Britain should vote to remain part of the EU. Here's whyby Bronwen Maddox / May 18, 2016 / Leave a comment
Published in June 2016 issue of Prospect Magazine
The 23rd June referendum on whether the UK will stay in the European Union will be an immense jolt to the country’s politics and economics whatever the result. If British people vote to leave, they will deliver to the country one of the most momentous shocks since the Second World War. If the UK votes to stay, the resulting tumult within the Conservatives could lead to the end of one of the country’s main political parties as we now know it.
The campaign has unleashed tensions within that party and the nation that are the opposite of what David Cameron intended three years ago when he committed himself to a strategy of “renegotiation and referendum,” hoping to settle once and for all the Conservative rift over Europe. When Philip Hammond, the Foreign Secretary, consulted his 27 counterparts in the EU last year, he found them agreed on only one thing: that Britain’s Prime Minister had been crazy to set the referendum in motion.
Some of the debate has been illuminating; much has not, and much has veered towards comedy as one side or the other has invoked Norway, Albania, or other countries which in few ways resemble Britain as a vision of the future. Much of the dialogue—particularly the claims to have the monopoly on truth in judging the economic impact—resembles the kind of accusation with which journalists are particularly familiar: “You’ve got your facts wrong. The facts are that I’m right.”
Nonetheless, I have set down here the reasons why I think the vote should be to “Remain.” This also represents the position formally taken by Prospect magazine, which occasionally does endorse a position ahead of a vote. However, I have not attempted a comprehensive rebuttal of every facet of the “Leave” campaign, as some publications have done. I have concentrated on the three main reasons, as it seems to me, why the “Remain” case is overwhelmingly stronger. They are the uncertainty that would follow a “Leave” vote, the economic impact, and the damage that Brexit would cause to Europe, to democratic values and to the west.
I acknowledge that an argument cast in this way does not answer all the challenges and passions of the “Leave” campaign. Indeed, one of the fascinating aspects of the debate has been how people—often from different political parties, and wielding very different arguments—have joined together to back one side. I took part in one panel in the House of Commons with MPs Kate Hoey (Labour) and Bernard Jenkin (Conservative) on the “Leave” side, and Nicholas Soames (Conservative) and Tristram Hunt (Labour) on the other; the argument was, as ever, deep into the economics when Peter Hitchens, the columnist for the Mail on Sunday, bellowed out: “I can’t see what economics has to do with it at all. This is about sovereignty, about liberty.”
Here are the arguments that I think clinch the argument for “Remain.”
The uncertainty that would follow a decision to leave is itself a heavy cost. The terms of the “divorce” deal which would determine the UK’s future relations with the rest of the EU would begin to be decided only when Britain had already voted to leave. This central point dominates all the discussion: we would not know the terms for which we had voted until after we had made the decision to go.
As I pointed out in our January issue, when we began running pieces examining the arguments for and against Brexit, Article 50 of the Lisbon Treaty, which sets out the procedure for deciding the terms on which a country leaves the EU, is not in the UK’s favour. It allows the remaining members to decide those terms without the UK in the room.
This uncertainty could stretch on for years, as the UK tried to thrash out trading terms with the EU, as well as unpick the myriad legal threads of interconnection. There would also be immediate uncertainty about the terms on which it could trade with its existing trading partners worldwide, as the EU deals that cover this trade would lapse—for the UK.
A foretaste of the effect of this uncertainty has come with the hit to growth which the country already appears to have taken in the run-up to the vote. GDP growth in the first quarter of 2016 was 0.4 per cent, down from 0.6 per cent in the final quarter of 2015. A note written in April by John Hawksworth, the Chief Economist at PwC, blamed this slowdown in part on the June vote which, he said, “may have led to some delay in major investment decisions, as indicated by weak construction output in the first quarter.”
