Girish Ramrous of NW Brown looks at reasons for Britain to remain in the EU.
The referendum is fast approaching and the debate is heating up. I have done some research on why Britain should remain in the EU.
I was specifically looking at this side of the debate partly for work and partly for my own information. I have put together a couple of interesting points from my findings, which I thought I’d share. My sources were online articles, blogs, newspapers, magazines and the FT’s EU referendum page.
Has the EU membership been good for the UK economy?
Since Britain joined the European Economic Community (now the EU) in 1973, the nation has become one of Europe’s best-performing large economies.
During that time, domestic product per person has grown faster than Italy, Germany and France, three big economies that the UK had previously lagged behind. In 2013, the country became more prosperous than the average of those economies for the first time since 1965.
Still, most economists agree that the EU effect is at least part of the reason why the UK’s relative economic performance has improved over the past four decades. There is no evidence suggesting that the UK has not benefited economically for joining the EU.
Why does the EU membership help Britain’s economic performance?
Many economists argue that the main contribution the EU has made is to British competitiveness, which increased as the country’s companies fought for markets with rivals across the continent.
Some maintain that greater trade has helped the UK economy all the more because companies that trade internationally have been responsible for most of the country’s increases in productivity. Meanwhile, the UK has become the bloc’s top recipient of foreign direct investment.
What about the EU membership bill?
One should be wary of exaggeration. Although the headline figure for the country’s annual transfer to the EU is £18bn, the net cost of membership is £7bn — after taking into account a rebate secured by Thatcher and EU payments to the UK. This translates to about £150 for each British household, not necessarily a big factor for the economy as whole.
So what would Brexit mean for the economy?
It is much harder to specify how leaving the EU would affect the British economy than it is to examine the impact of four decades of membership. Not only is Brexit a future hypothetical event, it also still largely lacks definition.
If Britain leaves the EU, how would the effects be felt?
- Taking in around $220 billion of its goods and services each year, the EU remains the U.K.’s single biggest regional partner for trade. The IMF reckons that as part of the club, Britain’s trade with the EU is 55% higher than it would otherwise be.
- One of the biggest advantages of the EU is free trade between member nations, making it easier and cheaper for British companies to export their goods to Europe. Some business leaders think the boost to income outweighs the billions of pounds in membership fees Britain would save if it left the EU. In case of leaving the EU, these might no longer apply to the UK, which would have to renegotiate them, likely on less favourable terms as a smaller individual trading partner. The UK also risks losing some of its negotiation power internationally by leaving the trading bloc, but it would be free to establish trade agreements with non-EU countries.
- For British businesses that trade in other European countries, the potential erosion of the UK’s position within Europe may deal a blow to their plans to expand on the continent, as cost and complexity of trade could gradually rise if tariff changes are made against UK goods and services
- Being part of the EU gives the U.K. significant advantages, helping it avoid tariffs it would otherwise face. The Open Europe think tank estimates some 35% of Britain’s EU-bound goods could be subject to levies of 4% or more upon exit, with makers of cars, chemicals and food among the industries worst affected.
- Relationships with crucial allies, like the United States, could also be jeopardized by Britain no longer being part of the Brussels machinery at a time when both sides of the Atlantic are negotiating an ambitious free trade deal.
- If there is a No Vote, the UK will have to negotiate new trade deals with the EU and the rest of the world, as EU trade deals negotiated or nearing completion with China, America, Canada will no longer apply. This will take years to renegotiate, leading to questions over how competitive UK trade agreements will be versus those we currently enjoy as part of the EU.
- The UK will have to renegotiate or reconfigure deals with more than 50 countries. The UK has not independently concluded such an agreement since the 1970s.
- Air transport- Britain potentially loses rights under 78 EU-negotiated agreements. New landing and airport access rights must be agreed with the EU and scores of international governments.
- Enforcement -National bodies replacing EU agencies need funding, manpower and legal clout to replace EU agencies. This covers competition, trade agreement and protection, farming, pharmaceuticals, chemicals and food safety standards.
- As a whole, entrepreneurs and business owners in Britain broadly remain in favour of remaining a member – and their enthusiasm may be growing. According to the Financial Times a survey of 3,800 businesses last year found 63% believe that leaving the EU would have a negative impact for Britain.. The sentiment seems to be reciprocated: of 2,600 senior executives in 36 countries across Europe in February, nearly two-thirds of those in the eurozone said a British exit from the EU would have a negative impact on the European economy.
- Lack of import taxes within the EU mean British businesses compete on a level playing field with businesses across the continent. Leaving the EU would create significant uncertainty , which may be enough to cause them to cut back on investment here.
- The consensus among business leaders appears to be that it is in the best interest of the UK’s economy to remain within the EU. In 2013 the Confederation of British Industry found 8 out of 10 of its members thought this was the case. In the manufacturing sector, 85% of business leaders considered it was best to remain within the EU, and similarly in the financial sector 84% believed it best to stay in the EU.
