Last week a cross-party campaign was launched in the UK calling for a referendum on the country’s membership of the European Union. Patrick Minford argues that the current costs of the UK’s membership far outweigh any benefits, and that the framework within Europe that is now evolving to cope with the Eurozone crisis is likely to impose even greater costs and pressures on the country. There is now a strong case for the UK to leave the EU.
This article was first published on the LSE’s EUROPP blog
The Eurozone crisis is likely to continue for a number of years, with the European Central Bank acting as a backstop until agreement is reached on a new institutional structure sufficiently reassuring to Northern Europe that its transfers to Southern Europe will have a good chance of being repaid. The UK’s exclusion from the euro has meant that it is neither vulnerable to the panic that has engulfed Southern sovereign bonds nor in direct line to make transfers to the crisis-stricken South.
The institutional framework now being developed implies a high degree of monitoring and intervention by creditor countries of debtor countries within the Eurozone. There will be controls on bank behaviour, targets for governments, and new financial taxes. While in principle this will take place within the Eurozone, there will be pressure to extend it to all EU countries on the grounds that other EU members could ‘undercut’ Eurozone arrangements. The UK will be seen as an offshore competitor with banks, businesses and governments in the zone that are burdened with these controls and regulations. Such competition will be argued to be unfair under the Single Market, for which Qualified Majority Voting applies. It would be easy to extend these things to the UK by majority vote.
Furthermore, the pressures for protection will increase in order to produce as much Eurozone growth as possible, for best prospects of debt repayment. Serious recessions for long periods such as the Eurozone is undergoing make such pressures intense. The UK suffers at present from the degree of protection for the EU as a whole. This protection will probably increase; even within the EU covert protection against non-euro countries could occur.
At best, the Eurozone will be obsessed with the euro crisis for the coming decade, stalling any progress in liberalising markets and in increasing competition, things that could have lessened costs of membership to the UK. This tendency for the euro to strengthen the drive towards excessive regulation as a way of bolstering the single currency was something widely foreseen at the start of the euro. But the crisis is likely to make this much stronger.
For the UK this prospect is extremely damaging. Even without any change in the status quo the economic costs to the UK of the EU are substantial: Table 1 below summarises the estimates I made in 2005, totalling between 11 and 38 per cent of GDP; I have revisited these with more up to date information since and they still seem to be of the right order of magnitude. The main change has been the rise of trade with China, which has led to a further wave of protectionism, at the same time as protectionism against older competitors such as South Korea has diminished. Meanwhile the EU-inspired social intervention has continued to make inroads into UK life, the latest one being widespread rights for temporary workers. With the changes the euro crisis threatens, these costs will increase towards the upper end of the possible spectrum identified in my original work on them.
Table 1: A survey of costs from the UK’s EU membership
% of GDP
|Net UK contribution||
|Costs of Common Agricultural Policy||
|EU protection of manufacturing||
A contrary and popular argument for the benefits of the EU to the UK revolves around Foreign Direct Investment (FDI). However this argument is entirely fallacious. FDI brings benefits because of technological spillovers from foreign firms, which raise productivity. The UK economy’s productivity is likely to be maximised when comparative advantage is allowed its fullest rein, i.e. outside the EU, under free trade. If this structure implies that industries operating in the UK are more efficient, then less FDI will be required. But this will reflect the fact that the UK is more productive, not less.
Another argument alleges that exclusion from the EU’s Common Tariff would be damaging. But this is a misunderstanding; exclusion would mean we would face world prices (free trade) on all our goods, exports and imports. This is beneficial to us because our trade would be governed by our comparative advantage; consumers would benefit and our production would gravitate to more efficient industries. The gain we calculated is shown above as around 3 per cent of GDP.
It is also said that we would no longer influence EU regulations, which is true. But we do not influence the regulations of any country to which we export and our exports are made to conform to them; this is part of our export costs and our influence in the EU has little if any impact on these costs. But by leaving we avoid the massive cost of these regulations to our own production in general, as shown in the Table above.
It is true that the EU restrains UK politicians from self-damaging acts, such as subsidising particular industries. However, politicians of most parties are now generally aware of the costs of such measures; and also the World Trade Organisation has also become more effective in discouraging them. But in any case the costs of such actions are relatively minor compared with the costs.
Thus the costs to the UK of being in the EU, already high, are likely to increase under the pressure of the euro crisis. This implies that the case for leaving the EU will become even stronger, to the point where it overcomes the inertial force of the status quo. A referendum on a) renegotiation and b) departure if renegotiation is denied will become difficult to avoid. As can be seen from the figures above, in any case total departure is the desirable option, with some arrangements on particular issues of common interest, such as rights of migration, free capital movements, and possibly trade agreements on particular industries like cars where there is large-scale cross-investment. Of course political cooperation will continue in areas of mutual interest as with all our allies.
The institutional evolution triggered by the euro crisis threatens to make the economic costs of EU membership higher than ever, in a highly visible way. The case for leaving the EU has become overwhelming.
On 11 September Professor Minford gave evidence to the House of Commons’ Foreign Affairs Select Committee on The future of the European Union: UK Government policy. Click here to watch the recording of the evidence.
Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
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Patrick Minford – Cardiff Business School
Patrick Minford CBE has been Professor of Applied Economics at the Cardiff Business School, Cardiff University since 1997. He has held economic positions in the Ministry of Finance, Malawi; Directors’ staff, Courtaulds Limited; H M Treasury; H M Treasury’s Delegation to Washington, DC; Manchester University; The National Institute for Economic and Social Research. He was a member of Monopolies and Mergers Commission 1990-96 and one of the HM Treasury’s Panel of Forecasters (‘Six Wise Men’) 1993-1996. He is author of many books and articles on exchange rates, unemployment, housing and macroeconomics.