Unlike those who feel this is above all an argument about soveriegnty, I regard the projected economic impact, the second of my three main reasons, as the core of the argument for “Remain.” The UK accounts for 1 per cent of the global population and 3 per cent of global income. The EU accounts for 20 per cent of world GDP, more than the United States, or China. I see no convincing case for the “liberation” of Brexit having a positive economic impact; the case that it could be very damaging is strong. But this is the area where rival claims have clashed most vituperously, documents headed “the economic case for remaining in—or leaving—the EU” thudding down on all sides.
As an attempt to cut through this, in April the Treasury put out its analysis of the projected economic impact of leaving. It estimated that after Brexit, Britain would be worse off by between £2,600 and £5,200 per household. Although this was jumped on by many critics, it seems to me a sensible estimate—acknowledging that it can give only wide estimates—of the likely impact.
As Chris Giles, Economics Editor of the Financial Times, argued when these estimates were published, it is unfair to reject them on the grounds that the Treasury does not more accurately predict economic growth itself. These are predictions in the difference that the Treasury reckons membership of the EU would make to growth. They are not disqualified by revisions to that course of growth itself. Or as Giles explained: “It is the same as saying, ‘We do not know how heavy you will be in 15 years, but if you drink a bottle of cola a day, we are pretty sure you will be fatter than if you keep off the sugar.’”
The impact is felt, above all, through the change in the terms of trade between the UK and both the EU and other countries beyond. As the Centre for European Reform pointed out in its three-year study on the economic consequences of Brexit, “Britain is highly economically integrated with the EU,” and “the share of UK output sold to the EU amounted to 9.8 per cent in 2011.”
The starting point would be to establish new trade relations with the EU; many other countries would look to those in opening negotiations with the UK. On leaving the EU, the UK would have to adopt one of several models for its new relationship:
• At the closest, it could become part of the European Economic Area, like Norway, Iceland and Liechtenstein. They enjoy most of the trade benefits of full EU membership. However, they must abide by most of its regulations and treaties. They are fully bound by the EU’s free movement rules. The Treasury estimated that under this scenario, Britain would be worse off by the least amount—£2,600 per household a year.
• The middle course would be to negotiate a bespoke relationship with the EU, as Canada, Switzerland and Turkey have done. However, this can take years. Canadian officials who took part in the five-year negotiations, point out that their experience should not be an inspiration; Canada had the benefit of a free trade agreement with the US, by far its largest trading partner, and much more like the relationship the UK has with the rest of the EU now.
EU officials also point out that while these countries have some ability to opt out of EU regulations, for example when it comes to the free movement of “economically non-active people,” the general principle holds that the more advantageous and closer the trading relationship that a country wants with the EU, the more it must accept its rules. There is no way to have such a deal and opt out entirely, for example, from so central a principle as “freedom of movement,” which is, in the EU’s own words, “a fundamental principle.” The Treasury estimated that under this scenario, the UK would be worse off by £4,300 per household a year.
• If the UK failed to strike a deal with the EU, its trading relations would become those prescribed by the World Trade Organisation—the relationship that Russia and Brazil have with the EU. These stipulate higher tariffs than the ones UK companies enjoy as part of the EU. The Treasury estimated that this arrangement would cost the UK £5,200 per household a year.
• The UK would at the same time have to renegotiate its trade treaties with other countries. Each one can take three to four years to conclude—if it goes smoothly.
Other studies shortly before the Treasury’s analysis, such as those from the London School of Economics’s Centre for Economic Performance, Oxford Economics and PwC, all reached the same conclusion: that the best outcome would be, as the Centre for European Reform, a pro-EU think tank put it, the “one that most closely replicated the current relationship.”
The Eurosceptic response to this is that the UK would be better able to negotiate trade settlements if it were unencumbered by its EU membership. But during a visit to London in April, the US President Barack Obama remarked that a vote for Brexit would put the UK to the “back of the queue,” in making trade deals with the US. Officials later appeared to qualify his remarks, but the point remains: trade partners would see little reason to give the UK better terms than they gave to the EU.
