PUEET/PULAT

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Britain and the European Union

March 12, 2016 | Blog, Uncategorized

By – T S Srinivasan

Introduction

As a British exit from the EU seems increasingly possible, although far from probable yet, there is a growing interest in answers to the following questions :

  • What are the benefits to Britain of remaining within the EU?
  • What are the potential risks to Britain of leaving the EU?
  • Why does Britain contemplate an exit at all ? and
  • How does the British public feel about this question?

 

BENEFITS OF EU MEMBERSHIP

The EU is the largest single trading bloc in the world, and being a member of that bloc offers hassle-free access to a very large market (nominal GDP of $18. 5 trillion, and a population of 508 million ). Such access brings the following additional benefits : greater competition, removal of trade barriers, reduced costs of doing business , greater business efficiency, and a level playing field for all players in the market. As readers might recall, the EU’s Competition Commission has been quite active over the years, and come down hard on potential monopolies (General Electric, Microsoft, other).

 

POTENTIAL RISKS OF A BRITISH EXIT FROM THE EU

Table 1,(see page 2), might be of some help in forming a view on potential risks. With nominal GDP of close to $ 3 trillion, the British economy is large, second only to Germany in all of Europe. Trade ( exports plus imports ) accounts for some 44% of GDP, suggesting that a good part of the GDP comes from trade with other countries. And as the highlighted portions of the Table 1 show, Britain’s major trading partners are leading members of the EU — Germany, France, the Netherlands, Ireland and Belgium, who account for 47% of British exports, and 34% of British imports. An exit from the EU couldpredictablycause considerable disruption in trade, and have an adverse impact on GDP.

 

These EU countries are also natural trading partners for Britain, due to their geographical proximity and economic affluence, much in linewith the “gravity theory” of trade, which says that size and proximity are strong magnets for trade. While Britain can, and should, expand its trade with fast-growing emerging economies ( Brazil, China, India, Russia, other ) British efforts are likely to gravitate towards the country’s huge, next-door neighbour, the European Union, with its 28 member states, and a population of 508 million.

 

EU and the United States, the world’s first and second largest economies,are well on course to signing a historic accord on trade, called the Transatlantic Trade and Investment Partnership. Europe’s Trade Commissioner, spoke of “how small and medium-sized enterprises could potentially benefit  from an agreement, from shoemakers in Spain who now pay tariffs of 35% on their exports to the US to a Finnish airport equipment maker who faces limits on how much it can sell in the US because of public procurement restrictions”(1).

 

Once concluded, this agreement will pave the way for the US to extend significant trade concessions to all members of the EU. Britain will stand to lose these concessions if it decides to leave the EU, leading to loss of exports and jobs. Again, to quote the European Trade Commissioner, “There are 4.7 million European jobs, thanks to exports to the US, and we want to create new export possibilities and a bigger demand for these higher-paid jobs.”  She also added that consumers would benefit from a wider choice of products at lower prices, while companies would become more competitive by being able to reduce the costs of imports.

 

Table 1 : Comparison of major economic indicators for UK and the EU
# Economic indicator Britain EU
1. GDP (Nom) : $ 2.945 trillion (PPP) $ 2.548 trillion, growth rate 2.3%, Per capita : $ 46,244 (Nom.) $18.495 trillion (PPP) $ 18.526 Trillion, growth rate 1.3%, Per capita $ 34,300
2. Sector-wise break-up Agriculture 0.6%, Construction 6.4%, Mfg. 14.6%, Services 78.4% Agriculture 2.1% , Industry 27.3%, Services 70.5%
3. Inflation(CPI) CPI 0.1%, September 2015, base lending rate 0.6% CPI 0.5%
4. Population 65 million 508 million
5. Population below poverty line 16.6% 17%
6. Labour Force 31.17 million, Employment rate 73.6%, a record high. Unemployment rate 5.4% 240.2 million, unemployment 9.6%
7. Exports $ 503 billion ( Switzerland 14%, Germany 9%, USA 9%, Netherlands 8%, France 6%, Ireland 6%, Belgium 4%) $ 3.182 Trillion ( USA 17%, Switzerland 10%, China 9%, Russia 7%, Turkey 5%, Japan 3%, Norway 3%)
8. Imports $ 783 billion ( Germany 14%, China 9%, Netherlands 9%, France 6%, USA 6%, Belgium 5% ) $ 2.902 Trillion ( China 17%, Russia 12%, USA 12%, Switzerland 6%, Norway 5%, Japan 4%, Turkey 3%)
9. Export Products Manufactured goods, chemicals, food, beverages, tobacco, automobile vehicles and components, computer programming, finance, entertainment, clothes, fuel oil and petroleum products, industrial supplies, military supplies Machinery & Transport equipment Other manufactured goods , Chemicals and related products , Food, Drinks and Tobacco , Mineral Fules and lubricants , Raw Materials , Commodities and Transactions
10. Import Products Manufactured goods, machinery, fuels, foodstuffs Machinery and transport equip- ment , Other manufactured goods , Mineral fules and lubricants , Chemicals and related products , Food, drinks and tobacco , Raw materials , Commodities and transactions
11. Current Account Balance Deficit of $ 60 billion Surplus of $ 280 billion
12. FDI Stock Inward : $ 1.421 TrillionOutward : $ 1.884 Trillion Inward : $ 4.42 TrillionOutward : $ 5.83 Trillion
13. Public Finances Budget Deficit : 4.38% of GDPGovernment Debt : $ 2.244 Trillion Budget Deficit : 2.9% of GDPGovernment Debt : $ 13.46 Trillion
Source : Wikipedia, Economy of UK, and Economy of the European Union

There is another likely consequence of Britain leaving the EU, and that relates to how Britain will be perceived by the US, its major trade and investment partner. The US perception is likely to be one of diminished influence and role for Britain in the world economy and in international trade negotiations .

