Hamish McRae: It is in Europe's interest to be nice to us – even if we do want a divorce
From the City: We have had a dry run for this great debate in the one about the adoption of the euro
Sunday 04 August 2013
There was a small news item last week which caught the latest shift in global economic sentiment. It was that Britain had passed Germany as the largest European export market for Ferraris. In the first six months of this year, dealers here delivered 415 of them, compared with 388 in Germany – and only 116 in Italy itself. Sales to the US and Canada were strong, at 1,048, but those to China were down at just under 350.
So there you have, in a snapshot, decent demand in North America and the UK, a weak Europe (even in Germany), and a softening occurring in China. That is pretty much what is happening to the world economy, isn't it?
But there is another story here. You are an Italian luxury producer. Your biggest export market is outside the eurozone. Your second biggest is outside the eurozone. Your third, Germany, is in it, but your fourth, China, is out. So your self-interest is to preserve good relations with markets outside the eurozone, not within it.
You can apply this thought to Britain's relationship with Europe, something that is inevitably going to become more fraught in the next few years, whatever the outcome of the referendum that will most probably take place during the life of the next parliament.
This is not just about Ferrari. We are Germany's third-largest export market, after France and the US, as you can see from the graph. They sell us almost twice as much as we export to them. Indeed, they buy almost as much from Russia as they do from us. German industry, accordingly, has a massive self-interest in maintaining a good relationship with this market, and this will, I suggest, determine how the relationship with Europe will develop.
To explain: we have had a dry run for this great debate in the one about the adoption of the euro – indeed, more than a dry run, for with hindsight that decision to stay out has turned out to be the key one shaping the relationship. Had we joined we would almost certainly be out by now, and that really would have damaged both our attitudes to Europe and their attitudes to us. As it is we scramble on as semi-detached members of the club.
That, surely, is how the relationship will continue. Leave aside all the stuff from the warring camps of "inners" and "outers" and focus on what will actually happen. We will inevitably have a semi-detached economic relationship with Europe and one that will tend towards becoming more detached, not for any political reason, but for the simple economic one that non-EU markets will grow faster than EU ones. That is happening to Germany too: the proportion of its exports to the rest of the eurozone is falling steadily.
It is not possible to call which way the referendum will tip. That will determine whether we are technically just in the EU as a de-facto associate member (associate rather than full because we are outside the euro), or whether we are technically just outside as a member of EFTA. I suspect it does not matter much either way whether we are technically in or technically out. Switzerland is out but has for obvious, geographical reasons has a closer economic relationship with the EU than we do.
Two things will, however, matter a great deal. The first is what happens to Europe, the second how the negotiations for a more distant relationship are conducted.
On the first there is not a lot new to be said. The scale of the economic disaster that has swept across much of southern Europe is worse than even most of the pessimists expected a couple of years ago, but the euro has survived so far, whereas a year ago many did not expect that to happen. We simply cannot know whether it can survive intact in the longer-term and there has been no new information in recent months to guide us. The tougher the conditions in Europe the looser the relationship between the UK and the rest of the EU will become. But for all the deluge of information and speculation about the European economy in recent months there is not a lot that is surprising. There is a cyclical recovery starting but it is a weak one.
There has been much less discussion on something that seems to me to be much more important: how we talk to Europe and how they talk to us. The point here is that an amicable settlement would be fine whatever the actual outcome; an on-going battle would be a disaster whether we are technically in or out. The parallel with a marriage breaking up is apposite. It has to be amicable for the sake of the kids. The worst outcome of all would be for the children to be used as weapons by warring divorce lawyers – with in this instance of course the business communities on both sides being the kids.
Businesses get on with it. The level of political risk generated by having a Britain in EFTA rather than the EU is small in the perspective of a multinational. A European company operating in the US, let along China or India, faces much greater risks than anything the UK and Europe can cook up. That won't stop companies making noises: remember how many said that it would damage inward investment in the UK if we did not join the euro?
But risk does, at the margin, damage economic activity. So the trick for the next few years for British and European politicians will be to make sure that the tone of the debate will be a reasonable and orderly one. It is even in the self-interest of the French to be gracious: after all the UK is the world's largest export market for champagne.
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