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What if Britain left the EU?

Eurosceptics want a vote on the ultimate question – and the PM does not seem entirely opposed. Ben Chu examines the consequences of saying bye bye to Brussels

Ben Chu
Tuesday 03 July 2012 01:22 BST


The European Union is easily Britain's biggest single export market, with 53 per cent of our goods purchased by our fellow European nations in 2011. This sector of our economy, directly and indirectly, supports three million jobs, according to Sir Iain Begg, a professorial research fellow at the European Institute of the London School of Economics. Without export growth last year, we would have fallen back into recession much earlier. If we were to leave the EU, we would almost certainly still be allowed to sell goods into the single market. Norway, Iceland and Switzerland already do so through a free-trade agreement. The difference would be that the UK would not be able to set the rules that govern the European single market. It would, of course, have to implement those rules to keep selling into those markets though. The argument sometimes deployed by those who want out of the EU is that leaving would, somehow, encourage British manufacturers to concentrate on exporting to the likes of China, Brazil and India.


Britain also imports a great deal from other nations in the EU – more than it exports, in fact. In 2011, we exported £159bn of goods to the EU and imported goods worth £202bn – an annual trade deficit of £42bn. Some argue that this deficit gives us leverage to demand more opt-outs and budget rebates from our European partners. The argument is: "They need us more than we need them." The problem is that we import a lot of European goods, not because we are doing the Europeans a favour, but because our people want to buy things that cannot be produced at home – think of all those German cars and French luxury goods. If Britain were to leave the EU, the Government might decide to impose large tariffs on European imports, but this probably wouldn't prove very popular. The likelihood is we would still run a trade deficit with the EU, but, as with imports, we would have no say over the rules governing the single market.


Would foreign capital still want to invest in the UK if it were not part of the EU bloc? Some economists say overseas investors would be put off. The National Institute of Economic and Social Research, for example, estimates that foreign direct investment would fall. And, mainly for this reason, it argues that our GDP would permanently be 2.25 per cent lower if we left the EU. However, Capital Economics argued last month that, because of the eurozone crisis, levels of foreign investment in the UK could actually go up if we left the EU, because we would seem like a safe haven.


If Britain left the EU, the Government would not be required to permit the free movement of all citizens of the 27 nations of the union into Britain, nor their right to work here. About EU 165,000 citizens migrated to the UK in the year to September 2011, after 182,000 arrived in the 12 months to September 2010. Proponents of withdrawal argue that stopping such flows would improve quality of life because there would be less strain on public services and infrastructure. Opponents argue that immigrants are an economic benefit for Britain, filling holes in our labour market and boosting overall productivity. But the free movement of people is two-way. An estimated 748,010 Britons live or work in the European Union. Many have holiday homes in France and Spain. If we decided to restrict inflows of EU citizens to Britain, the European Union would be likely to respond in kind.


The UK makes an annual gross contribution to the EU budget of £15bn and it gets a rebate of €6bn in various subsidies – mainly agricultural. This makes an annual net contribution of €9bn. Ending those payments by leaving the EU would help to reduce the UK deficit, but these are not transformative sums. Our EU contributions are equivalent to 0.6 cent of GDP. We presently have a deficit of 8.3 per cent of GDP. Plus, one has to consider the benefits of those contributions. Structural funds – as payments into the common EU budget are known – are used to develop post-Soviet bloc countries in Europe, building up their infrastructure and making them bigger potential markets for British goods and services.


A study by the British Chambers of Commerce has estimated that the annual cost to the UK of EU regulation is £7.4bn, but costs must be set against benefits. The EU has forced the mobile phone networks to stop ripping of customers when they use their handsets abroad. It has tackled Microsoft and airlines about over-charging. Britain outside the EU would have to rely on British competition authorities alone to protect customers from the malfeasance of corporations.


This is a complex relationship. The UK actually wants to impose higher capital requirements on its domestic banks than the rest of Europe does. Yet Britain is also fighting a Financial Taxation Tax, something that much of the rest of Europe

supports. British bankers, for their part, are generally in favour of staying in the EU. They fear that their access to lucrative European capital markets could be impeded if Britain left the bloc. And both banks and businesses calculate that Britain's EU membership is in their interests because the EU can help to open foreign markets such as China up to them more effectively than the UK acting alone.


The EU's Common Agricultural Policy is almost universally considered a wasteful mechanism that encourages over-production and undermines African farmers. Between 2007 and 2013, the UK will contribute £33.7bn to the Common Agricultural Policy (CAP) and get back £26.6bn, according to the Open Europe think-tank. That works out as a net contribution of £7.1bn. If the UK left the EU, our Government could scrap these subsidies at home and save the money. But it already has discretion at home about what to do with the payments – enabling ministers to channel the money to conservation, rather than production. And, within the EU, it can push for badly-needed reform of the CAP. Outside the EU, it would have no influence.


Europe is more social democratic than the UK. Even countries with centre-right governments tend to tax more, spend more on welfare and are less laissez-faire when it comes to markets. Those on the left in Britain tend to be in favour of the UK's continued membership because they feel it will help to move the country in this direction. Those on the right tend to be opposed for similar reasons; they feel Europe is helping to undermine Britain's social and economic freedoms. Yet there are global politics to consider, too. The right wants to rely on Britain's "special relationship" with the US, but Washington prefers Britain to work in closer partnership with the EU. Rising Asian giants such as India and China also seem to regard Britain's membership of the EU as a good reason to build economic and diplomatic ties with us.

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