There are also worries that Britain’s credit rating might be downgraded by a couple of notches, if it left the EU. Currently, Britain enjoys AAA ratings ( S & P ) on all three key dimensions — Domestic, Foreign, and Transfers/ Convertibility. However, all three credit rating majors ( S & P, Moody’s and Fitch ) have issued mild warnings that Britain could lose its triple A rating if it left the EU(2)

 

WHY DOES BRITAIN CONTEMPLATE AN EXIT AT ALL?

The rise of United Kingdom Independence Party (UKIP) during the current parliament has seen the Conservative Party promise a referendum on Britain’s membership of the EU if the party wins the 2015 election, which it has. With such strong currents of anti-EU sentiment within the country, David Cameron, the British Prime Minister, has outlined four major points of contention(3)

 

  • Sovereignty:: his demand for Britain to be given an opt-out from the EU’s historic commitment to create an ever closer union among the peoples of Europe and his call for national parliaments to be given the right to club together to block EU legislation.
  • Competitiveness: the UK’s repeated calls for the EU to complete the single market.
  • Fairness between euro-zone and non-euro-zone members.: This is designed to ensure that the non-euro-zone members, whose number could eventually shrink to two, cannot be outvoted by euro-zone members when rules are decided for the single market.
  • Migration and welfare:: his demand that Britain should be able to ban EU migrants from claiming in-work benefits for four years.

 

All these are legitimate concerns for any sovereign member of the EU. Migrants and their lack of assimilation into the local economies and cultures has often emerged as a major problem within the European Community.(eg. the recent terrorist massacres in France), not to mention the increased pressure on jobs, employment and benefits.

 

On the other hand, at Europe’s eastern gate, Syria is going through a crisis of epic proportions, throwing out millions of refugees into Europe. And even Germany, normally very hawkish on immigration, has agreed to absorb a million refugees, although Angela Merkell, the German Chancellor, seems to be paying a heavy political price for allowing immigrants on that scale. This is the kind of scenario in which one wonders whether Britain can, as a senior member of the EU, take too tough a stance on absorbing refugees. No easy answers here, with EU’s unemployment rate at close to 10%.

 

As Margaret Thatcher famously remarked when she was Prime Minister, nearly thirty years ago, Britain would not like to be ruled by a bunch of bureaucrats in Brussels. But then, history, particularly the first half of the twentieth century, during which Europe plunged the world into two major wars, argues for greater, not less, integration in Europe – political, economic, financial, other. This is a tide of history which Britain can only ignore at its own peril.

 

On the other hand, there is a growing perception in Britain that it is Germany and France that are the kingpins of the EU, that Britain somehow is not part of the inner council, and is often treated as an outsider, if not indeed as a poor cousin. A wholly unwelcome perception, which the EU needs to correct urgently.

 

The issues of competition policy, and fairness between euro-zone members and non-members, are entirely legitimate, and can and should be thrashed out at EU summit meetings.

If it comes to a pinch, Britain could consider joining the EFTA, the European Free Trade Association, in place of the EU—Britain, after all, was one of its founding members in 1960, before eventually joining the EU. But then, the problems will remain more or less the same, and there would be need for additional preparatory work by way of reworking conventions and treaties to provide a successful framework for the expansion and liberalization of trade within the EU and with the rest of the world.

WHAT ARE CURRENT ATTITUDES IN BRITAIN TOWARDS EU MEMBERSHIP?

Here are the key findings of the latest attitude survey conducted by NatCen Social Research(4)

  • Euro-skepticism has been widespread in recent years
  • Even those who feel Britain should continue in the EU would like to see EU’s powers reduced
  • Around half of those who think immigration is bad for the economy want to leave the EU compared with around one in ten of those who think it has been good for Britain’s economic fortunes.
  • Support for leaving the EU varied similarly between those who think immigration undermines vs. enriches Britain’s cultural life

No wonder, David Cameroon, is under pressureto take an aggressive stance on the question of whether Britain should continue within the European Union.

TO CONCLUDE

Britain is at a crucial stage in its relationship with the European Union, its huge neighbor to the east. That Britain needs the EU as much as EU needs Britain, will not be seriously disputed. And, as argued in this paper, Britain has much to lose by leaving the EU. On the other hand, achieving higher levels of growth and employment, remains a challenge for the whole continent, as much as it is for its member countries.

 

As is inevitable in such a massive experiment in the union of so many nation states, faulty perceptions are likely to grow on both sides of the Divide, and these need to be understood and corrected, with speed and empathy. And then, there is bureaucracy which tends to flourish like the Amazonian rain forest, and needs to be very carefully watched and weeded out, lest it choke the spirit of the Union.

 

As of now, it seems to me that the prospects of Britain continuing within the EU are brighter than those of its leaving the Union.

 

References

1 European Parliament News, 19 March 2015

2 Britain faces a two notch credit slip if it votes to leave EU, The Guardian, 29 October 2015

3 David Cameron to set out EU Demands in days” The Guardian, 29 October 2015

4 British Social Attitudes, 32nd Report, Natcent Social Research, 2015

 

About the Author

The author is Visiting Professor at three of India’s national institutes of management – Lucknow, Kashipur and Trichy. Formerly, he was Professor at the International Management Institute, at Delhi, India, and at Kiev, Ukraine.

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