- On to the thorny issue of immigration, (as opposed to refugees) having open borders across Europe isn’t some liberal, politically correct, one-nation project; it is an economic necessity. Without freedom of movement to work, the Euro currency zone would collapse and the common market would be less effective.
- Take the situation in the early 2000’s, where unemployment in Poland and labour shortages in construction in the UK led to many polish workers coming to the UK. The UK construction sector boomed whilst unemployment in Poland fell, setting Poland up for economic recovery and increasing trade with the UK. Add to that, EU immigrants tend to be young, get married and have children and generate 45% more tax for the government over their working lifetimes than UK born peers.
- There is a strong argument that reforming EU immigration rules should be a high priority, not least as a Brexit would probably not change anything as the UK would probably have to accept EU immigration to retain access to the common market.
- “Twenty per cent of our top people are from the EU,” says one fund boss. “It would be very awkward if it became more complicated for them to be here than it currently is.”
- Financial services employers rely heavily on EU workers. “The City attracts the best financial services workers from across the world,” says Chris Cummings, chief executive of The CityUK, a lobby group. “But EU nationals dominate, in large part because of the ease of working across the single market.”
- Almost 11% of the City’s 360,000 workers come from elsewhere in the EU, according to the latest census. That is by far the biggest contingent after the 78 per cent accounted for by domestic labour. Ireland, France and Italy between them account for nearly half of all the City’s EU migrant labour.
- Free movement of people across the EU opens up job opportunities for UK workers willing to travel and makes it relatively easy for UK companies to employ workers from other EU countries. Limiting this freedom would deter the “brightest and the best” of the continent from coming to Britain, create complex new immigration controls and reduce the pool of candidates employers can choose from.
- If the UK looks likely to leave, then Foreign Direct Investment (FDI) in the UK will slow dramatically and cost jobs. Millions of jobs could be lost if global manufacturers, such as car makers, move to lower-cost EU countries
- The No side also assumes that freedom from EU regulations will make companies more cost effective but what cost new jobs without basic workers’ rights, a limit on the hours worked, relaxed safety rules? Would these be jobs worth having? Would they exacerbate inequality and increase the number of the working poor?
- The loss of EU farming subsidies would be extremely difficult and costly for the agricultural sector in the UK to absorb. British farmers would lose billions in EU subsidies.
- Taken at face value there is a compelling argument about the UK’s EU membership fees but those already enjoy a significant rebate and that would have to be renegotiated.
- Norway have to commit funds to EU development and don’t get EU grants in return, nor do they have any MEPs. EU grants can fund as much as 50% of university research and improving R&D is one of the key opportunities for UK economic growth. Also, the EU offers grant support to areas of economic deprivation, so whereas London and the South East get very little back from the EU, Scotland does well. The EU has a role in redistributing the UK’s wealth that we don’t want to lose.
- One of the greatest reasons for economists fearing a vote to leave is that it would spark huge uncertainty, which stops companies investing and households spending, harming growth.
- A study by the think-tank Open Europe, which wants to see the EU radically reformed, found that the worst-case “Brexit” scenario is that the UK economy loses 2.2 per cent of its total GDP by 2030. However, it says that GDP could rise by 1.6 per cent if the UK could negotiate a free trade deal with Europe and pursued “very ambitious deregulation”.
- The Centre for Economic Performance at the London School of Economics predicts the range of Brexit economic scenarios from something akin to the global financial crisis (-10% GDP) to a best case scenario of a – 2.2% annual loss of GDP. Other credible think tanks are more positive but none predict a boom time following a Brexit, so the case for a No vote would appear to be based more on British Nationalism than economic pragmatism.
- A decision to leave the EU would have a significant adverse impact on economic activity. The immediate aftermath would likely result in substantial uncertainty weighing on investment, while UK households would struggle to maintain spending power amid an anticipated rise in import costs. Quantifying the impact on the economy is uncertain, but GDP may be 2-7 per cent lower than it might otherwise be, with such losses likely front-loaded.
Foreign Exchange and Interest Rates
- Sterling would likely face a significant drop. A decision to leave would likely trigger further weakness as growth slows, policy is eased, deficits increase, capital inflows fade and questions are asked about the UK’s export capabilities.
- Brexit would probably trigger weakness in sterling and bring forward interest rate increases. Growth will be weaker as the UK will be seen as a less attractive place to locate a business. Investment and productivity growth would be weaker as a result.
- The financial services sector — a key contributor to British GDP — would also suffer disruption with investors potentially put off by the uncertainty a vote on EU membership would create, potentially curbing the hefty flows of foreign direct investment the U.K. has enjoyed for years. The UK’s status as one of the world’s biggest financial centres will come under threat if it is no longer a seen as a gateway to the EU for the likes of US banks.