Red tape, and the City
Trade is not the only angle of economic impact. Some in the Brexit camp argue that the economy would be “liberated” by being freed from EU red tape. Many companies blame the EU for suffocating rules, particularly on employment, such as the Working Time Directive which limits work to 48 hours per week and sets paid annual leave at a minimum of four weeks per year. In a poll by PwC, 80 per cent of UK chief executives said they were concerned about “over-regulation.”
However, it is unclear how much red tape companies could jettison even if the UK left the EU. The Open Europe think tank claims that if Britain left the EU, it could save £12.8bn a year, through looser employment rights, rules on health and safety, and on the financial services industry. It argues that the UK has gone in for “gold-plating” rules: making them more elaborate and compliance more expensive than Brussels actually requires. The Oxford Economics study found that deregulation would raise GDP by an estimated 0.13 per cent. PwC reckoned 0.3 per cent.
However, the “Remain” camp points out that Britain has already secured extensive opt-outs from existing regulation and protection from new rules, and that the EU has pledged to simplify its rule-book. These advocates point out that the UK labour markets are among the most flexible already, and that much EU regulation has already been incorporated into UK law, making it hard to extract.
What is more, the City, a key part of the UK economy would hardly be free from regulation following Brexit. The UK would be left with essentially no influence over the financial regulation that would determine how the City ran itself.
Eurosceptics argue that leaving the EU would free the City—Europe’s largest wholesale financial market—from regulation, and that profits would soar. Yet this assumes that other markets would allow UK financial services firms to operate in their jurisdictions without being bound by their rules.
That is highly speculative and cuts against a decades-old tendency towards greater international regulatory alignment, a tendency that has increased since the 2008 global financial crisis.
Cost of EU budget now
The question is whether the loss in trade value would be greater than the sum that the UK now pays to the EU. This is the easiest figure in the debate to quantify, although even here there are disputes. The UK’s contribution to the EU budget is 0.5 per cent of GDP—£9.8bn in 2014. The CER notes that “if the UK were to pay into the EU budget upon the same basis as the Norwegians or the Swiss, its net contribution would fall by 9 per cent or 55 per cent respectively.”
The chance that the UK lost more than that by leaving, however, seems very high. That is the consensus of almost all the economic studies on the question, including that of the Treasury.
It is worth reflecting, too, that the greatest obstacles to faster growth for the UK lie at home. A patchy education system in which only one in five children studies maths after age 16, a grotesquely distorted housing market, a lack of investment in national infrastructure, or misdirected investment, due to confusions and constrictions of national policy—these are the things which handicap Britain in raising productivity, wages and growth.
Strength of Europe
One of the strongest arguments, I believe, is the damage that Brexit would do to the European project, to the sense of a united west, and to Europe’s commitment to democracy. It would also, I think, undermine Britain’s role in the world and the contribution it makes to upholding those ideals. The EU project was conceived as a bulwark against the forces that had led Europe to tear itself apart in two world wars.
The expansion eastwards, to take in the former Soviet bloc countries of Central and Eastern Europe in 2007, which the UK emphatically backed, has given rise to some of the consequences fuelling the Brexit campaign, such as resentment of immigration from the EU. But the expansion also represented a statement about the common values that the EU intended its members to share.
It is true that the EU has not been able to insist that those values are upheld by members as much as it would like. Once in, they find that Brussels has few sanctions by which to make non-compliance uncomfortable, as the persistently poor state of the Bulgarian justice system shows, for example. The EU has also failed to act over Poland’s introduction of illiberal media laws.
All the same, it is clear that the EU stands for western values of liberal democracy, broadly free markets and a respect for human rights. The authoritarian lurch that Turkey is taking shows how the EU is surrounded by countries which challenge or reject those values; Russia’s action in Ukraine (see Mikhail Gorbachev’s essay, p32) is a further reminder. If the UK left the EU, the danger is that others might head for the exits too, and the project unravel.
In this zone of the debate, there has been a secondary, technical argument about whether Brexit would hurt domestic security. However, Richard Dearlove, the former head of MI6, has argued in Prospect that Brexit could make Britain more secure. “Brexit would bring two potentially important security gains,” he wrote in our April issue. “The ability to dump the European Convention on Human Rights… and, more importantly, greater control over immigration from the European Union.”
