June 15, 2016    10 minute read

Understanding The EU Referendum

   June 15, 2016    10 minute read

Understanding The EU Referendum

The UK heads to the polling stations in a week’s time and by the end of next week, the country’s fate will have been decided for the next generation in what has become a particularly important and divisive referendum campaign.

Do we remain in the EU, for all its troubles, or venture outside, for all its unknowns?

Pollsters point out that young people are twice as likely to vote to remain in the EU, but under-25s are only half as likely to vote as over-65s. This shows why David Cameron was particularly keen to target the youth as he made a last-ditch effort to get people to register to vote last week:
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But with that deadline now over – for real – the nation will speak on this contentious matter very soon. For the undecided, which way should you vote?

The weigh-up UK residents face seems to have boiled down to four key areas:

  • Trade
  • Fiscal contribution
  • Immigration
  • Regulation

Both sides of the campaign have tried to throw out statistics which appear to be mutually incompatible – it is not quite so simple as putting an accounting number on the ‘benefits’ the EU provides, or likewise the ‘costs’ – so ultimately this comes down to a normative judgement.

What are the benefits?

One statistic that is not open to debate though is the trade figures between the UK and EU, its biggest trading partner. With 45% of UK exports going to the EU, it is clear the UK benefits significantly from the single market and its movement of goods, services, capital and labour. With a 500 million customer base, a potential Brexit would worsen relations, and whilst it is inconceivable that there will be no trade with the EU in the event of Brexit, the reality is that the UK may have to look to other economies. If there is turmoil in the EU, what is happening in the likes of Brazil and Russia? Can you trust the emerging economies to prop up our growth? The EU, in this sense, looks a safe bet.

This is a particularly relevant point considering the nature of the UK economy, which is heavily services-oriented and this relies on the EU. Firms grow because of the EU harmonisation and this helps the UK export globally. London, for example, is the gateway to the financial sector – our financial services trade surplus worth £60 billion and one-third of that is with EU – and we can only begin to imagine the chaos a Brexit would cause, as we saw when HSBC flirted with the idea of moving its headquarters away from the capital. What would happen in the event of a Brexit? Whilst it is hard to say as we have never had to consider the counter-factual, it is clear the UK would very much lose out to the likes of Dublin and Paris.

But it is not just City bankers. Despite the JCB chairman backing a Brexit – this is understandable as most of its profits are made in the UK – two-thirds of British jobs in manufacturing depend on demand from Europe and thus leaving could put up to 50,000 apprentices at risk. Many other major players from other significant fields – lawyers, insurers, investment bankers, energy, hospitality, telecoms, airlines, whiskey business, housing firms – all echo the same message: the UK is stronger together with the EU. Businesses and foreign investors like the certainty of stable underlying foundations such as tax rates and exchange rates, and we saw from the Scottish referendum alone the impact on the pound sterling, which fell 6.5% against the US dollar. A potential Brexit would be a far bigger break-up, with Goldman Sachs estimating the potential for a 20% drop.

 So it is clear big businesses want to be in to utilise the EU as a platform. Foreign multinationals tend to be high productivity firms and they bring new technologies and management skills with them. Given the substantial sunk costs involved in FDI, the uncertainty generated by the possibility of an in-or-out referendum may have a negative impact on investment.

But SMEs prosper by remaining too owing to the vulnerability caused by leaving. There are no tariffs on trade, and they can hire cheap and skilled labour from other parts of the continent. Think of the counterfactual: big businesses can relocate easily, but SMEs would struggle over comparable EU SMEs.

One must also not forget the role the EU plays in providing funding for research and development channelled towards businesses and universities. The UK currently receives more funding from the European Research Council than any other country and 50% more than Germany. This funding would be lost in the event of Brexit and may not be replaced by the UK government.

Most of the benefits listed thus far do not seem tangible to the everyday consumer, but one must take into consideration that a Brexit would unpick many of the good EU policies. These include greater consumer protection with returns policy, lower data roaming charges for your phone bill, a togetherness in tackling climate change and fighting terrorism, a cap on hours worked, and a lowering of hotel rates, all aided by EU regulation.

Sounds too good to be true… there are costs, right?

