However the debate of the last few years has now clearly revealed how costly it could be to us, in the form of increased economic volatility, ‘boom and bust’ in the Chancellor’s phrase. The recent experiences of Germany and Ireland within the euro-zone have borne witness to the problems the UK would itself experience. As a trading nation with over half our trade (inclusive of services and investment earnings) with the dollar area (Figure 3), we would be particularly destabilised by the fluctuations of the euro against the dollar, over and above our inability to set our own interest rates. Ironically, we would not even achieve currency stability, the main aim of our membership, for this very reason: that by joining the euro we would increase instability against the dollar. Indeed we find that our overall currency instability remains about the same. Moreover, there are almost no instances in modern times of a newly formed fixed exchange rate regime surviving for more than five years- which doesn’t necessarily mean the Euro is certain to fail only that there is a greater element of doubt. Indeed the Euro may be a recipe for economic stagnation and higher structural unemployment if the European Central Bank pursues a deflationary monetary policy for Europe at odds with the needs of the domestic UK economy.
If the single currency is a disaster, and the UK is still not in, business in the city could soar. And in addition the Bank of England will retain its power to set interest rates and can adjust the level of interest rates to the specific needs of the British economy.
A commonly argued point in favour of joining the eurozone is lower unemployment (the result of greater growth and mobility of labour). Under the Charter of Fundamental Rights incorporated in the current Constitution, EU policy could take the UK back to the 1970s in terms of rights of collective bargaining and the unions- harmonisation of a particularly damaging sort. Using the Liverpool Model of the economy (Minford, Should Britain Leave The EU?, 2005) of the effects of such policy changes we can examine what might be the effects of these policies which amount to the (reversal of reforms from 1979). On the assumption of rather moderate changes (a minimum wage raised to 50 per cent of male median wages, union power restored to mid-1980s levels, social cost rises worth 20 per cent of current wages), the model predicts that they would raise unemployment by 5.7 per cent – that is 1.8 million – and cost us 6.4 per cent in reduced output- Figure 4. It could of course be either more or less depending on just how extensively this harmonisation was pursued; but the Constitution indicates clearly enough that what we have seen so far – including the working time directive, the social chapter and the works council directives – is just a beginning.
In the 1970s and 1980s another mechanism through which the member states of a customs union may benefit was put forward. It relies on the idea of economies of scale would increase production, restructure the industry into a smaller number of plants and make surviving firms bigger and more efficient (Smith, 1988)- estimations of the gains are put at €174–258 billion (Cecchini, 1988). Any barriers between the member states that limit cross border trade thought, would prevent scale economies from being achieved. The argument stands however that the creation of large “Euro-firms” can form a lack of competition, which could lead adversely to higher prices (this scenario is dependent on how effective EU contestable market policy is). The presence of scale economies would encourage firms to choose one location and the presence of transport costs would encourage them to locate in the country that has a relatively large market for their goods (Krugman, 1980).
As I afore stated firms will be encouraged to locate in one place, in a way, the “Euro CBD.” One could consider the adverse regional multiplier effect- firms would be attracted away from the edges of the UK to the south or even France or Germany, a more central position within the EU. In a perfect situation, this would not be a cause for concern as these edge-pockets of skilled labour and relatively lower costs should attract firms. However it is more likely that the skilled work force will have migrated elsewhere and the areas will be left even more depressed. Furthermore, one argument for the EU is the right of labour mobility, the extent of this is out of proportion if one is to consider the language barrier only then it is apparent that this is not beneficial for the British people. The British workforce is fairly immobile as it is just across the UK.
The UK differs very much from the rest of the EU, as was apparent in HM Treasury’s, so far, 18 reports- each shows how different our business cycles are from the EU and more in line with that of the US. Not only is the lack of convergence an issue the lack flexibility to cope with economic change would be likely to destabilise the UK economy (Spencer, 1985). More UK borrowing (corporate and consumer) is undertaken in the short-run, variable interest rate terms than in the EU; in fact UK consumers borrow more than most eurozone countries, which funds the housing market. The housing market far more significant in the UK (greater proportion of owner-occupiers) - changes in interest rates therefore would affect the UK more. A final difference is that the UK is still a major exporter of oil so its economy is influenced more, than the EU who are importers of oil, by changes in the world price of oil.
This leads me to the biggest objection: the loss of national sovereignty to the EU. Intervention in our own economy will be very difficult and in the worst case scenario, the cost of “bail out” is still too high- NIESR concluded a loss of 3-4% of GDP. Despite the amendments in the EU constitution, difficulties will be hard to manage. One prominent potential cause of the need for “bail out” is pension deficits. If we take these 1995OECD projections as illustrative at least, the projected deficits as a percentage of GDP come out at Germany 10 per cent of GDP by 2030, Italy about the same, and France a little bit less. Add up these deficits as a percentage of UK GDP, which is of similar size to each of these 12 Costs and Benefits of UK Membership of the EU countries’, and you come to some 30 per cent. If we were to pay a quarter of that, suppose we were via some federal system to be asked to ‘share the burden fairly’, then the bill would be some 7 per cent of GDP (OECD).
