The Third Rock Forum - Economics

1 : INTRODUCTION

The pre-referendum debate about the United Kingdom’s membership of the European Union is in full swing and, predictably, views are becoming polarised. The Remainers have envisaged a third world war if the UK votes to leave. The Brexiteers predict that, if we remain, the UK will be part of the bureaucratic fulfilment of Hitler’s dream: i.e. a non-democratic unification of Europe.

It’s all very confusing.  We are told by the Remainers that the UK is too small and insignificant to stand alone but at the same is so crucial to the European Union and global economic stability that, if we withdraw, the European Union may disintegrate and we may trigger a global economic catastrophe.

We are told by the Brexiteers that, if we leave the European Union, we shall be somewhere between £8.5 and £13 billion a year better off, be able to reject the founding EU principle of the “free movement of people”, thus taking control of immigration - and yet still enjoy all the economic  benefits of free access to the EU market.

It might be helpful to introduce some degree of rationality into the debate.

First, the ground rules.  Most of the arguments put forward by both sides are based on speculation. Some of the speculative predictions are more probable than others; but they are all uncertain and should not be taken as facts. The economic statistics being bandied about the future are rather less reliable than weather forecasts.

Secondly, whether we remain or leave, there are certain to be both advantages and disadvantages.  If one side or the other was indisputably the preferred option, the issue would not have divided opinion for decades.

Thirdly, although many of the repercussions of staying or leaving are uncertain, there are some facts that we can identify.

2 : THE CERTAINTIES

So let’s start by identifying the facts: i.e. the points made by each side that are indisputably true.

The certainties if we remain:

1. The European Union will continue to work for “ever closer union”  The UK has an exemption from this process, but the process will nevertheless continue.  For many in Brussels, the objective is to form a federal superstate.
2. The population of the EU, some 500 million people, will have unrestricted rights to settle in the UK.
3. The UK population will have unrestricted rights to settle in any of the other 27 countries of the EU.
4. We will retain the current full membership rights of unrestricted free trade access to the EU.
5. The UK will continue to be a substantial net contributor to the EU income for the foreseeable future

The certainties if we leave:

1. The UK will be £164 million a week (our current net contribution to EU income is £8.5 billion) better off.  (If we include the money the EU returns to us, to part fund EU projects in the UK, we will actually have £250 million a week or £13 billion a year to spend as the government sees fit.)
2. We will be able to control immigration in terms of the number and types of immigrants.
3. We will be free to negotiate free trade agreements with any country or trading block, without the need to take account of the particular interests of 27 other countries.
4. The sovereignty of our elected Parliament will be unambiguously  re-established as the UK’s only and supreme legislative body.
5. The many thousands of UK businesses that do not trade with the EU would be freed of the obligation to fulfil all the EU's bureaucratic requirements.

All ten points are certainties.

3 : IMPLICATIONS OF THE CERTAINTIES

3.1 : If we stay in the EU

1.  The European Union will continue to work for “ever closer union” The UK has an exemption from this process, but the process will nevertheless continue.  For many in Brussels, the objective is to form a federal superstate.

If the EU moves towards ever close union, including centralised economic and defence policy, the UK will find itself in a dynamic (i.e. non-static) situation  where it will probably have to choose at some time in the future between joining in the federalist process or becoming increasingly detached. Whether implicated or detached, it will almost certainly find itself helping to finance a process of which it sought NOT to be a part.

There is, of course, the possibility that the EU will change course and abandon ever closer union. After all, there is strong resistance to the idea of a federal state amongst the populations of many of the EU member states.  If this happens, the EU will remain closer to the current status quo but, given the commitment to “the project” of Brussels and the establishments in a number of European capitals, this seems unlikely.

There is also the possibility that the EU will fall apart if it turns out that the peoples of Europe to not support and will not accept the ultimate destination of the EU project – a federal state.

2. The population of the EU, some 500 million people, will have unrestricted rights to settle in the UK.

Because of the attractions of the UK, including a raised minimum wage, the UK is likely to remain a magnet, particularly for low-paid, unskilled workers from the poorer countries of Europe.  Net immigration is running at more than 300,000 per annum and, if we remain in the EU is likely to increase rather than decline.  Even if the UK economy falters, it will remain very attractive for low-paid foreign workers because of in-work benefits and the UK’s welfare system. 

