Original link is here

The Guardian, London, May 14, 2015

Katie Allen, Philip Oltermann, Julian Borger and Arthur Neslen in Brussels

Growth, trade, immigration, jobs, diplomacy: what would the impact be if a 2017 referendum pushed UK towards the exit?

Going it alone: some argue that freedom from EU rules would make Britain more prosperous. Photograph: Alamy

---

David Cameron’s electoral triumph has brought the prospect of a British withdrawal from the EU one step closer. The prime minister has vowed to reshape Britain’s ties with Europe before putting EU membership to a vote by 2017.

But what would “Brexit” – a British exit from the 28-nation EU – look like? Eurosceptics argue that withdrawal would reverse immigration, save the taxpayer billions and free Britain from an economic burden. Europhiles counter that it would lead to deep economic uncertainty and cost thousands, possibly even millions, of jobs.

Our writers have drawn on the best available expertise to assess what Brexit would mean for growth, jobs, trade, immigration and Britain’s position in the world.

The broad economy

There have been a few attempts to quantify what an exit from the EU would do to the size of the UK economy, despite the obvious pitfalls of trying to put a figure on a hypothetical situation that has a number of variables – such as what sort of trade deals are negotiated post Brexit (more of that below). Given the range of potential post-Brexit circumstances there is a broad range of estimates. Some argue the economy will suffer permanent losses on the back of weaker trade and investment. Others say freedom from the rules, as well as the costs, that come with EU membership would make Britain more prosperous.

Starting with the estimates that leaving would be a net loss to the UK economy, one analysis often cited is from researchers at the National Institute of Economic and Social Research in 2004. They found an exit from the EU would permanently reduce UK GDP by 2.25%, mainly because of lower foreign direct investment. That estimate is now old and, as the thinktank’s current head, Jonathan Portes, has pointed out, the world economy has changed considerably in the past decade.

Another analysis by economists at the Centre for Economic Performance (CEP), part of the London School of Economics, calculated the UK could suffer income falls of between 6.3% to 9.5% of GDP, similar to the loss resulting from the global financial crisis of 2008-09. That is under the researchers’ pessimistic scenario, in which the UK is not able to negotiate favourable trade terms. Under an optimistic scenario, in which the UK continues to have a free trade agreement (FTA) with the EU, losses would be 2.2% of GDP.

Overall, the authors state:

Our current assessment is that leaving the EU would be likely to impose substantial costs on the UK economy and would be a very risky gamble.

There have also been attempts to collate various pieces of research on how much a Brexit would cost, and come up with an educated guess of what is at stake. This was the approach of business group the CBI, which has lobbied for the UK to stay within a reformed EU. It said in November 2013 that by aggregating research already available it has came to a “conservative” estimate that the benefits of EU membership amount to 4-5% of GDP, or as much as £78bn a year, making each household £3,000 better off.

In between those who see a net loss or a net gain from Brexit, are those keen to stress the economic consequences could go either way. The thinktank Open Europe noted in March, for example, that an exit might boost UK GDP under certain circumstances. It said:

On the one hand, UK GDP could be 2.2% lower in 2030 if Britain leaves the EU and fails to strike a deal with the EU or reverts into protectionism. In a best-case scenario, under which the UK manages to enter into liberal trade arrangements with the EU and the rest of the world, while pursuing large-scale deregulation at home, Britain could be better off by 1.6% of GDP in 2030.

There is similarly a more nuanced analysis from economist Roger Bootle in his book, The Trouble with Europe (2014). His perspective is that the EU is not worth staying in without fundamental reform. But Bootle cautions against boiling the argument on either side down to numbers. His useful analysis on the UK money flowing to Brussels underlines that warning.

In 2012, the UK economy made payments of £16.4bn, just over 1% of GDP , to EU institutions, says Bootle. On the other hand, the UK government received a rebate on its contributions to the EU budget of £3.1bn and £0.9bn in other receipts. The private sector received £2.9bn from EU institutions. So overall, the UK paid a net £9.6bn into the EU, about 0.6% of nominal GDP. He concludes:

These are not the sort of sums on which the fate of great nations depends – nor on which momentous decisions about EU membership should be made.

