In or Out? A Rational Approach to the EU Referendum

Now that the dust has settled on the general election we face some 18 months of campaigning and debate about the long overdue Euro referendum. Depressingly it seems that the quality of debate has already sunk to infantile and I type this in the hope of raising it slightly.

Firstly let’s consider the process. Cameron will seek reform on the EU and then let the electorate decide whether to stay in a reformed EU or leave. Clearly the most important question is “What reforms?” but that information is not available. Nor has anyone conducted a public assessment of what they may be, which is odd. Stranger yet, Cameron seems to be weakening his hand for negotiation with the EU by pretty much revealing that he would prefer to stay in EU, even though he does not know what reforms he has won. A wiser person would be going to EU saying “UKIP got 4 million votes and a sizable part of the conservatives 11M would vote to leave were the referendum tomorrow. You need to give me significant reform.” I suspect that there are sizable parts of the electorate in other EU member states that would sympathise with this, and actually support such reforms.

The next problem is what actually constitutes a reform? Clearly any change that has completed the legislative process would count. But given the timeframe few changes are going to get through the EU process (which might also require ratification by national parliaments) and if they aren’t on the statue books they really are only political promises. I suspect that the only thing less credible to most of the UK electorate than a politician’s promise is an EU promise. The result being that very few reforms are likely to be credible, which in turn means that arguing the minutiae over reforms is not really worthwhile. So I won’t, in this post at least.

So we come to the unalloyed in out question. A rational person would pick in or out on the basis of an evaluation of future benefits of either membership or freedom. The fundamental point, obscured by many public figures, is that this choice relies upon the evaluation of economic forecasts and the history of economic forecasts, even neutral ones, is not great. It is also hard for anyone to calculate the cost or benefit that UK would have incurred or gained had we not joined in EEC. Which unfortunately means that the debate is likely to be trying for rational people. Unfortunately there are some who claim many achievements for the EU/EC/EEC, for example cleaner beaches in the UK.

The clean beach example is fatuous (almost Panglossian); while it is true that the EU/EC/EEC created the legislation that has led to the UK’s beaches being cleaner that is entirely because this area of legislation was ceded to EU/EC/EEC. Had the UK not been in EU/EC/EEC and its population desired cleaner beaches similar legislation could have been imposed with similarly happy results for beach lovers. I find it profoundly depressing that politicians are producing arguments that would be embarrassing in a fifth form debate.

We should however be able to agree that the debate is about the future and splits into two parts, political and economic.

The political choice is the more straightforward; either our Westminster Parliament is sovereign or it isn’t. Of course all governments are bound by treaty terms, although they are free to break the treaties and suffer the consequences – that is a sovereign decision. In many, but not all, areas Brussels has eclipsed Westminster. If one has a fundamental problem with that then the answer is vote “Out.”

Similarly, if one wishes to avoid the commitment to “ever closer union” (which would require treaty change, and therefore can’t be achieved in the Cameron timeframe) one has to vote “out.”

The economic argument going forward is deceptively simple – will UK GDP grow more inside EU or by forging its own path. There is no definitive answer hear (other than the truthful but useless “nobody knows”) so the rational person seeks the most likely answer. First some context; the generally accepted numbers are that UK GDP is 80% domestic, 10% exports to EU and 10% exports to the rest of the world.

So what are the growth prospects in the EU? The two largest trends that determine the size of a market are population size and population affluence (usually expressed in GRP per head). The EU population is pretty much static (except for when new countries join, and we’re running out of them), as is affluence (although the average EU affluence drops when poor new members join). The implication is surely therefore that growth within the EU will be modest.

By contrast India, China, Indonesia and the like have both growing populations and growing affluence. This is why so many of the multi-nationals are expanding there, and indeed the reason why some of them like Unilever can actually borrow more cheaply than the US and UK governments. It would therefore seem that if you sought economic growth (as Unilever and its peers do) you too would expand in the developing world, and leave EU as a mature market. Given this, it seems reasonable to conclude that the best place for UK export led growth comes from the rest of the world.