- Equities would also likely drop. Weaker GDP growth and more difficult export conditions would impact specific sectors, including financial services, exporters, retail and property. This should be somewhat offset by a lower level of the pound and QE. But the net effect is likely to be negative.
- Gilt market reaction would likely be more neutral, caught between divergent forces. Concerns over UK credit quality may prompt capital flight, particularly in an economy dependent on imported capital. A short-term, sterling-inspired inflation spike would also raise nominal yields. But the prospect of additional QE and weaker potential GDP growth should tend to lower yields overall. We would also expect to see a further widening in sterling credit spreads.
- Investment banks prospered as London bolstered its role as the world’s largest foreign exchange trading hub. By the same token, their future in the city could be profoundly affected should the UK leave the EU.
- Today banks takes advantage of the ability to “passport” around the EU from the UK — exporting services without setting up fully-fledged local operations. This is not only efficient but a magnet that brings revenues and jobs to London — one that could be jeopardised by Brexit.
- The City has always been about far more than banking. London’s pre-eminence in insurance, particularly marine insurance, dates back to the 17th century. Edward Lloyd’s coffee shop — the basis for today’s £30bn Lloyd’s of London market — started out as a venue for insuring ships and their cargoes.
- Insurers, are careful of overstating the consequences for their industry if the UK left the EU. But many are convinced it would accelerate the shift of business to other global insurance centres, such as Singapore and Japan. The argument applies across different areas of insurance, but the impact on the London-dominated marine market could be the greatest.
- At present London commands a third of the $18bn global marine insurance market, according to Marsh, the broker. Of that, insurers say about 40 per cent is cross-border EU business.
- The ability to write business from London passport-free across the EU keeps prices low, says Marcus Baker, who chairs Marsh’s global marine business from the US’s group’s London base. “But if insurers do not have the freedom to write cross-border business as they do now, and have to set up local operations across the EU, there will be potential cost increases,” he says.
- The opening-up of the EU market has made asset management one of the most dynamic areas of cross-border financial services. London has eagerly shared in the spoils.
- One particular cross-border product, called UCITS — which stands for Undertakings for Collective Investments in Transferable Securities — has grown dramatically, benefiting three jurisdictions in particular. According to Morningstar, the data provider, the UK is neck and neck with Ireland as a domicile for UCITS, only beaten by Luxembourg, which, like Ireland, offers tax advantages.
- During the past five years net assets held in UCITS in all three locations have doubled, principally because of cross-border sales. For a large chunk of the industry the risk is clear: Brexit would push the UK portion of the business — worth more than €1tn last year — to Luxembourg or Dublin.
- UKIP leader Nigel Farage believes Britain could follow the lead of Norway, which has access to the single market but is not bound by EU laws on areas such as agriculture, justice and home affairs. But others argue that an “amicable divorce” would not be possible. The Economist says Britain would still be subject to the politics and economics of Europe, but would no longer have a seat at the table to try to influence matters.
- Britain may lose some of its military influence – many believe that America would consider Britain to be a less useful ally if it was detached from Europe.
- A likely outcome is that Britain would find itself as a scratchy outsider with somewhat limited access to the single market, almost no influence and few friends. And one certainty: that having once departed, it would be all but impossible to get back in again.
- Free trade, economic cooperation, free movement of people and goods and the bringing together of independent nations in a war torn Europe in friendship and co-operation has protected Europe’s diminishing place as the world’s political and economic axis swiftly moves East.
- Scotland would re-emerge, possibly leaving to another referendum on independence — and maybe to a break-up of the UK.
If the U.K. decides it does want to go it alone, figuring out how to do so will be the other significant hurdle to overcome. The country has several options, none of them particularly appealing.
- UK outside the EU could either choose to follow Norway, which pays into the EU budget and implements the bloc’s regulations or opt for a much more distant relationship, with trade governed by World Trade Organisation rules.
- It could follow the example of Norway and join the European Economic Area (EEA) but EEA members have to apply all of the EU trade and employment directives in order to access the EU common market. Norwegian Foreign Minister, Børge Brende, said “Norway was one of the fastest to apply EU directives without being ‘around the table’ to have a say in new rules and regulations”. And that “Britain would be forced to implement every rule from Brussels, even if it leaves the European Union”.
- What’s more, the U.K. would still have to pay into the EU budget. Norway, for example, contributes 100 euros per person compared with the U.K.’s 180 euros today, according to Open Europe.
- From here, the issue is whether the UK (or what’s left of it) would follow Norway in taking everything from Brussels (unlikely), or try to negotiate everything (Switzerland model) —considering it has taken years to strike 100 trade deals with individual EU and EFTA states, that hardly seems practical.
- Perhaps the most simple — if risky — strategy could be to shun all of the above and fall back on Britain’s membership of the World Trade Organisation as a basis for favorable terms. Doing that would see the country automatically forfeit about 50 EU trade deals at a stroke, surrendering large amounts of bargaining power.