This is not to suggest that EU immigrants come to the UK to take advantage of welfare benefits but it is the case that, in general, in a country with a progressive tax system and welfare benefits, low-paid workers, whether indigenous or foreign, take more out of the system (if you include their share of defence, education, health, infrastructure, security and other benefits) than they pay in.  If this is so, the UK is going to find the costs of low-paid immigrant workers is higher than the tax income they contribute, especially when many of them do not spend their money in the UK but remit much of what they earn to their families in their own country. The UK will therefore almost certainly have to raise taxes to pay for the requirements of an ever-growing population.

There is another but rarely mentioned hidden cost to high immigration.  The vast majority of immigrants, whether temporary or permanent, come to work.  But, in many cases, the work they do is work that the British refuse to undertake, preferring to live on benefits. The number of immigrant workers coming to the UK proves there is plenty of work about. (More than 800,000 came last years alone.) But we have 1.68 million unemployed (March 2016).  While the amount the unemployed can claim in benefits is equal to or greater than the amount they can earn in low-paid jobs, it is unlikely we will be able to persuade many of the unemployed to work. So we must add the cost of at least part of the welfare budget to the true net cost of immigration - not welfare for the immigrants but for indolent UK citizens.

3.   The UK population will have unrestricted rights to settle in any of the other 27 countries of the EU.

This is an option taken by several million Brits, an option that is particularly attractive to those who have retired, and who choose to live in other, usually warmer, countries, where the cost of living tends to be lower. 

While it is unlikely Brits would be refused access to other EU countries if we left the EU, life would undoubtedly become administratively more complex for UK emigrant retirees.

4.   We will retain the current full membership rights of unrestricted free trade access to the EU.

We currently pay a net contribution of £8.5 billion a year and meet all EU requirements for unrestricted access to the EU market, just as all EU member states have unrestricted access to the UK market.  If we stay in the EU, obviously we will retain free access to the EU market..

5.   The UK will continue to be a substantial net contributor to the EU income for the foreseeable future.

The net contribution of member states is based on the size of their economy.  As one of the larger economies, we are currently (2015) the second largest net contributor (10.8 billion Euros), after Germany. The size of future net contributions depend on the size and success of the economies of member states but the UK will be a major net contributor for the foreseeable future.  Estimated net contribution in 2016 is between £10 billion and £11 billion (i.e. more than £200 million a week).

3.2 : If we leave the EU

1.   The UK will be £164 million a week (our current net contribution to EU income is £8.5 billion) better off.  (If we include the money the EU returns to us, to part fund EU projects in the UK, we will actually have £250 million a week or £13 billion a year to spend as the government sees fit.)

That is the net saving to the UK if we leave.  In other words, after the UK has provided any and all of the subsidies and grants that the EU currently 'gives' to UK institutions, the UK government will have a minimum of an additional £8.5 billion to spend as it sees fit.

Of course, the EU might decide to say that, if we wish to have free access to the EU market, one of its conditions is that we pay key money.  They might demand some or all of the £8.5 billion. Other countries outside the EU but which have free access to the EU market have to pay for access and, in some cases, also have to agree to the free movement of people (Norway and Switzerland)  The UK is a far larger economy than Norway or Switzerland and we could certainly try to negotiate a more favourable deal. Against this, if we leave the EU, Brussels is likely to wish to make an example of the UK in order to deter other disillusioned countries from following the UK's example (the Hissy Fit scenario).

Some of the Brexiteers argue that we could negotiate free access to the EU market without onerous condition because it is in the interest of the EU for the UK to be part of the free trade area, given that the EU exports more to us than we do to them. There is truth in this argument but it ignores the Hissy Fit scenario.

Other Brexiteers argue that, outside the EU, tariffs would either be non-existent or low (between 1% and 4%) and the effect on trade would be negligible.

Either way, the Brexiteers believe we would enjoy the benefit of most, if not all, of our net contribution to EU coffers.

The Remainers argue the effect of leaving the EU on UK trade would be anything from seriously bad to catastrophic. They point out that many countries outside the EU use the UK as their access point to the EU market and the UK would become less attractive if we were outside the EU. The Brexiteers reply that the UK's attractions (tolerance, language, stability, commercial expertise, etc.) would ensure any adverse effects of leaving would be easily manageable.

Much would depend on the nature of the trading relationship we negotiated with the EU if we left.

2.    ​We will be able to control immigration in terms of the number and types of immigrants.

If we leave the EU, we will no longer be committed to the free movement of peoples from EU member states into the UK. We will be able to determine our own immigration policy, determining the number, origin and quality of immigrants in the context of UK need.