The pro-Europe thinktank, the Centre for European Reform (CER), says that although the UK is a net contributor to the EU, after Brexit the country would face pressure to replace EU regional funding and agricultural subsidies with domestic spending. There would also be a dent to the public finances if immigration is cut upon exit, given migrants are large net contributors to the Treasury and rejuvenate Britain’s ageing population, according to a report by a CER commissionlast year.

Finally, there are the voices noting the costs to the UK of EU regulations.

Tim Congdon, economist and runner-up in Ukip’s 2010 leadership election, publishes an annual report for the party on what he sees as the costs of being in the EU. His latest edition again highlighted the “damage that excessive and misguided regulation is doing to British business, particularly to small- and medium-sized businesses” and concluded:

The UK is roughly 11.5% of GDP – about £185bn a year – worse off because it is a member of the EU instead of being a fully independent sovereign nation.

Jobs

The Liberal Democrat leader, Nick Clegg, has been quick in debates to reach for a jobs number when arguing for the UK to stay in the EU. He has in the past claimed that 3m jobs depend on British membership of the EU.

As the Guardian has reported previously, in a detailed reality check of Clegg and Nigel Farage’s radio debate last year, the Lib Dems said the EU safeguards British jobs because it provides access to a market of 500 million consumers and because Britain’s membership attracts foreign firms keen to be part of that market. Then like now, those politicians supporting EU membership cite business bosses who say they may take their companies out of the UK in the event of a Brexit.

Firms that have contemplated scaling back in the UK in the event of a Brexit include food maker Nestlé, car companies Hyundai and Ford, and US investment bank Goldman Sachs.

Two sectors get particular mention: the car industry and financial services.

On the first, the Society of Motor Manufacturers and Traders (SMMT) has argued Europe is fundamental to the success of the UK automotive industry, a sector employing more than 700,000 people and accounting for 3% of GDP. A report for SMMT by consultants KPMG last year argued:

The attractiveness of the UK as a place to invest and do automotive business is clearly underpinned by the UK’s influential membership of the EU.

In the broader manufacturing sector, business leaders make the case for the boost to UK businesses, and therefore employment, from EU money that funds research and development here. The manufacturers’ organisation EEF says the EU invests £11bn a year on innovation programmes, of which 15% is invested in the UK.

In financial services, 250 foreign banks employ 160,000 people in the UK, according to lobby group TheCityUK 2014.

Its chairman, Gerry Grimstone, said alongside TheCityUK reports into EU membership last year:

Our research clearly shows that leaving the EU would seriously damage economic growth and jobs in the UK. But the EU can and must be improved. It must not interfere in things which it does not need to do and it must make a better job of doing the things it has to do. We need to continue saying this loudly and clearly. London is Europe’s financial centre so there is a strong national interest in getting this right.

But a large dose of caution is needed. First, even though company bosses have raised this as an issue, there are no guarantees they would leave in droves. Second, talking about a certain number of jobs being dependent on the EU is misleading. Implying millions of jobs would simply disappear is downright mischievous.

The free market thinktank, the Institute of Economics Affairs, makes this point in its paper The EU Jobs Myth. Author Ryan Bourne comments:

Politicians who continue to claim that 3m jobs are linked to our EU membership should be publicly challenged over misuse of this assertion. Jobs are associated with trade, not membership of a political union, and there is little evidence to suggest that trade would substantially fall between British businesses and European consumers in the event the UK was outside the EU.

He also notes the UK labour market is dynamic and so would adjust:

It would adapt quickly to changed relationships with the EU. Prior to the financial crisis, the UK saw on average 4m jobs created and 3.7m jobs lost each year – showing how common substantial churn of jobs is at any given time. The annual creation and destruction of jobs is almost exactly the same scale as the estimated 3-4m jobs that are associated with exports to the EU.

Trade

This area is fraught with assumptions that are so broad as to have fuelled a chain of claims and counter-claims on what a Brexit would mean for the UK’s exports.

Nigel Farage makes the argument that by withdrawing from Europe, the UK frees itself from EU rules and regulations, and will make its way in the world as a strong, independent trading nation, looking to faster growing markets such as Brazil and India.

