Why we will soon be better off than the Germans

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So they can sell us their porn but we can't sell them our beef. We cannot work longer than a 48-hour week, and we cannot smack our children. And now we may have to pay pounds 150m of compensation to Spanish fishermen barred from British waters. It has not been a great week for Britons concerned about loss of sovereignty to Brussels.

This little clutch of reverses did, however, have one immediate effect. It enabled the Daily Mail, a paper with a sinuous skill at identifying issues likely to strike a chord with its readers, to call for the Prime Minister to assert British sovereignty now, even at the risk of expulsion from the European Union.

Suddenly a debate that has been rumbling away for most of the past year - whether Britain would be better off, in economic terms, outside the EU - has taken on a new and harder edge. Why is this happening now?

You can argue, of course, that we are at one of those pivotal moments of history: that if we do not make a stand now, our identity will be submerged for ever. That's the most popular argument, but it is surely rather ridiculous. Not only can Britain withdraw from the EU at some later stage if that is what people want to do; it is perfectly possible, indeed quite likely, that the EU will itself break up in the next 25 years. At the very least, the present close Franco-German relationship is going to change. So the "it's now or never" approach is to take a very myopic view of the long sweep of European history.

No, the change is surely less because Europe has become overweening (though there is something in that) and more because Britain's self-confidence has grown. Having significantly lower unemployment than any of the large EU nations is one cause; staging an earlier and more secure recovery from recession is another; and both have been achieved without a surge in inflation or a serious balance of payments deficit. Sure, there are economic problems in the UK, but suddenly, in comparison with those of continental Europe, these appear quite manageable. It is surprising what three years of decent economic growth can do to turn a mood.

True, none of this seems to have benefited the Government. But that, too, is surely unsurprising, for the economic recovery has had as much to do with the Government's failures (such as the expulsion of the pound from the Exchange Rate Mechanism) as its successes. It may even be that the support for Labour comes from a sense of economic self-confidence, a sense that the economy is now strong enough to stand a change of government, something it was not strong enough to do in 1992.

But here lies the trap. If this self-confidence is merely the result of the cyclical position of the UK economy, then is it liable to evaporate as rapidly as it did at the end of the Lawson boom. Having faster growth than the continent for three years is not nearly as important as the possibility of having faster growth for 10 or 20 years.

To suggest that Britain will, a generation from now, probably have a higher standard of living than France or Germany would seem to most people to be wishful thinking. Yet there is a powerful argument to be made that not only will this happen, but it will happen irrespective of whether Britain is in or out of the EU or whether the EU exists at all.

The argument comes in three parts. First, Britain is ageing more slowly than other countries. The proportion of workers relative to the young and the old will rise, but it will rise more slowly than elsewhere. So in relative terms it will be easier for us to increase living standards than it will for anyone else - in fact, in the year 2030 Britain will have a slightly higher proportion of people of working age to retired than even the United States, and significantly higher than Japan, France or Germany.

Second, the British economy, more perhaps by accident than design, happens to be strong in sectors that will be difficult for new East Asian competitors to attack. Our manufacturing sector is quite small. But since know-how in manufacturing crosses national boundaries with astonishing speed, so it is possible for newly industrialised countries to build up manufacturing very quickly. A small but nimble manufacturing sector is an advantage, not the reverse. We are, on the other hand, very strong in things such as trade in intellectual capital. For example, in 1994, the most recent year for which comparable figures are available, Britain had a surplus of $1.3bn on royalties and licence fees, whereas Germany (despite its reputation for high-quality education) had a deficit of $2.4bn.

Third, we seem to have become good at creating new businesses. All over the world, large, established enterprises are shedding labour. So creating jobs will depend on creating new businesses and encouraging the growth of small ones. The success of large firms will matter enormously for the success of economies in general. But do not expect them to be net job creators. So employment growth is likely to be stronger in the UK than in most of continental Europe.

All this will change the political dynamics of Britain's relationship with Europe. It will not necessarily mean, as some Euro-haters might like to think, that Britain will feel confident enough to walk out of the EU - though that is one possibility. It may simply mean that Britain will tend to have more influence within the EU than it seems to have at the moment. Most important of all, though, it will mean that if the EU no longer happens to exist, economic life in the UK will be quite comfortable, thank you.