The EU Referendum: Stay or Go?

Professor Robin Bladen-Hovell

Robin (1)

“Should I stay or should I go?”
With the onset of the Official campaign, the past three weeks have seen a flurry of information regarding the EU referendum, including a report on EU membership from the Treasury, a high level statement from Barack Obama placing the UK at the back of the queue with respect to a trade deal with the US, together with the “delusional tax” evaluation by the OECD concerning UK prospects should we leave. Although none of contributions originate from the Official Remain camp, they were all clearly directed towards influencing people in that direction.

At one level, the argument for Britain leaving the EU is simple. It rests upon cost/net benefit considerations revolving around the question of how much we actually (and should) pay to be a member of the club, together with an argument about what the club is for. Here the main contention by leavers is that the club should not be about “every closer union” and that, by leaving, Britain will be able to forge an economic and political renaissance, re-establishing what is described as national autonomy across a broad range of areas. These are, of course, big questions with both sides of the debate claiming that the referendum will settle the matter of Britain’s EU membership for the foreseeable future.

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“If I go there will be trouble”
EU membership impacts upon the UK through various channels with the result that the effects of leaving are likely to be felt broadly across the economy. The EU is, at its heart, a trading bloc that has removed border taxes on trade between member states and, by pooling sovereignty, has established a common external tariff with respect to trade from non-member countries. With 28 members, the EU represents the world’s largest trading bloc and is the top trading partner for 80 countries globally, comparable to the United States in terms of its share of world output. The Single Market offers members unimpeded access to a market of 500 million people.

The benefits that flow from this trade are, perhaps, the least contentious aspect of the debate, commanding widespread agreement on both sides. Removing barriers to trade is beneficial, allowing countries to specialise in those goods and services that they are relatively more efficient at producing, increases competition and technological innovation, and leading to economic growth. Recognizing the need to address this issue the Leave Campaign has offered various visions of UK prospective trading relationships in a post-exit world, the most complete perhaps being Michael Gove’s contribution involving Britain joining a free trade area that “extends from Iceland to the Russian border” and, perhaps most importantly for that side of the argument, “free of EU regulation”. Unfortunately, this vision is aspirational at best, disingenuous at worst and almost certainly not deliverable in the way that Michael Gove describes.

The pattern of trading arrangements across Europe are complex but at their heart sits the EU. Norway, Iceland and Liechtenstein, who are often offered as examples of the arrangements that a post-exit UK might follow, interact with the EU via the European Economic Area. Membership of this area involves all three countries accepting EU regulation, including the so-called four pillars that guarantee free movement of goods, services, people and capital. An alternative, bilateral, arrangement that operates between Switzerland and the EU is somewhat looser but still requires free movement of people and is more restrictive in terms of Swiss access to the EU when it comes to selling services in the Single Market. Given the importance of the service sector, particularly financial services, for the UK economy it is far from clear that the Swiss model would necessarily be in our best interest.

For most, our experience of the EU is through the regulatory framework that impacts upon our lives. Much of this regulation is to ensure that businesses face a level playing field when trading in the Single Market, though recent developments in the areas of social protection, sustainability and human rights have raised questions about whether the EU is straying too legislatively far from its core purpose as a customs union. The Single Market means that businesses are affected by regulations concerning product standards, competition and company merger policy, employment conditions, such as the Working Time Directive, and EU-wide rules relating to health and safety, and consumer protection. Some of these areas, particularly where they involve a social dimension, have been seen as contentious in the UK where rolling-back the influence of the State has characterized domestic policy to varying degrees since the 1980s.

The effect of this is that, for some commentators, EU legislation is seen as an unnecessary burden on the UK economy and a challenge to UK sovereignty. The burden is typically expressed in terms of the annual cost to business and the figure referred to by Vote Leave in this respect is the £33.3 billion estimate proposed by Open Europe. But this figure isn’t an estimate of the economic burden of regulation overall since such a measure needs to weigh-up the benefits of regulation against the cost. Regulations that affect working conditions may, for example, impose a cost on business but be highly beneficial to individuals and families. A measure of economic burden should capture this.

A more subtle form of the regulatory argument, eschews the issue of measuring the burden and focuses instead on the prospect of the UK being able to deliver a more tailored and flexible regulatory environment once free of the confines of the EU. How this might work in practice though, is not always made entirely clear. In terms of business regulation, for example, trade with EU member-states in a post-exit world will require that our exported goods and services meet European product standards at a minimum. This minimum level of compliance, however, is unlikely to suffice should we, for example, successfully negotiate an alternative preferential trade agreement with Europe.