Those most passionately opposed to a Brexit, meanwhile, say leaving the EU would shut the UK out of its most important market (the EU) and from other markets around the world that have trade agreements with the EU (but not with the UK in isolation).

Again, the most likely outcome is somewhere in between these scenarios. Much depends on what a UK government could negotiate once outside the EU.

The latest survey of about 3,500 businesses by the British Chambers of Commerce highlights this. More than half of businesses (57%) believe that remaining a member of the EU, with more powers brought back to Westminster, would be positive. However, 28% of firms also view withdrawal combined with a formal UK-EU free trade agreement as a positive scenario. But only half that proportion, 13%, view withdrawal without such an agreement as positive. This chart sums up responses:

Business attitudes to EU options

The British Chambers of Commerce asked businesses whether various scenarios would have a positive impact on them. More than half of businesses (57%) believe that remaining a member of the EU, with more powers brought back to Westminster, would be positive. However, 28% of firms also view withdrawal combined with a formal UK-EU free trade agreement as a positive scenario. Only 13% view withdrawal without such an agreement as positive. The group received about 3,500 responses for the survey, conducted in November and December last year. Illustration: BCC

---

Before considering how a post-Brexit trade picture might look, it is worth getting an idea of how things stand now.

Office for National Statistics data show that goods exports to the EU were worth £147.9bn in 2014, compared with £154.6bn in 2013. Goods exports to non-EU countries were £144.9bn in 2014, down from £152.2bn in 2013.

The UK’s top six export trading partners are the US, Germany, Netherlands, France, Ireland and China, according to the latest figures [spreadsheet download]on goods exports (for the three months to the end of February 2015).

But considering only goods trade, on which figures are more readily available, overlooks the importance of services – the UK’s dominant sector. The UK’s trade in services, which covers areas such as IT and accountancy, ranks second behind the US in terms of its share of global exports, according to a report from the forecasting group EY ITEM Club.

In The Trouble with Europe, Bootle tries to assess what this all means for the UK economy. Looking at goods and services exports as well as what the UK earns on overseas investments, the proportion of total receipts from abroad that come from the EU is just over 40%, Bootle says. Although this probably exaggerates the true importance of the EU in British trade, says the economist, given distortions to the figures from factors such as UK companies exporting to ports in the EU only to re-export beyond the region.

Shipping containers at Felixstowe container port, Suffolk. Photograph: David Levene for the Guardian

---

On what would happen after a British exit from the EU, Bootle is quite upbeat. The UK is the rest of the EU’s largest single export market, he notes, something that increases the chance of the UK securing a free trade agreement with the EU. Failing to get such an agreement would not be disastrous, he adds.

It would place the UK in the same position as the US is currently in, along with Indian, China and Japan, all of which manage to export to the EU relatively easily.

Some argue that the UK would get a boost from re-focusing its exports on faster-growing, emerging economies outside the EU. This was the position taken by Iain Mansfield, the winner of last year’s €100,000 IEA Brexit prize (which asks entrants to submit a blueprint for Britain outside the EU). He said that after an exit, the UK should pursue free trade agreements with major trading nations, deepen its engagement with organisations such as the G8, G20 and OECD and in Europe, and secure open trade relations. Mansfield found fewer regulations, coupled with greater trade with emerging economies, could provide an overwhelmingly positive outlook for an independent Britain.

He concluded:

Although the years immediately surrounding the exit are likely to feature some degree of market uncertainty, if the right measures are taken the UK can be confident of a healthy long-term economic outlook outside the EU.

But the UK’s ability to negotiate favourable trade deals is not a given. The Centre for European Reform warns trade costs would rise after a Brexit and the UK would have less bargaining power for trade agreements than it does as part of a bigger entity, the EU.

Business for New Europe [pdf], a coalition of business leaders pushing for the UK to stay in a reformed EU, is similarly sceptical about post-Brexit bargaining clout. It says:

There are a number of free trade agreements currently being negotiated by the EU, including with the US and Japan. The UK with 65 million consumers would not have anywhere near the negotiating power that the EU with its 500 million consumers would have.

The CBI foresees tricky negotiations if the UK wants to keep its current trading conditions after an EU exit.

The business group’s deputy director general, Katja Hall, says:

While we could negotiate trade deals with the rest of the world, we’d have to agree deals with over 50 countries from scratch just to get back to where we are now, and to do so with the clout of a market of 60 million, not 500.