But he is a lone voice among members of the security establishment. His successor at MI6, John Sawers, along with the former head of MI5, Jonathan Evans, have argued that EU membership and the intelligence-sharing capabilities that it brings are a benefit to Britain. Writing in the Sunday Times, the former spies said: “Counter-terrorism is a team game, and the EU is the best framework available—no country can succeed on its own.” In a letter sent to the Times in May, 13 former US secretaries of state and defence and other security experts wrote that “Europe would be dangerously weakened,” if Britain were to vote for Brexit.
Although this is not one of the central arguments for staying in, in my view, it is a practical example of the value of the alliance.
I have not attempted to overturn conclusively two of the key arguments that pro-Brexit campaigners make, on immigration and on national sovereignty.
There are indeed many studies claiming that immigration from the EU is a considerable net economic benefit to the UK. In 2014, academics at UCL calculated that, in the 10 previous years, European immigrants had contributed £20bn net in tax to the UK.
Nonetheless, there are good arguments that economists are too blithe, in citing these nationwide figures, about the impact on communities, on local wages, on demand for housing and on public services such as schools and hospitals. In areas with concentrations of recent immigration, the effects can be pronounced and intensely unwelcome to those communities. As with the effects of free trade and global competition on local jobs and wages (a question to which Prospect will return in depth in the next issue), there is evidence that for all the overall benefits for the nation, it can take years for workers to recover from the competition, refashion their skills and rebuild their income.
Resentment of immigration is one of the main forces driving the “Leave” campaign. The usual retort from the “Remain” camp is to point out that leaving the EU will not end freedom of movement; the UK will have to accept essentially the same degree of movement if it wants good terms of trade. The tradeoff is inescapable, they point out.
This is entirely correct—and yet it seems to me not to dispatch entirely the immigration point as the “Leave” camp makes it. In practice, by leaving the EU, the UK might find itself more able to restrict future immigration, for instance from other countries that have not joined the EU yet. It does not answer at all, of course, the challenge which has driven Ukip’s success: that people who dislike immigration from the EU think the impact on them far outstrips any economic benefit. They feel that it has been anti-democratic to boot: that the country has changed profoundly and no one asked them.
Nor does this argument for “Remain” attempt to overturn entirely the sense of national sovereignty compromised that drives another flank of the “Leave” campaign. It is fair to point out that sovereignty is never as absolute as those advocates claim; modern nations repeatedly agree on limits to it in order to take part in international treaties, trade deals among them. Membership of Nato now costs Britain 2 per cent of GDP, and brings obligations too. It is right to point out, too, the many opt-outs from EU legislation that Britain has secured.
But as Wolfgang Münchau argued in our July issue, part of the decision on how to vote depends on people’s instinctive feeling about what they want to be part of. For him, and me, and many others, that is Europe. For many others too, though, that is part of an independent Britain, and anything less than that feels all but intolerable. There seems no point to me in doing anything but acknowledging the force of those feelings, except by offering a rival vision that the attempt to make Britain even more an island than its geography literally does will diminish its influence and standing.
I’ll end with one image from a decade ago, when the conflict in Afghanistan was beginning to boil up again. I’d fly back at night often from Afghanistan or Pakistan. For hours, you see nothing but the darkness of Central Asia, occasional cities glowing dimly out of the gloom. Suddenly, with only two or three hours to go, you come across Europe, and the contrast is shocking. Tight knots of bright, bright lights, connected with glowing wires of roads; it all looks so organised, so affluent, so closely interwoven with itself, and so unlike the countries around it. It looks both immensely desirable as a place to live, and vulnerable.
It is both, as the immigration crisis swelling at its southern and eastern borders has shown. Britain would, I believe, lose by leaving it. And the European project and the values for which it stands would lose heavily too, at a time when it cannot safely afford to do so.