Overall it is clear that costs outweigh the benefits, in time the five tests may prove to become directing towards membership. The referendum is likely to continue to produce a “no” vote, however the City appear to be edging toward a majority yes. The substantial potential future costs of harmonisation, pension sharing and euro membership could escalate to very much larger sums than those currently being faced. And as I’ll discuss in the next report many of the benefits are obtainable outside of the EU.
3. The most striking thing about the eurozone is huge costs to the UK (and Continental) citizens, on top of everything currently paid. And this all occurs against the background of an alarming deterioration in the public finances of France, Germany and Italy; the fact that their current budget deficits have breached the stability and growth pact can be put down mainly to cyclical reasons — far more serious is the prospect of massive state pension deficits, rising to more than 5 per cent of GDP by around 2050. It is now rather plain, even to UK public opinion which has hitherto hoped that an integrationist agenda would be quietly forgotten, that the majority of our EU partners are set on rapid and considerable integration: the adoption of the euro has been followed by demands for policy coordination, harmonisation and burden-sharing. These demands are consistent with the generally interventionist and dirigiste ideas of EU policy makers. They pose serious potential risks for the UK.
The UK would be worse off inside the euro: there would be greatly increased volatility and there would be no compensating benefits. Hence the UK’s opt-out will continue to be essential. As far as one can tell, the opt-out is not specifically threatened by the draft constitution; however, it is not easy to tell as a variety of clauses about ‘policy coordination’ could be interpreted as implying that all EU members should be in the euro (BBC).
With regards to the pensions problem I draw the data from the OECD pensions report:
This paper usefully also looks at more optimistic possibilities:
1. Increase of the retirement age by 1 year (from the assumed age of 63). This reduces the 2050 projected deficit by 0.3 per cent of GDP and the present value of deficits by 12 per cent of GDP.
2. Doubling of net immigration; this reduces the 2050 projected deficit by 1 per cent and the present value of deficits by 13 per cent (all of GDP).
3. A rise of 0.5 per cent per annum in productivity growth: the 2050 deficit falls by 0.8 per cent, the present value by 2 per cent.
4. A fall in real interest rates by 1 per cent (to 3 per cent per annum): this increases the present value of deficits by 18 per cent of GDP.
However, the difficulty with this ‘solution’ is the lack of employment in the EU context. To implement later retirement one has to create equivalent jobs. Yet this presupposes a flexible labour market capable of this job creation.
The UK should leave the EU’s protective agreements altogether– the CAP, tariffs and anti-dumping and all else – and resume unilateral free trade. The agreement would place the UK outside the EU’s protective arrangements; non-discrimination would be agreed, so that we would have the same access to the EU market as any WTO non-EU member and EU members would have the same free access to the UK market as any WTO member. If there were any doubt about the good faith of the EU in pursuing non-discrimination, then the UK should also join NAFTA to create countervailing power in the event of traded disputes. NAFTA allows each member to pursue its own trade agenda, provided it allows other NAFTA members free access in agreed trade areas. It would therefore be entirely consistent with the UK’s free trade policy. (Minford, Patrick Minford, 2006)
In the area of services, the UK already largely has free trade and free market entry. Here the single market could bring about competition within the EU through the discussions going on area by area. The UK has nothing to lose by participating in these discussions; and to the extent that residual UK barriers could be dismantled in particular areas, the UK would actually gain. Therefore, the UK should stay in the discussions on the single market for services, cooperating on a case-by-case basis to create new agreements. Existing competition agreements as for airlines would be kept to.
Freedom of movement of capital and labour has already been established and brought benefits. The UK should continue in these arrangements. In other areas – such as competition policy, economic consultations, coordination of anti-terrorist policies – the UK would continue to participate but by specific and limited agreements in each area. The ‘social dimension’ of the EU, including the working time directive imposed for ‘health and safety’ reasons under the single market laws, would be abrogated in the UK. Finally, EU law would no longer be binding on the UK. Instead, only those agreements explicitly made with the EU would be, as any Treaty obligation, incorporated into UK law.
The UK must protect itself against this situation as it threatens immense economic costs to the UK. Plainly at the very least the UK must resist new incursions into its economic policies — notably the draft Constitution, the euro, new efforts at harmonisation and any demands for bail-out. However this essentially defensive posture would still leave the UK not only paying large existing costs but also vulnerable to opportunistic ambushes establishing elements of the above. Hence it is inadequate to safeguard the UK’s interests. Our suggestion therefore is that of a ‘UK protocol’ under which the UK would withdraw from elements of these EU policies — essentially to unilateral free trade while maintaining the underlying freedoms of movement of labour and capital of the EU and also aspects of the single market, notably in services as they come to be deregulated over time. It is hard to judge in the end whether other EU members would go along with this. Should there be no willingness to do so, then it would be in the UK’s interests to leave the EU and unilaterally pursue liberal policies, including towards members of the EU. We have shown in these pages that on the assumption that the EU would impose on the UK all the external barriers it now levies on other non-members the UK would be considerably better-off by following this course.
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