Katie Allen

Immigration

Ukip’s 2015 manifesto claims leaving the EU would allow Britain to “take back control of our borders”.

But would it? For a start, fewer people come to live and work in the UK from within the EU than from the rest of the world. 624,000 people immigrated to the UK in the year to September 2014, up from 530,000 the year before. The majority of them – 292,000, up by 49,000 – came from outside the EU and would already have been subject to complex visa restrictions. Some 251,000 people moved to Britain under the EU’s looser free movement rules, an increase of 43,000 over the previous 12 months.

Until it is clear what kind of new arrangement with the EU will replace the current terms of memberships, it is hard to say how the latter group can be “controlled”. Many experts view it as likely that British access to the single market will come at the price of a free movement arrangement similar to the one that is in place now. Norway, which is not in the EU but is a member of the European Economic Area, serves as a warning to enthusiastic “outers”: as a recent study by Open Europeshowed, in 2013 Norway was the destination of more than twice as many EU migrants per head as the UK.

Yet until such a replacement arrangement is put in place, migration in and out of the UK could theoretically be regulated purely by British national law. In such a scenario, moving to Britain would become considerably harder than it is now: EU citizens would face the same kind of long queues and border checks upon entering the UK as “third party” nationals.

UK Border Force officers check the passports of passengers arriving at Gatwick airport. Photograph: Oli Scarff/Getty Images

---

Border staff would need to establish whether new arrivals meet the requirements for entry, requiring proof of income, intention to return and lack of intention to work. Those planning to stay for longer would need to present proof of employment – posing as a major disincentive for those in industries with low job security, such as the arts. At universities, EU nationals would have to pay full tuition fees and would have no access to student loans.

Britain draws up its own list of countries whose citizens need a visa to enter the country. In theory, it could make poor Bulgarians and Romanians fill in lots of forms before arrival, while allowing rich French and Germans to visit the UK relatively hassle-free. The problem with this, as Steven Peers, a professor of EU law at the University of Essex, points out, is that the EU has its own joint visa list:

The general rule is that if a country like Britain were to cherrypick and discriminate against individual EU member states, the EU would at least threaten to retaliate.

Potentially, Brits would end up having to apply for visas every time they travel across the Channel. Brits already living in other EU countries such as Spain may face integration rules, such as a requirement to speak the language of the host country, before gaining long-term residency status.

Within Britain, the border between Northern Ireland and the Irish Republic would by default become the obvious “back door” for entry into the UK from the EU, and some Irish commentators have said this would inevitably lead to the introduction of stricter passport checkpoints and customs controls on one of the most politically sensitive dividing lines in the country.

Philip Oltermann

Status in Europe

A consensus holds that a Brexit would diminish the status of the UK and EU alike, by varying degrees.

If the dominant mood in Brussels remains “one of extreme irritation with Cameron, almost bordering on contempt”, as Roger Liddle argued in The Risk of Brexit – as seems inevitable – few favours will be offered.

A relatively rich offshore supplicant knocking on the doors of the single market would be ripe for caricature along the penny-pinching, antisocial and racist lines that Eurosceptic sentiment inspires.

Jacques Delors and Pascal Lamy may twinkle at the thought of an Efta-style free trade agreement with Albion, but the terms would probably be prescriptive. In that case, a need for new scapegoats in the UK could further erode its reputation,Fabian Zuleeg, head of the European Policy Centre, believes.

A more optimistic scenario sees the UK overtaking Germany as the most populous country in Europe by the 2040s, and channeling transatlantic influence as one of the EU’s biggest trading and political partners. But even Tim Oliver of the Center for Transatlantic Relations at Johns Hopkins University, who advances this vision, says the UK would be a junior partner, dependent on the caprices of European institutions, trying to negotiate bilateral free trade deals from a position of weakness.

David Cameron watches while Luxembourg’s prime minister, Xavier Bettel, left, speaks with Dutch prime minister, Mark Rutte, second left, and Belgian prime minister, Charles Michel, centre, during a roundtable meeting at an EU summit in Brussels. Photograph: Geert Vanden Wijngaert/AP