With the Leave.eu campaign pledging to win back the UK, and with The Britain Stronger in Europe campaign pledging to explain the “true reality of life” outside the EU, arguments for and against UK’s membership give and take daily. Here, Dennis Novy explains why a divorce from the EU would risk putting the UK in a weaker economic position.
The option of Britain leaving the European Union sounds superficially attractive. Who doesn’t like the idea of freedom and independence? But it isn’t as simple. In fact, Britain needs Europe a lot more than Europe needs Britain. Isolation is costly.
Look at international trade. The British economy is heavily exposed to the European Union. The EU is by a mile Britain’s biggest trading partner, covering roughly 45 per cent of imports and exports. In the other direction, Britain is only responsible for less than 10 percent of trade of other EU countries. This asymmetry inevitably results from the fact that the British economy is relatively small compared to the rest of Europe.
To facilitate trade with the European Union, Britain has an interest to adopt the regulations that govern EU trade and investment, with the Single Market at the core. At the moment, Britain still has a place at the negotiating table and plays a part in determining those regulations.
If Brexit happened, Britain would become a passive receiver. This would be the model of Norway and Switzerland. Those countries adopt the same regulations but have essentially zero say. By the way, Norway makes an annual financial contribution to the EU in return for access to the Single Market. From 2009 to 2014, Norway paid almost 1.8bn euros.
Look at foreign direct investment. Britain has historically received a disproportionately large share of investment coming from non-EU countries. Yes, Britain has an English-language advantage and generally a pro-business climate. But another major reason has been that Britain was perceived by foreigners as an export platform that benefits from easy access to the EU and similar regulations and standards. Once Britain left the EU, this advantage would be eroded.
Look at immigration. It is tempting to blame Britain’s problems on immigrants. However, academic research shows that we need immigration to pay our bills. One reason is the declining fertility of the native British population. Another reason is the skills gap in the British labour market.
The European Union will not accept a deal that allows free trade and investment with an “independent” Britain but without any mutual migration. It is a fantasy to believe that Britain could fully control immigration from the EU once it left. Again look at Norway and Switzerland where migration to and from the EU is commonplace, not least because EU countries demand it.
Then look further abroad beyond Europe. One claim of Brexit campaigners is that an independent Britain would be able to negotiate its own free trade agreements. That is true. But those agreements would be dramatically worse than what the European Union can achieve.
Take the example of the Transatlantic Trade and Investment Partnership or TTIP, a trade agreement that the EU currently negotiates with the United States. If Britain negotiated by itself, it would lack the EU’s negotiating power. The US would possibly make Britain a “take-it-or-leave-it” offer, which is in essence how trade agreements have been negotiated with smaller countries such as Peru or Columbia. But as part of the EU, Britain has leverage and can implement its priorities. Size does matter.
Another, often overlooked issue is that Britain simply does not have the administrative expertise to carry out some of the functions that the EU currently fulfils on behalf of its member states. Again, take the example of international trade negotiations and TTIP. The team hammering out agreements under the guidance of the EU Trade Commissioner in Brussels consists of some of the most experienced and seasoned operators in the business, drawn from all over Europe. These are the best and brightest in the game that can stand up to the venerable team working for the US Trade Representative. It would take Britain years – and serious government resources – to try and match that expertise.
In fact, the Brexit debate is already damaging to British interests right now. Other EU countries do not like the antagonistic approach. They are increasingly irritated at Britain’s hesitation to cooperate, for example when it comes to taking a reasonable share of refugees from Syria.
Eyebrows are also being raised outside of the EU. President Obama has made it clear that he prefers Britain to remain in the EU. When it comes to EU business, many policy makers in Washington are listening less to Britain than they otherwise would, anticipating the decline of British influence in Brussels. Instead, other EU countries like France and Germany increase their impact at Britain’s expense. In other words, Britain’s negotiating hand is already weakened today by the Brexit cloud hanging over the country.
In summary, we cannot just ask whether Britain should leave the EU or stay. The public debate should be relentless in focusing on the counterfactual scenario of a post-Brexit Britain. We have to ask: what would the world look like if Britain were on its own? How exactly would Britain’s international trade be affected? Would foreign direct investment into Britain decline? How can the British government match the policy expertise concentrated in Brussels? And how would other countries perceive a Britain that has lost its crucial influence in Europe?
Note: This article originally appeared on the British Politics and Policy blog and it gives the views of the author, and not the position of BrexitVote, nor of the London School of Economics. (Featured image credit: Moughan CC BY-NC 2.0)
Dennis Novy is Associate Professor in the Department of Economics at the University of Warwick and Associate at the Centre for Economic Performance at the London School of Economics. He tweets at @DennisNovy
It is commonplace among EU apologists to state that the UK like Norway & Switzerland MUST accept EU laws & MUST pay huge tribute payments to the EU coffers in return for access to the EU market.
The UK is not Norway.
The UK can & will say no to paying extortionate or any tribute payments & to bending the knee to the EU.
Take a look at German exports to the UK. A massive fact of German business life & employment life. Will Germany allow the EU tariffs to destroy this?
The UK can & will create another trade group without making the awful mistakes of the EU. Imagine, a blank canvas to work & to benefit by not doing what the EU fantasists have done.
An inner group with Canada, Australia & New Zealand will be a base. The fact that Japan, Brazil, S. Korea, Mexico, South Africa, Turkey & other trading countries all need a trade bargaining group is not lost on their governments & will each welcome a free UK [a P5 member] to lead from the front.
The UK Ministers will not be waiting alongside a fax machine.
The EU is going downhill & its trade is diminishing yearly.
