Should the UK leave the EU? Thoughts on the forthcoming UK referendum on EU membership.

By Dr. Chris Tsoukis Senior Lecturer in Economics

The day of reckoning is approaching! The UK is due to vote on the 23rd June 2016, about one-and-a-half months away from the time of writing this, on staying in (the YES vote) or exiting from (NO – ‘Brexit’) the European Union. This development will be a defining moment in the, sometimes fraught, 40-something-year -old EU membership of the UK, which joined the EU in 1973. It will be defining not only for the UK, but also for the EU of (currently) 28, which, in the case of a Brexit, will see for the first time a ‘rolling back’ event that undoes integration.

This second referendum (the first one robustly re-affirmed the UK membership in 1975) has been prompted by some uneasiness in the UK about immigration from the EU and benefit tourism. Prime Minister David Cameron had promised that he would re-negotiate the terms of the UK membership with the EU and then would ask the country to either ratify the amended membership terms and vote to stay or reject and exit. The changes that the PM has secured amount to some restrictions on the benefits that new migrants are entitled to so as to curb benefit tourism; guarantees that the City of London’s financial industry will not be unduly harmed by excessive European regulation; and guarantees that the UK would be excluded from a (perceived) inexorable drive towards ever-closer Union. Critics may argue that the changes that David Cameron has secured amount to practically little; but they do help to assuage anxiety about issues of vital importance to the UK.
Much of the debate on membership that is now in full bloom centres on three issues:

  1. National sovereignty and related issues;
  2. The economic costs of benefits from a possible Brexit, with emphasis on trade;
  3.  Migration.

Accordingly, this contribution will be structured around these issues. It does not lay any claim on ‘objectivity’ – if that attribute ever exists, it should perhaps not be expected from someone who has made the UK his home over most of his adult life, but who remains a European national. This piece will attempt to deal with the issues with the seriousness that they deserve; the emphasis will be on analysis and information and the author’s opinion will only emerge gradually.

Going back to the 1957, when it was called the European Economic Community (or, Communities), the EU has always been driven by a double motive: Firstly, to leave behind, once and for all, the possibility of strife on the European Continent by building stronger links between countries; and relatedly, to deal at a regional level with issues that were of a regional/continental character. (Note: The word ‘region’ is used here in the sense of ‘European continent’.) Post-war reconstruction, trade and foreign policy were all of that nature. Subsequent developments took naturally lots of twists and turns, but the logic running through them was always the same: to deal with regional issues at a regional level. The ‘subsidiarity principle’ that was gradually established guaranteed that issues that were best dealt at a national level because of national importance (e.g., education, health, housing, etc.) should remain in the domain of national policy-making; as such, the ‘subsidiarity principle’ became a guarantee against excessive centralisation.

Today, the amount of truly regional issues has proliferated: From the environment to trade to migration to foreign policy, and many others that the global village continuously presents us with, these are issues of paramount importance that must be dealt with at a regional level, if they ever have a chance of being resolved. There are several of these that in reality are global, not even regional; but even there, the EU has a greater chance of intervening effectively if it acts as a regional bloc rather than as a disparate collection of national voices. In all these issues, uncoordinated national decision-making will in all likelihood lead to inaction, ineffectiveness and national initiatives turning against one another. To put it slightly more technically, co-operative solutions are superior to the individual ones that are motivated by partisan self-interest. This is a key point that has been well explored and verified in various subject literatures, including those in economics, politics, and game theory.

Being part of the EU naturally entails being part of this joint decision-making: Much of the time, the UK must follow legislation that has been decided by the European Commission or by the inter-governmental conference of the heads of national government; legislation into which it may have had little or no input. But, on the other side of the same coin, there will be a few issues which will have been determined by the UK’s decisive influence, and then these decisions will be carried out at Union, not just national, level. Much has been made of one side of this coin: the ‘loss of sovereignty’; but the other side, that UK-sponsored legislation will be followed by all, is not emphasised. We should be clear: Pooled sovereignty is not lost sovereignty. Pooled sovereignty means a drive for co-operation and greater effectiveness; and because the UK is one of the bigger EU countries, full engagement will ensure that the UK’s voice will be heard more than average.

The UK’s clout in the world also hinges on the UK’s influence inside the EU. A more isolated UK will obviously carry less weight, enjoy less of a ‘special relationship’ with either the US or the rest of the world. So, once again, exit in a time of interdependence in the global village will mean less, not more, clout for the UK, both in the region and internationally. Britain will find itself following and not leading, which means practically even less, not more, sovereignty.

Yes, there is of course the big issue of the democratic ‘deficit’: EU decision-making is bureaucratic, opaque, and expensive. But the answer here, in the mind of this author, is to seek reform with a view to strengthening the European Parliament: the only body that can enhance democratic, transparent decision-making by the European people against the confused horse-trading resulting from the current inter-governmental decision-making processes. Once again, full engagement is the answer, which carries greater promise that the UK’s voice will be influential.

