Buttonwood’s notebook | EU referendum

The arguments for voting Remain

Being part of a continent-wide free market is good for Britain. The alternative vision of the Leave campaign lacks convincing detail

By Buttonwood

THE opinion polls seem to indicate that Britain will vote to leave the European Union on June 23rd. And the gambling markets, which many investors rely on as the “true” signal, are moving the same way. So it is time for this blogger to take one last chance to argue the case for Remain.

Let us start with the positive case. The EU was set up (as the common market and then the EEC) in the wake of two world wars that devastated Europe’s economy and left the continent divided between east and west. It has succeeded remarkably, so much so that former Communist countries queued up to join. The right to work and live in the EU is a freedom that 1.3m Britons currently take advantage of (and something our children can still benefit from).

Britain initially stood aloof from the project but then spent a decade trying to join, as its poor economic performance became clear; between 1946 and 1965, British GDP per capita grew at half the rate of other industrialised countries. Since joining the EU, Britain’s relative economic performance has improved; GDP per capita has grown faster than France, Germany and Italy since 1973. Is this all down to the EU? Probably not. But it is hard to argue, as some do, that the EU has damaged British growth.

The EU is also a political force in the world; a club of democracies that gives Britain enhanced status at the global negotiating table. None of our allies, in or out of the EU, want Britain to leave. For all the nostalgic talk of an economic alliance with the Commonwealth, the Indian prime minister, Narendra Modi, has made it clear he wants Britain to stay.

The single market, something that Margaret Thatcher lobbied for as being to Britain’s economic advantage, allows our companies to trade across the EU on the same basis as all other companies. Currently, 44% of our exports go to the EU, and 48% of foreign direct investment into Britain comes from the EU.

Will all that disappear with a Brexit? Clearly not. But it will be adversely affected. This is from an Ernst & Young survey of foreign direct investors (the companies that build factories and offices here) last year:

With 72% of investors citing access to the European single market as important to the UK’s attractiveness, the referendum has the potential to change perceptions of the UK dramatically, posing a major risk to FDI. Our survey indicates that 31% of investors will either freeze or reduce investment until the outcome is known.

What about the Leave campaign’s arguments? The first is that Britain is overregulated because of EU membership. But that isn’t what international comparisons show (see chart). The World Bank’s survey on the ease of doing business ranks Britain sixth, one spot above the US.

Nor is it clear what regulations the Leave campaigners want to scrap; a Daily Express list of the eight worst EU rules includes one on the prevention of cruelty to animals in transport and another on the elimination of excessive packaging, things most Britons would like to see controlled. When the Leave campaign talks of scrapping rules, they may well mean regulations that protect workers; something they don’t mention for fear of alienating their working-class support. At long last, the Labour party and trade unions are waking up to this.

On sovereignty, all international arrangements including NATO and the WTO involve its pooling. It is a fantasy to think that Britain can tackle the big problems that face us all—terrorism, climate change, tax evasion, cybercrime—without co-operating with others. And co-operation means compromise, and compromise means we won’t always get what we want. In a globalised world, Britain is affected by American interest rate policy, Chinese economic policy, Saudi oil production decisions and all the rest; it is a fantasy to think we can “take back control”. No-one has control.

Then there is the question of the EU budget contribution. Leave has used the £19 billion, or £350m a week, figure which the head of the Statistics Authority has twice slammed as “potentially misleading”. A rebate is applied before Britain sends the money to the EU and then around £5 billion comes back in the form of regional grants and industry subsidies. The remaining contribution is around 1% of government spending. And the IFS, a body that every politician has been happy to quote in support in the past, estimates that the hit to British tax revenues in the event of Brexit will be much larger than £8 billion. There will be no “extra money” to spend, on the NHS or anything else.

How can anyone know this, you might ask? Of course, no one can be certain of the future. But the bodies that have analysed this—the Bank of England, the IMF and OECD—all cite a hit to economic activity, assuming other things remain equal. Some will say that these experts have been wrong before. But what is the alternative? A blind faith in the assertions of the Leave campaign, and the likes of Boris Johnson, who said the pound rose when sterling left the Exchange Rate Mechanism—when in fact it plunged. He can’t even get the past right, let alone the future.

The hit to economic activity will come from investor uncertainty (as we work out what trade deal to do with the EU) and from the potential for trade to fall. Another problem with the Leave campaign is that it is not clear what kind of relationship Britain will have with the EU post-Brexit. Membership of the European Economic Area will, like Norway, involve making a contribution to the EU Budget and freedom of movement. Most MPs may favour that but voters may not; the result could be constitutional chaos. Outside the EEA, Britain’s access to the EU would not be as good, particularly for services, the area where British trade is strongest.

Nonsense, says the Leave campaign. The EU will still want to sell us goods. It will. But the United Kingdom is a less important market for the EU than the EU is for us (Jonathan Portes reckons Britain is around 16% of EU goods exports). Any small businessman who has a customer who buys half his output will know where the power in the relationship lies. The EU will not want to offer Britain a special deal, for fear of encouraging leavers and discouraging remainers in other countries. They have said this repeatedly. To assert otherwise is to gamble recklessly with the livelihoods of British workers.

Finally, we come to immigration, which may be swaying the most votes. It is sad that immigrants who play such a positive role in the Britain are being so derided; especially when they make a net positive contribution to public finances. (That is quite a feat when Britain has a big deficit; the rest of us take out more than we put in.) Yes, there are local problems when services get stretched but that is something the British government should be tackling with more resources. Nations that welcome immigrants have prospered; in the early modern era, the British economy took in Huguenots and others fleeing persecution to help establish the textiles industry.

This is perhaps the most dishonest part of the whole Leave campaign. Here are a bunch of largely free-market Tories arguing that governments should decide which workers companies should employ. Instead of sweeping away regulations, a points system would involve the imposition of new ones. In any case, last year slightly more people came to the United Kingdom from outside the EU than from within it. Eliminating all EU migration will not get the total down to the “tens of thousands”.

On security, it is just a blatant lie that Turkey will join the EU in the foreseeable future; joining the EU means signing up to norms on democratic freedoms. Turkey is heading in the opposite direction. Nor has the campaign dealt with the problem that “controlling our borders” is incompatible with the current arrangements in Ireland, where there are no controls. Either we will have to impose border controls or we will have to sublet those controls to the Irish. The Irish have free movement within the EU; so any EU citizen can currently drive over the border. And what happens if Scotland leaves? The choice will be border controls at Carlisle or letting another nation be in charge of our border.

In summary, membership of the EU, while not perfect, has seen our prosperity (and freedom to travel and work abroad) grow. We put all that at risk if we leave, on the basis of some vague plans from the Leave campaign that are misleading and contradictory. The current action in the markets—the pound and shares falling, and bond yields pricing in recession—show that this is not merely the assertion of “experts” but what people who have to stake real money think will happen to the United Kingdom in the event of Brexit. Remain is clearly the better option.

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