This does not necessarily mean there would be a dramatic decrease in immigration. The UK is particularly attractive to foreign workers and we need immigration to maintain services. But is does mean the UK could determine how many and which type of immigrant workers were needed.  And we would be able to draw from a global pool of talent, not one biassed in favour of EU migrants..

3.  We will be free to negotiate free trade agreements with any country or trading bloc, without the need to take account of the particular interest of 27 other countries.

Currently, the conditions for any free trade agreement between the EU and other trading blocs have to be approved by the European Commission.  Efforts to take into account the wishes of 28 member states impede the process.  After 10 years of negotiation, there is still no agreement beween the EU and the USA.  Outside the EU, the UK would find it easier to negotiate trade agreements, since it would have to take account only of its own interest.

Of course, seen from the viewpoint of trading blocs (e.g. the USA), a trade agreement between them and the UK would not be as important as an agreement with the EU.  On the other hand, the UK is the world's fifth biggest economy and the trade links between the US and the UK are already strong and go deep, and. of course, we also have long historical relations with other trading groups (especially in the Commonwealth).

It is certainly true that conventional bilateral trading agreements are generally easier and quicker to negotiate than those between blocs of countries.

  4.   The sovereignty of our elected Parliament will be unambiguously re-established as the UK’s only and supreme legislative body.

In terms of law-making, Brexit would restore and restrict UK law-making rights to the UK parliament.

As a separate issue, while we remain members of the European Court of Human Rights (ECHR), the application of UK law would still be subject, in the last resort, to a higher court.  If the UK leaves the EU, it will still be subject to the ECHR, unless it also decides, by act of parliament, to leave the ECHR.

5.     The many thousands of UK businesses that do not trade with the EU would be freed of the obligation to fulfil all the EU's bureaucratic requirements.

There would likely be some (unquantifiable) economic benefits if small and medium-sized businesses that do not trade with the EU were freed from some of the burden of Brussels bureaucracy.

That's a brief consideration of some of the implications of the certainties. What about the issues where we cannot be certain?

4 : THE UNCERTAINTIES

4.1 : Economic future

The Remainers argue that, if we leave the EU, we face economic disaster.  According to David Cameron, UK businesses will suffer, we will lose jobs, sterling will weaken and interest rates will increase. In addition. we are told only Putin and ISIL will rejoice.

The Brexiteers argue that, freed from the shackles of EU bureaucracy, incompetence and indolence, Britain would once again be free to trade successfully with the world.

There are several misunderstandings in both positions:

1.  Whether in or out of the EU, Britain and the EU are going to trade with each other. If the Brexiteers win, the EU might, in a fit of pique, erect trade barriers in the form of tariffs of 3% or 4%, but that will not stop us from buying Volkswagens and Mercedes and it will not stop the EU from using the City’s financial services. And if they set tariffs against British goods and services, we would probably reciprocate - and, given that the trade balance between the UK and the EU is in the EU's favour, the EU has more to lose than us. We cannot be sure how the EU would react to the UK's withdrawal but the odds are that, after an initial period of instability, commercial interest would prevail and "things would settle down".
2. The future of sterling is equally uncertain. If the European Union is able to sort out the economic problems of Greece, Portugal, Spain and Italy and to help to develop the east European economies, the Euro will strengthen. If it fails, the Euro could fall or collapse completely. If the UK economy does well, sterling will strengthen; if it does not, sterling will weaken. In other words, no one knows what will happen to sterling or, indeed to the EU economy or the UK economy in coming years. Any statements by either side purporting to give precise figures for economic indicators should be treated with profound scepticism.
3. If we leave the EU, there is no guarantee that Britain’s economy will be re-energised. It is speculative and, possibly, simply wishful thinking, that the UK will experience a revitalised entrepreneurial spirit and set out once again to conquer the commercial world. On the other hand, it is true that the UK would be free of some of the bureaucratic.interference from Brussels which some UK businesses argue inhibits their growth.

4.2 : Political Future for the UK

The Remainers argue that the UK's influence is enhanced by membership of the European Union. It is certainly true that the leaders of most other countries, if they have expressed a view, favour our continued membership. On the other hand, as members of the EU, we are one voice amongst 28. We have a louder voice than other members because;

• we have global connections around the world
• we have a seat on the Security Council of the United Nations
• we are members of the G* and G20
• we spend a great deal on defence
• we are a nuclear-powered member of Nato
• we are the world's 5th or 6th largest economy
• we have massive overseas interest and investments
• we are a major contributor to EU finances

but we are still members, not in charge, of the EU.