Switzerland, with its bilateral agreement with the EU, is able to side-step EU legislation in relation to the environment and competition policy but is subject to the same freedom of movement rules in relation to people as the rest of the EU, including the Working Time Directive which is the rule most commentators claim is the most burdensome.

Other areas where departure from the EU may have considerable impact is in relation to the decisions made by foreign companies to locate and invest in the UK. The UK currently offers an attractive location for such investment. Indeed, according to the recent Attractiveness Survey undertaken by Ernst and Young, we ranked first among European nations and fourth globally, behind the US, China and India, as the most attractive location for overseas investment.

This attractiveness stems from a variety of factors but the most commonly cited, by 72% of respondents in the Ernst and Young survey, is access to the European Single Market. However, attractiveness is fickle and the vulnerability the UK-position in this beauty contest is shown by the fact that 31% of respondents also indicated that they would freeze or reduce investment until the outcome of the referendum was known. A decision to leave could therefore have serious long-lasting consequences. How serious is perhaps best illustrated by looking at the 2014 position in more detail. Foreign companies in 2014, invested almost £28 billion in the UK. The investment was broad-based across the economy, creating some 31,000 new jobs, largely through investment that led to construction of new facilities. Even where the investment involved acquisition of an existing concern, however, potential benefit will still occur, including the take-up of new technology, improvements in management and adoption of new ways of working within the acquired company. As the survey indicates, a decision to leave would place a question-mark against future overseas investment for a number of reasons. First, over half the investment inbound to the UK originates from other EU countries and this investment is attracted by factors other than simply establishing a toe-hold in the Single Market – the companies already have that in their home country. Our stepping outside the EU will therefore introduce an additional hurdle for these investment decisions to clear if they are to continue. Second, favourable decisions regarding investment are more likely to occur in a stable economic environment, uncertainty generally being associated with a decision to wait-and-see; safer rather than sorrier. This uncertainty may be quite protracted if we decide to leave because it is so unclear what our trading and wider relationships with Europe and the rest of the world will look like at the end of the withdrawal process. Business that is risk averse is likely to reflect this uncertainty by withholding investment until the dust has settled.

It is, of course, impossible to consider the advantages or disadvantages of staying-in or leaving the EU without some perspective on the cost of club membership. Here figures from the Treasury indicate that, in 2015, the UK’s gross contribution to the EU budget of some £12.9 billion. The size of this and other member’s contribution is largely determined by the size of the economy, or Gross National Product, and together these contributions establish the so-called “own resources” of the EU. These resources are allocated to broad spending categories within a financial framework that operates over a planning horizon, currently 2014-2020 alongside a ceiling for total EU expenditure overall. Year–to-year income and spending is subsequently matched through an annual budget round.

Approximately 88% of the EU budget is returned to member states. The larger part of these payments take the form of regional assistance to the least-developed parts of the EU, largely Eastern and Southern Europe, together with support for agriculture, rural development, fisheries and measures for the environment. For a variety of reasons Britain receives relatively little from these budgets with the result that we have remained a net contributor to the EU for most of our membership. It was largely because of these relatively low receipts that we negotiated the rebate on our contribution in 1984.

The Treasury estimates our net contribution (payment minus receipts) stood at £8.5 billion in 2015, considerably less than the £350 million a week figure promoted by the Leave Campaign. Moreover, even the Treasury figure overstates our net contribution because it ignores EU spending that accrues directly to UK businesses and other non-governmental institutions, such as Universities, and it also assumes that EU revenue generated by the common border tax and administrative expenditure are associated with the country in which they are made rather than benefiting the EU as a whole. Adjusting for these issues produces what the EU refers to as the budgetary balance for each country, which in Britain’s case was net contribution of £4 billion in 2015 which comes to roughly £77 million per week or £62 per person: roughly the price of filling a medium-large sized family car with petrol.

There are, of course, other areas of contention between the Leave and the Remain camps. Issues like migration and our ability to control borders are commonly put forward in this respect. Even here, however, there is strong persuasive evidence to suggest that the UK as a whole has benefitted in terms of the standard of living, albeit modestly, from net migration. Moreover, it is unclear that this competence would return to the UK should we choose to leave but then seek to negotiate an alternative trading arrangement with Europe.

“An’ if I stay it will be double”
Overall, the argument to remain in the EU appears compelling, at least from an economic point of view. The objections of the Leave campaign echo a debate that has been ongoing for over six decades reflecting a schism regarding the role of the nation-state within the EU. Despite what is claimed by both sides, I find it difficult to believe that the referendum on 23rd June will mark an end to that debate within the UK. That may be an important message for the Remain Campaign particularly if the outcome in the referendum is close. Perhaps Clash had the referendum in mind when they wrote their song.

Professor Bladen-Hovell is one of Keele Management School’s Economics lecturers.

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