Well put, I more or less fully agree. This article’s headline should be flipped the other way to reflect reality.
Yes, the UK is not Norway. The latter has used its North Sea revenues to amass a sovereign wealth fund that will help the country adjust to an ageing population. Britain used its oil and gas receipts to pay for mass unemployment, tax cuts and current government spending. The Thatcher government channelled some of the oil revenue into tax cuts. A more permanent solution would have been to use more proceeds for investment……
As for exports, you seem to be oblivious to the fact that the UK’s exports to Germany accounts for about 17 percent of the UK’s total exports. The corresponding figure for exports from Germany to the UK accounts for about 5 percent of the total exports from Germany. In short, Germany can live fine without the UK. I’m not sure if the same goes for Britain.
If the little Englanders believe that the City of London and “outside world” will help them out – fine! In the past 30 years, the UK’s manufacturing sector has shrunk by two-thirds, the greatest de-industrialisation of any major nation. It was done in the name of economic modernisation – but what has replaced it? There’s ample evidence that the promised rewards of the UK’s “post-industrial future” haven’t materialised. What was sold as economic modernisation has led to industrial decay, with too often nothing to replace it. By any standards these numbers represent a collapse. As the UK government itself readily admits, no other major economy has been through that scale of de-industrialisation. The Germans and French have kept their big domestic brand names – the Mercedes and Mieles, the Renaults and Peugeots – and with them their supply chains of smaller suppliers and partners. The loss of manufacturing means Britain no longer pays its way in the world. Last year, the British bought around £100bn more in goods from other countries than Britian sold to them. Apparently. the little englanders have long argued that this doesn’t matter: that Britain can simply borrow more and sell its assets to foreigners. But there are problems with relying on foreigners for hard cash; they can simply refuse to extend it to you – just ask the Greeks.
And that’s the problem, the UK may become northern Europe’s Greece. Do you seriously believe that manufacturing companies such as Airbus will continue to invest in the UK after a brexit?
So long, and thanks for all the fish.
What a hilarious rose-tinted spectacle propaganda piece from Karl! I note he comments on what he sees as the terrible decay of the UK economy over the last 30 years, but fails to note that this coincides with the ever tightening noose of EU influence.
Of course, the truth is that the economy isn’t as bad as he said, and that manufacturing declines etc aren’t all to do with the EU either. But the logical conclusion of the indifferent reader might well be to try something new if the last 30 years have been said, i.e. burst free from the EU when the referendum comes.
Correction last sentence: if the last 30 years have been SO BAD.
Perhaps you could point out what exactly in my comment above is “propaganda”. As the second POTUS once said; “facts are stubborn things” – and facts are not something that seems to be of any concern for the little englanders if they’re not inline with their agenda – or sort of similar to how the know nothing republicans in the US invent their own facts with respect to climate change end evolution. Pretending, therefore, that a brexit would not lead to a swift downgrading of London’s financial sector and that it would not cascade into ripple effects throughout the UK, is nothing short of self-delusional.
Also, it may seem as if reading comprehension is not a particularily strong trait for the little englanders as well, since I was talking about the trade in goods and the story of the continued deindustrialisation in the UK and the important implications it has for long-term growth – and not about the UK economy in general. Was that so hard to comprehend? As for the economy in general, the UK has a surplus with respect to its EU partners, for trade in services. I wouldn’t be surprised, though, that the little englanders believe that this surplus could be maintained after a brexit.
Addendum: Definition of little englander
Let us get to the gaming of the situation.
We will be subjected to having to listen to & hear much nonsense over the Brexit referendum.
Instead, examine carefully the cards that we little Englanders [apologies to Scotland, NI & Wales]. have to play.
SCOTLAND will not vote to leave the UK if there is a Brexit. Scotland will be less likely to do so. Why? Because Scotland would have to use the Euro currency called the Frankenstein currency in some quarters. Then there are Scotland`s exports, 68% of which go to England, NI & Wales [England et al]. Given that England et al will wisely drive sterling down to increase exports that means that besides the EU tariff that will effect Scottish exports to England et al there will also be currency drifts which will together see at least a 15% hurdle for Scottish export to England et al. Could be 20%!!
GERMANY has a 100 billion US dollar export trade to the UK involving 1 million German jobs dependent on UK trade. Will Germany slash those jobs for Brussels? No they will not.
POLAND is already hinting that if the UK sends a heavy brigade from its Germany bases [which are scheduled to close soon] to the Masurian lake region they will accept the overall UK position.This will be hugely popular with not only Poland but with Denmark, Sweden, Finland, Estonia, Latvia, Lithuania, Romania. Bulgaria, Hungary, Slovakia & the Czech republic – after the Russian aggression in Crimea & Eastern Ukraine. Russia broke the understanding about not positioning NATO troops into E. Europe.
If the UK offers to do this it will be in exchange for absolute free & unfettered access to the single market while being outside of the UK. The alternative for Brussels is a massive revolt among many countries. Brussels cannot afford that.
OUR FAMILY is Canada, Australia & New Zealand. We can work with them best because we trust them most. We will create a better trade association together & then create APTA [Atlantic Pacific Trade Association]. Japan, Brazil, Mexico, S. Korea, Turkey & many more big economies want & need a trade negotiating group without the terrible mistakes & absurdities that the European “Elites” have punished Europe with over the last 40 years & more.
Do not listen to the crazies. They cannot think straight or worse they bought into the wishful thinking that has infected European political thinking for so long.
correction …should read .”..listen to & read much nonsense……..”
I regret that under the heading POLAND I mis-typed EU & put in UK where it says………..while being outside of the UK…. Apologies.