The Brexiteers point out that, with the exception of the final bullet point, all the reasons for the UK's status in the international community, are inhibited, not magnified, by EU membership and that, if we leave the EU, our place in the world would be enhanced rather than diminished, in that we would be able to speak out more clearly than is possible while we remain in what it, as they would argue, a largely dysfunctional European Union of 28 nations.

It is fair to point out that, if the EU is to be successful, it probably needs to pursue the federal dream. Only when there is true convergence of the EU economies and the imposition of central fiscal control will the EU function efficiently. It is arguable that the UK does not want to be part of such a federal state and it is therefore not in either the UK's or the EU's interest for us to remain a member.

4.3 : Political future for the EU

The EU wishes the UK to remain as a member.  This suggests the EU recognises the Union is stronger with the UK in it, than if it leaves.

The Brexiteers can argue that, politically, the UK brings rather more to the EU than the EU brings to the UK. The only other member with similar military and diplomatic credentials is France. It is certainly arguable that, politically, the UK's departure would weaken the EU.

The EU is currently facing a number of crises. 

Economically, the underlying problems of trying to hold together entirely disparate economies are proving.intractable. Greece faces decades of austerity during which EU loans to Greece are fully consumed in servicing Greece's ever-growing debt. Other EU economies are in poor shape.

The migrant crisis is pulling the union apart. Member states are erecting wire fences and walls to prevent migrants from responding to Angela Merkel's remarkably ill-judged invitation to migrants to come to Germany which, in effect, in the longer term, was an invitation for migrants to come to the EU. The EU deal with Turkey to ameliorate the Syrian refugee problem is likely to turn out to raise as large a problem as it solves.  Turkey has been promised some acceleration of its application to join the EU. Either that promise will be fulfilled or Turkey's help with the Syrian refugee problem is likely to evaporate.

Then there is the issue of terrorism. While most migrants are simply seeking a better life, we cannot ignore the fact that they are coming from countries where the predominant religion, Islam, is open to the interpretation that those who reject its prophet and his teachings are at best second class people, at worst legitimate targets for abuse, violence or death. Only a minority hold this view but, while the mainstream of Islam clings to a belief that the Quran is the unalterable word of God and that Muhammad is the perfection of man, there is at least the threat of a clash of values which could prove intractable. And there is a risk of further terrorist outrages which are likely to feed anti-immigrant and anti-Islamic feeling. To put it mildly, the omens for peace and harmonious relations within and between the member states of the EU are not entirely favourable.

Given these problems, there is a serious possibility that the European Union will break up or be forced to abandon some of its founding principles, such as the "free movement of peoples" and "ever closer union". This raises further questions for anyone considering how to vote in the UK referendum. 

If the EU degenerates into political, economic or social chaos, would it be better for the UK to be in the EU, acting hopefully as a rational, stabilising influence; or would we be better out of the EU, given that we are essentially opposed to unrestricted immigration into the UK and out of sympathy with the drive for ever closer union - and are therefore unlikely to be of much help to the EU?

If we withdraw from the European Union, would we make the crises in the EU worse?  It is arguable that our withdrawal would be a destabilising factor at a time when the EU is already beset with intractable problems. But it can also by argued that Britain is an impediment to the EU in its pursuit of a federal state and that it would make better, easier and speedier progress, without the UK resisting the move towards ever closer union.

5.:  DISCUSSION

5.1 : Assessing risks

We need to understand that, whether we stay or leave the EU, there are risks. 

If we stay, we remain part of a trading bloc that is faced by major problems:

• political (significant resistance in a number of EU member states to both the free movement of peoples and ever closer union)
• economic (large, possibly unrepayable, debts in several EU countries)
• social (the migrant crisis, the clash of civilisations: i,e, Western relativist values v the Islamic absolutist mindset)

These are all difficult problems which most analysts agree the EU will have a chance of resolving only if the member states successfully pursue ever closer union. But the UK has an exemption from ever closer union, so, if the EU survives and prospers, the UK will find itself increasingly peripheral to what will be an increasingly powerful centralised administration. The UK will be obliged to conform to EU policy but excluded from the heart of the decision-making process - unless, of course, it decides to become part of a federal state.

If we leave the EU, we will have recovered Parliamentary sovereignty and control of our immigration policy but cannot know how our trade with the EU and the rest of the world will be affected. The EU will be keen to demonstrate to other member states that withdrawal is painful. (After all, there are sizeable proportions of the population in a number of EU countries which would like to follow the UK's example if we leave.) On the other hand, in the balance of trade between the EU and the UK, the EU has more to lose than the UK if the EU decides to impede trade. It will be a fight between political and economic interests.