Unfortunately as EU members we are not able to negotiate our own free trade agreements (which means tariff free imports and exports). Brussels does it for us. Or rather, it doesn’t. The EU has fewer free trade agreements than, say, Singapore. Objectively, one can see that it’s hard to find free trade terms that would work as well for say Romania as they would for UK. But what that means is that UK exports are being held back by the different needs of Romania and the remainder of the EU. The current attempt at securing the TTIP agreement illustrates the problem. The unavoidable deduction is that staying in the EU will slow the UK’s growth by reducing the rate at which we are able to develop non EU exports.

If we were not part of the EU we would be able to negotiate free trade agreements as and when we chose. Note that non-EU free trade agreements are far simpler than those with the EU as they do not involve complying with all the other mechanisms. Joining NAFTA (the US, Canada and Mexico free trade agreement) would be pretty straight forward for a start, and others would follow in fairly short order with Commonwealth countries. It is therefore reasonable to conclude that securing growth in the non-EU export markets would be achievable.

The risk of leaving the EU is that we would not be able to renegotiate an acceptable free trade agreement with them, and that the current 10% of our GDP earned from exports to EU would be adversely affected by tariffs. This is absolutely true and is the single most important risk to leaving. The impact of the tariffs (estimated at 2%) all comes from profit (assuming no price elasticity). The knock on effect would be that the UK would be a less attractive place for foreign direct investment. However there are reasons for supposing that much of Europe, in particular Germany (6.3% of German exports worth US$89 billion per year are to UK), is equally keen to avoid the trade war which would be the inevitable result. All the UK requires is the preservation of the status quo, and do nothing options are always popular. Moreover, if we do go down the tariff route all the UK government has to do is apply similar tariffs to imports from EU and use that revenue to subsidise exporters to EU. The maths work at all tariff levels as the EU exports more to us than we do to them. I find it hard to accept that Angela Merkel is looking forward to explaining to BMW, Audi, VW and the rest that their exports to the UK are no longer tariff free. So yes, it is a risk but it’s one that will only occur if some politicians make some very silly decisions.

Of course at the moment many of those involved (and a fair few of those not) do not want to concede the possibility of the world’s sixth largest economy leaving the EU and so they are planting statements to the effect that “Nissan could leave the UK if UK leaves EU.” Again, a fifth former would be embarrassed to make this point; anything could happen. The important question is whether Nissan would leave UK if free trade agreements were in place. Moreover, if Nissan does decide to move its operations, in the process shutting down one of its most efficient and profitable factories, it does rather beg the question where in the EU it would go. Its choice is into the Eurozone or not. The former is (mostly) the wealthy bit of Europe. The latter is the poorer bit, with less existing infrastructure etc. One can see why they don’t want to have to make the decision. This whole part of the in out debate is reminiscent of the join the Euro debate. Many of the same people (CBI, Ken Clarke, The Economist) all assured us that not joining the Euro would be disastrous. Events have rather proved otherwise.

The Euro is part of this debate. As Cameron won’t be able to get “ever closer union” removed in the timeframe that he has set (even if he wants to) at some stage in the future we will have to join what is left of the Euro. Many of the EU’s problems, in particular the Eurozone’s, stem from its less than complete structure. If the EU is to work it needs the Euro to work, and that requires fiscal union. It seems to me unlikely that the UK would ever vote for that (provided we were granted a referendum). Given recent history, it is unlikely that any other non-Euro countries would want to join. This in turn means that UK’s continued membership of EU is at the cost of the proper operation of the Eurozone.

And so we come to the real, logical choice. We either vote to stay in, thereby reducing our chances of sustained growth and consigning the EU to continued problems arising from its lack of political union or we vote out, taking the risk that the EU that we leave will start a trade war that it can’t win but being able to exploit the opportunity to trade with the 6.6 billion people who live outside the EU. I prefer the latter route.

2 thoughts on “In or Out? A Rational Approach to the EU Referendum”

  1. How about a letter to The Times? It might have more impact than a relatively obscure (without intending any insult!) Blog.


  2. Good point Will. I’m biding my time. I think “relatively obscure” is a pretty flattering description of this blog at the moment. Thank you.


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