are complaining that it is hard to recruit the most able people. If Britain leaves the EU and refuses to allow free movement to continue, tighter restrictions on European students and academics can be expected, to universities’ detriment.
10—Would Britain emit more carbon?
The EU has already met its 2020 target to reduce greenhouse gas emissions by 20 per cent. But this is largely down to economic slump and deindustrialisation, with carbon emissions being outsourced to China and other emerging economies that make carbon-intensive goods for export to Europe. In recent years, the US has been reducing carbon emissions more quickly than the EU—admittedly from a higher level—by switching from coal to gas made cheaper by the fracking boom. Meanwhile, Germany and other EU countries have been burning more coal as nuclear power plants are decommissioned and industry protests against high energy prices, partly caused by subsidies for renewables.
Outside the EU, however, it seems unlikely that Britain’s energy policy would change much. The reason is that the EU’s policies lack teeth, and so energy policy is still largely set by national governments. Britain is likely to miss its EU renewable energy target of 15 per cent of the energy mix by 2020, and the Conservatives will end subsidies for onshore wind farms next year—a sop to the party’s rural voters.
Electricity from coal is on the rise, as it is in Germany. And, while the European Court of Justice might hand out a fine, the likelihood that the EU would punish Britain for missing its renewables target is small.
11—Would Britain be less secure?
Simple theory tells us that when states’ interests are aligned, co-operation will ensue. This should lead one to hope that Brexit would not have a major impact on justice, security and foreign policy co-operation with the EU. Norway and Iceland, for example, have agreed to arrest and extradite suspects to EU member-states—they are members of the “European arrest warrant” system in all but name. Norway, Iceland and Switzerland also use the EU’s criminal databases—although, as members of the Schengen passport-free zone, they are more closely involved with the EU’s justice and migration policies than Britain. And foreign policy remains largely in the hands of the member-states: a European army remains a federalist dream.
However, Brexit poses some risks to Britain’s foreign and security interests. The EU’s main foreign policy weapon is sanctions. The UK has been a driving force behind sanctions against Iran, and, at least behind the scenes, Russia—as well as two former British colonies, Zimbabwe and Burma, whose behaviour the EU may have ignored without British pressure. And the EU’s economic size means that its sanctions inflict more pain than unilateral action by Britain.
Outside the EU, the UK could join in with EU foreign policy missions, which include military training in Somalia, and police and army reform in Ukraine. But other non-EU countries that do so are excluded from EU decision-making about missions’ aims and operations.
12—Would Brexit lead to Scoxit?
The biggest Brexit unknown is over the future of the British Isles. Nicola Sturgeon, the SNP leader, has promised another referendum if Britain votes to leave the EU against the wishes of Scots. But would Scots really want an EU border with their largest trade partner, England? Would they be willing to join the euro, which might be the EU’s condition for membership—and so leave a stable currency union for one which is beset by problems?
Meanwhile, Brexit might further strain the triangular relationship between Northern Ireland, Britain and the Irish Republic. An EU border between the Republic and Northern Ireland may not do as much economic damage as is commonly supposed, because both do much more trade with Britain than they do with each other. But Sinn Fein might argue that such a border would invalidate the British-Irish Agreement Act which established devolved government at Stormont, and renew its campaign for a United Ireland.
After four decades of EU membership, Britain’s formal relationships with the rest of Europe are governed by a tangle of treaties, institutions and laws. The reach of the EU into British life is so far-reaching that Brexit would require a renegotiation of most of Britain’s international obligations. A new trade agreement would have to be signed with the EU—and more than 50 with other countries outside Europe, to make up for those annulled by Brexit. Customs officials, border guards and trade negotiators would have to be hired to regulate and police trade and migration flows. New laws would have to be passed to replace EU regulations. Treaties between Britain and Ireland might have to be rewritten. And Scotland might—probably against its economic interest—leave the UK, which would lead to another round of political and economic turmoil. Given Brexit’s lack of obvious economic benefits, all this might prompt Britons to ask whether it is worth the bother.