There is often talk, and some confusion, related to the Council of Europe (CoE) and the associated European Convention on Human Rights (ECHR). The CoE comprises a Parliamentary Assembly and the European Court of Human Rights. It is not to be confused with the EU or the European Court of Justice or European Parliament, to which they are entirely separate. (Note that the CoE, Parliament and Court, is located next to the European Parliament in Strasbourg but that is a coincidence.) The CoE is an independent inter-governmental organisation, whose remit is to debate and enforce human rights, democracy and the rule of law among its 47 member states. Exit from the EU does not mean or preclude exit from the CoE and the ECHR, and vice versa. All signatory countries have judges on the Court and often receive admonition and penalties on matters that are in the jurisdiction of the Court as stipulated by the ECHR. There is lots of debate going on as to what are the appropriate boundaries of the Court’s jurisdiction; but this discussion is entirely separate from (the question of) EU membership. Suffice it to say that exit from the European Convention on Human Rights and the CoE will leave the UK outside the mainstream of Europe. (The CoE’s ‘membership’ of 47 is much wider than the EU membership of 28 and practically encompasses the entire Europe.)

The economic costs and benefits resulting from EU membership have also received a fair amount of attention. Here, people naturally turn to economics for enlightenment. Unfortunately, there is no agreement even among prominent commentators: Based on sophisticated technical analysis, the HM Treasury Report (2016; details at the end) shows a negative economic effect of Brexit, arguing that the typical UK household will lose about £2000 to £5000 per annum, depending on what the trade regime will be after a Brexit. These numbers are not trivial, but they are hardly show-stopping (or show continuing!). Against that, equally respected authorities, e.g. Minford et al. (2015; reviewed by Tsoukis, 2016), have come to different conclusions: Motivated by the basic assumption of economic theory that free trade maximises national welfare, they estimate that there is loss involved in EU membership: This results because there is free trade with other EU countries (this trade amounts to about 50% of UK trade) but restrictions in trade with the rest of the world (the other 50%). The sums involved here are also not enormous (they are couched in more abstract terms such as ‘loss of 1% of GDP’). So, these numbers are rather small to sway the debate either way (small in the big picture), too uncertain (such is the nature of the economy, it cannot be precisely be quantified and/or predicted) and reliant on too many assumptions and hypothetical scenarios for comfort.

Behind the lack of agreement, the deeper problem is that it is rather futile to seek precision in estimates about such momentous events; the economy is too fluid a system to allow reaching reliable and concrete conclusions – such is the view of this economist at any rate. Thus, decision should be taken on matters of principle based on the big picture, with technical calculations playing only a subsidiary role. And the big picture, in the mind of this author, is the interdependency and the regional problems that need regional solutions, as argued.

In a Brexit case, the UK’s net contribution to the EU will of course cease. The UK Treasury and the British taxpayer will benefit from that. But the amounts involved are, again, not show-stoppers if compared with the size of the UK economy. Against that, the UK will lose the support that it receives towards regional cohesion and regeneration, transport infrastructure and in sectors such as agriculture.

Naturally, the costs/benefits of Brexit depend on what arrangement will be followed after it, particularly in relation to trade. This is an area of considerable uncertainty, but three possible scenarios may be discerned:

  1. The ‘European Economic Area’ (EEA) scenario, with Britain pursuing free trade with the EU but having its own trade policies towards the rest of the world; such as the arrangement currently in place with Norway. It is well known that this is politically feasible but an admin and logistical nightmare, as the authorities need to track all goods imported into the UK and the EU from the rest of the world and adjust the tariffs when they cross the UK-EU borders. E.g., there will be an incentive to import from the world a good ultimately destined for the European market first into the UK with its (presumably) low tariffs and then transport it to the European market; this will have to be intercepted at Calais and the extra EU tariff will be levied there; a nightmare, considering the volume of such traffic and the tricks that will no doubt be employed. In such a case, there will no doubt be pressures for external tariffs to be harmonised. If so, the UK will follow policies decided in the EU without any say in them. There is a similar danger in policies in other areas, e.g. migration.
  2. A special trading arrangement may be pursued, like the one Canada is about to conclude with the EU. Even proponents of Brexit (e.g. Minford) agree that something like that must be done in order not to disrupt the existing close links between the UK and the EU. But it will be hugely time-consuming and laborious to negotiate.
  3. Britain may opt to trade freely with all countries (incl. the EU) under World Trade Organisation (WTO) rules. Guided on abstract theory, proponents of Brexit (e.g. Minford) argue that this is the best world. The reality is, as the former WTO Chairman (2002-13) Pascal Lamy reminded us (Newsnight, 19/4/16), the world does not work like that. There is reprocity: I give you access to my markets if you give me access to yours. There is no free trade in the abstract – all countries impose trade restrictions of one sort or another. As a result, Brexit without negotiation of a new arrangement (costly, as argued above) would deprive Britain of the EU market (currently 50% of the UK trade) plus the countries that are associated with the EU with agreements (another 15% of UK trade).