In other words, the risks, whether we stay or go, are literally incalculable. We are likely to have to make a decision on principle and on the certainties, rather on spurious statistics and highly speculative arguments promulgated by either the Remainers or the Brexiteers.

5.2 : Who runs the EU?

The body that sets the overall strategy and coordinates policies for the EU is the European Council, made up of the Prime Ministers of the 28 member states. It has a President. In addition, the President of the European Commission is a member.

The Council of the European Union consists of a government minister from each member state. The Council of the European Union has law-making powers which it exercises in conjunction with the European Parliament. 

The EU Parliament consists of 751 MEPs. The Parliament shares legislative responsibilities with the Council of the European Union.

The EU Commission is the Executive, the bureaucracy charged with formulating laws and the day to day running of the EU.

This summary of the key EU institutions shows that the EU in not a truly democratic institution. The EU Parliament provides a democratic gloss but, in reality, those with power in the EU (predominantly the Commission) are so remote from the views of the populations of the individual member countries that there is an almost complete disconnect. Indeed, it cannot be otherwise. It is unlikely a single organisation can adequately represent a group of 28 countries with such diverse histories, widely different political outlooks, divergent economies, and very different life experiences.  We have seen some of these problems already when we compare the attitudes of the Germans with those of the Greeks.

This does not matter so much while the EU remains a confederation of states and the EU Commission a fairly liberal, benign, if grotesquely bureaucratic, institution but, if the EU becomes the federal state it aims to be and if the heads of state of some of the countries became less centrist and more extreme, either to the left or the right, other member countries, including the UK if we remain, could find themselves part of a new state entity which it found entirely unacceptable. If that happened, there would be no democratic process whereby countries could change the EU's direction and, ironically, the EU would then become not the guarantor of peace, but the primary cause of conflict.

6 : THE DECISION

There are good arguments on both sides. 

Most people would be happy to be part of a democratic, harmonious and successful European alliance, built on the principle of free trade both within and, ideally, outside its borders.  And many Remainers are voting for such a future.  But let's be clear, that happy option is not on offer.

Then again, if the future envisaged by the more optimistic Brexiteers was guaranteed - a saving of £8.5 to £13 billion a year, free trade within Europe, regaining of our sovereignty, control over immigration and a reinvigorated UK, fired with entrepreneurial zeal and a revitalised work ethic - then most would vote to leave.

But we have to be realistic.

On the political front, we know the direction in which the EU intends to go - ever closer union until a United States of Europe (USE) is formed, with its own foreign policy, centrally determined and imposed fiscal policy and, almost certainly, its own military forces. We can be a part of this federal state; indeed we could be a powerful voice in this federal state which will be world's largest trading bloc. But we would be one voice amongst others. The UK would have to cede its sovereignty to the EU. Some may be with happy with this prospect; others, not: but everyone should understand that is what we are doing, if we remain.

In economic terms, if we leave, there is likely to be a short-term shock to the UK economy but even those economist who argue we should remain do not predict the UK will be poorer if we leave; simply that it won't be as rich as it would be if we stayed in the EU. The UK economy may find life outside the EU is tougher than we thought. Equally, we may find that the economic problems facing the EU are intractable and we are better off out than in.

The difference between politics and economics is this. Politics can to a large extent be determined by the will of men. If the political will is strong, a United States of Europe can probably be established.  Economics on the other hand, is an unpredictable beast. As we know, even short-term economic forecasts can be wildly wrong. Long-term economic forecasts are about as reliable as astrological predictions.  And, of course, economics can frustrate the political will, however strong that will may be.

In other words, we know where the European Union intends to go; we don't know what the economic future holds whether we remain or leave. We should discount possibilities that are profoundly uncertain. We don't know whether the EU will in the end be a great success; or whether it will break up in the most appalling financial crash of all time. We don't know whether the UK will experience a renaissance or whether it will gently decline in importance, a disconnected appendage of what will have become the USE  We don't know. We can't know. So let's answer a question where we can be pretty certain the alternatives are real.  On referendum day, it will come down to this: 

Do you prefer to think of this country as:

• a strong voice within a powerful federal state
• but with no control over immigration from the other EU member countries
• and paying the EU £8.5 billion net a year for free access to the EU market?

or

Do you prefer to think of this country as:

• an independent nation state
• with another £8.5 billion a year to spend
• in which those with power are a little more accountable to their electorate
• but whose free access to the EU market is uncertain and, if we choose to negotiate it, is likely to cost at least some, if not all, of the £8.5 billion?