The Leave campaign have enough ammunition to counteract all of the above points made. Despite there being no research on the below alternatives for trade being good for GDP – indeed all say welfare and GDP will suffer – the Leave campaign highlights we could follow:

  1. The Norwegian model, where we have membership of the EEA and have the internal market but still ‘suffer’ with EU contributions and laws
  2. The Swiss model, which has some 120 bilateral trade agreements (have fun negotiating that!), no full internal market and still needs to abide by some laws
  3. A Free Trade Agreement, which sees no inflow of people but also no outflow – there are 2 million Brits in the EU – which would isolate ourselves costing jobs, hitting growth and leading to higher prices
  4. A Turkish model, with a customs union – no tariffs, no budget contribution and you have your own regulation but it cannot provide a financial services on par with the EU
  5. WTO, where whilst we get regulatory sovereignty, the exporters would face EU tariffs and you would still have to comply with EU product standards if they wanted to sell their wares on the continent

They will argue that leaving the EU means we can put red tape behind us, enabling the UK to strengthen trade relations with non-EU countries and not the likes of a stagnant Italy. But the reality is being in the EU does not stop the UK from doing this. The EU is already negotiating with the US (TTIP) and Japan, and a Brexit means the UK will miss out. The EU has no tariffs and quotas on internal trade, while common rules have further reduced trade costs. A Brexit would mean the UK does not inherit the EU’s existing bilateral trade agreements that are already in existence; it would have to negotiate new ones. So upon exit, it would have less access to markets outside the EU, not more.

Furthermore, a large fuss has been made of the UK’s net contribution to the EU. The claim is that the UK pays too much contribution which could be used as tax reductions or an increase in NHS funding. The reality is that the UK’s net contribution to the EU budget is less than 1% of GDP (£9.8 billion). To save £9.8 billion looks sizeable, but to save 1% will bring a question of whether the savings would be outweighed by the loss of trade and investment – reduced integration with EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget. Cameron has managed to negotiate ‘special status’ for the UK, leading to not having to pay any bail-outs, but is it enough?

Immigration continues to be a heavily controversial topic of discussion, with the claim being that migrants take our jobs and a Brexit would allow us to take back control of our immigration policy so we can hire skilled immigrants from around the world rather than be forced to take in EU migrants via the single market. This sounds very fair, but from a business perspective, what is wrong with cheap European labour? There is no evidence to suggest it harms UK-born workers; in some sense you can treat migrants – both inflow and outflow – as a trade of workers and, put simply, trade increases welfare. Let us not forget that EU immigrants are currently net contributors to the UK’s public finance. To so dramatically want control back of our borders will send the UK backwards as a place of integration; we need EU’s help for culture and diversity.

So that leaves regulation. A Brexit would allow for much freer control of our regulation, internal policy (like CAP) and our trade and budget contributions, they argue. But the reality is EU regulation collapses 28 countries’ laws into one common ground. The cost saving will not be that large; FTA and EU product regulation will still cost. Besides, is regulation all bad? Drug companies would suffer because the standard regulatory market makes it easier for pharmaceuticals to be bought and sold within the EU. Ironically, the risk would be a UK outside of the EU, unable to influence from within, yet still compelled to follow EU regulation to remain competitive.

It appears the Leave campaign’s premise is one based on hope, whilst they make the Remain campaign’s one allegedly of Project Fear. The UK may or may not benefit in the long-term – that we will not know until we get there, however vague the definition – but it is clear there will be massive short-term pain. It could take Britain up to 10 years to negotiate new trade deals with Europe. And the law of unintended consequences: will Scotland try for independence again? The saga could get messier.

This is the reason I will be backing a Remain next week. To leave I think there could be a lot more pain than the perceived gain, and it is case of better the devil we know than the devil we don’t. Regulatory sovereignty from a Brexit would not transform Britain’s growth prospects, but would alter our unimpeded access to the EU’s single market. A Brexit would cause ultimate confusion and uncertainty, with years of complex negotiations and haggling. The UK needs the EU and the EU needs the UK, and we may live to regret our decision down the line if we choose Brexit – absence will make the heart grow fonder.

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