A probable net result here is that in the case of Brexit, Britain will lose access to the big EU market (the biggest economy in the world, taken as a whole), with very uncertain benefits, if at all, from access towards the rest of the world. Uncertainty and protracted negotiations will be the by-word here for many years and on all fronts.

Then there is migration, a vexed issue. The complaint here is of big inflows of EU migrants, seeking higher welfare benefits here, displacing local workers from work and putting pressure on local resources (schools, health). But only about half of the immigrants into the UK last year (2015) were of EU provenance, the rest came from third countries. And benefit tourism exists, but may not be as dramatic as often claimed. It is well known in the literature that immigration benefits the host economy overall, as it provides fresh, cheaper labour; witness construction, health, agricultural and domestic workers. Against that, competition by immigrants for work may put downward pressure on wages for certain sections of the population and may increase the chances of unemployment (the effect of the legendary ‘Polish plumber’). The affected workers, even communities, lose out from migration. In other words, immigration has distributional effects (benefits and hurts different people), an issue that deserves more attention in both the literature but also in public discourse (where the voice of local communities is often ignored).

So, policy-makers should take appropriate measures to alleviate the distributional impact of immigration and spread the benefits more evenly (e.g. with unemployment benefits, support to local communities, etc.). In this way, immigration could be beneficial to all. Add to this the fact that immigrants work and pay taxes and can rejuvenate demographically both local communities and the (ageing) UK as a whole. With these considerations in mind, one comes to the conclusion that immigration, if managed properly, is part of the solution and not part of the problem, from a longer-term perspective. Human history is a history of migration; the issue will not go away. The best approach to it is a European-wide response (that would alleviate, e.g., the Syrian crisis) and managed immigration at national and local level. Working at EU level can help formulate more effective responses to the challenges than those achieved by isolated initiatives. At the same time, the millions of European expats in the UK and hundreds of thousands of Britons in the rest of the EU will find themselves stranded and confused in the case of a Brexit.

The question of membership of course involves still wider considerations: Despite the many criticisms it can and does receive, the European Union is a zone of economic prosperity, political liberty and social solidarity. Do we want this to break up? Are we sure of the alternatives that will emerge? If the break-up process of the EU begins, for the first time in its history, what is the ‘economic atom’ that will emerge, the smallest unit that will be immutable to break-up? If it is in the interests of the UK to be an independent, free-market economy, might that not be the case also of Scotland or Wales versus the UK or Catalonia versus Spain? Might we therefore see a large number of regions breaking away from the conventional current states? What will be their number? Who can guarantee stability in this possibly chaotic world? These considerations may lead one to suggest that wholehearted engagement and work towards reform, rather than exit, is the way forward.

So far, I have not touched Britain’s contribution to the EU, as, in a sense, the referendum is about the opposite, the EU’s contribution to British life. But one cannot conclude without a reminder of how much poorer Europe will be without one of its biggest, richest, influential, most culturally vibrant and diverse countries being an integral part of it. Britain’s history has always been interwoven with that of Europe, even though the UK has had a more cosmopolitan engagement and outlook than most other countries. A strong asset to Europe, Britain has always contributed to European civilisation, economy, public life, political strength. In equal measure, it benefits from European culture, ideas, lifestyle. These are two-way streets; a rupture would leave both sides poorer.
I started by saying that objectivity cannot be expected here, it might not even be possible; against that, I promised that I would offer an analysis without clichés or slogans. But I cannot help ending with one headline: Britain needs Europe and Europe needs Britain. The hope is that the British people will vote on the 23rd of June to remain a part of the common European home.

References:
Minford, P., with: S. Gupta, V. P. Mai Le, V. Mahambare and Y. Xu (2015): Should Britain Leave the EU? An Economic Analysis of a Troubled Relationship, Second Edition, Cheltenham, UK: Edward Elgar in association with the Institute of Economic Affairs, 2015.

HM Treasury Report (2016): The long-term economic impact of EU membership and the alternatives, April 2016. https://www.gov.uk/government/publications/hm-treasury-analysis-the-long-term-economic-impact-of-eu-membership-and-the-alternatives

Tsoukis, C. 92016): Review of the Minford et al. (2015) volume (see above), South-Eastern Europe Journal of Economics (SEEJE), Spring 2016, Vol. 14, No 1, pp. 97-101, http://www.asecu.gr/Seeje/issue26/issue26-tsoukis.pdf

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