WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Local elections have just been fought in the United Kingdom and now the way is free for the historic vote on 23^rd June on whether the UK should remain in the EU or leave. This is a momentous vote not just for the UK but for the European integration process as a whole; in fact I shall argue that the negative repercussions of a #BREXIT vote will be greater for the EU than for Britain itself.

But we are not there yet: current opinion polls still indicate a higher share of votes for ‘STAY’ (46%) compared to ‘LEAVE’ (43%), but this can be seen as a small margin. If some nasty stories appear in the British media over the next few weeks (e.g. around the refugee issue, continued squabbling amongst EU leaders, bungling of international relations issues e.g. with Turkey, unpopular policy developments such as with TTIP), the votes might very well flip.

In the following I discuss the issues which characterise the debate in Britain in the current referendum; I order them according to how important I judge them to be for the outcome of the vote:

Impact on the economy

The evaluation of the economic impact of BREXIT for the UK economy occupies a central place in the debate not only amongst experts but also with the general public.  

An important issue regarding the ‘costs’ of leaving the EU is whether it means leaving the Single Market and, if yes, which new relationship would emerge between the EU and the UK. A lengthy report issued by the UK Treasury (UK Government, 2016) assessed the different options of leaving the EU: the first option would be the ‘Norwegian option’, i.e. membership of the EEA, which de facto means remaining in the Single Market but without having any say in its further development. This option has now been mostly dismissed by the ‘Leave’-campaign as it would in all likelihood mean that the UK would still have to adhere to the ‘Four Freedoms’ including the free movement of people. Further, it would also mean continuing to pay into the EU budget. As two of the central demands of withdrawing from the EU are to take ‘control of borders’ and thus of intra-European migration and mobility, as well as ending UK’s contribution to the EU budget, the Norwegian option has been dropped.

This leaves two other options: one, similar to Switzerland, would be a negotiated deal which all EU members have to individually support. The other would simply be to – initially at least – fall back in relation to the EU to having WTO membership status.

The most likely outcome would be a negotiated deal and here the two sides disagree on the relative bargaining power of the UK vs. the EU on the likely content of such a deal. The ‘Leave’-campaigners point to the interest of EU members – particularly Germany, which has a substantial trade account surplus with the UK – to offer the UK rather good conditions. The ‘Stay’-campaigners, on the other hand, emphasise that such deals will take a very long time to negotiate (see the lengthy negotiations with Switzerland or, more recently, with Canada) which means that in the meantime the UK could face substantial tariff and non-tariff barriers. Further, in the negotiations individual countries will push their individual interests so that a free trade deal will be significantly watered down. The recent negotiations with Canada on a free trade deal also excluded financial services, which is a vital UK interest. Finally, the EU would want to take a rather tough stance in these negotiations in order to demonstrate that any further current EU member contemplating exiting the EU will be aware of its costs.

The long-term trade arrangements are, of course, important for the attractiveness of the UK for foreign investors who see the UK as a gateway to the rest of the EU and rely on its membership of the Single Market. The emergence of substantial tariff or non-tariff barriers (including a differentiation in technical standards and regulations) would make the UK a less attractive place to invest in. There would also be a major upheaval in the City of London as the non-applicability of certain EU regulatory structures would prevent significant operations to be conducted from London. Any further evolution of regulations regarding financial services in the EU would no longer be influenced by the UK and this could also be seen as a potentially major disadvantage for the City of London.

Apart from the long-run arrangements, there is a dispute about the short-term costs: the ‘Stay’-campaign points to a period of substantial uncertainty that would lead to delayed private sector investment and capital flight in expectation of a major devaluation of the Pound Sterling. Such uncertainty could be protracted, as an exit also would be accompanied by major disarray in the ruling Conservative party.

All these concerns are countered by the ‘Leave’-campaign, stating – without any substantial analytical work backing up these claims – that current EU regulations are simply stifling UK business, that the UK could negotiate its own trade deals with countries all over the world and that fears of short-term disarray are highly exaggerated. The Treasury Report (see UK Government, 2016) – accused by the ‘Leave’-campaigners of partisanship – came up with the following estimates of the longer-run (level) impact on GDP depending on which of the different options was chosen:

Option 1:  EEA (like Norway) ..... -3.8%

Option 2: Bilateral agreements (like Switzerland or Canada) ..... -6.2%

Option 3: WTO membership (like Brazil or Russia) ..... -7.5%

Overall, most commentators are sharing the opinion that on the issue of the ‘economic cost’ of BREXIT, the ‘Stay’-campaigners are making the stronger case, and this side of the argument would be in their favour. The opposite holds with the next issue.

Migration

Migration flows are – as in most European countries – a highly sensitive issue in the UK. The population blames the last Labour government for having vastly under-estimated the impact of EU Enlargement on migration flows to Britain. The net migration flows have reached over 300,000 per annum over the past years and about half of these flows come from within the EU. Thus the argument brought forward by ‘Leave’-campaigners is that Britain has lost control over about half the net inflows due to the Free Movement of Persons component of membership of the Single Market. Further, due to the free inflow of EU citizens, the extent of immigration had to come down one-sidedly on non-EU would-be migrants and this constrained migration policy to allow for an optimal mix that would include migrants from the rest of the world.

The ‘Stay’-proponents are rather defensive on this issue. They argue that free mobility of persons is a necessary component of being a member of the Single Market and the economic benefits of this membership outweigh the possible costs of reduced control of migration policy. Economists (Dustmann, 2011; Portes, 2016) also point to the overall benefits of migration to Britain’s economy: There is not much evidence of significant labour market disturbances, migrants from EU countries are net payers to the social security system, contribute significantly to the dynamism of the economy, etc. But these arguments are less powerful in the debate than the worry of loss of sovereign control in this vital area and the experience of congestion on housing, educational and health infrastructure that are strongly perceived by the population.

Thus the migration issue is the solid card in the ‘Leave’-campaign’s hand, even though its two pillars – the explicitly anti-immigrant UKIP party and the more aloof set of Tory campaigners including the popular and eccentric ex-mayor of London Boris Johnson – do not play this card in the same manner.

Sovereignty and democracy

This is the other issue that plays into the hands of the ‘Leave’-campaigners. Britain is one of the (few) countries in Europe – Switzerland probably the other main example – where there is a great deal of legitimacy underlying its democratic traditions and institutions. Any shift of control over legislation and the judicial system to the European level is unpopular with the British public. The arguments by EU-supporters that cooperation on trans-European and global issues and on human rights involves delegating powers to the pan-European level – the analogy drawn here is with NATO on security issues – fall on deaf ears.

The UK public is largely content with the workings and traditions of the democratic processes in the country and sees any EU interference as reducing democratic control. Of course, the EU-sceptics would also strongly oppose any strengthening of democratic structures at the EU level (such as further enhancing the powers of the European parliament); this would deprive them of their argument that the EU is an undemocratic, bureaucratic monster run by unelected officials. In the decision-making at Council level they point to the UK in many instances as being outvoted and as the euro-countries proceed with tighter integration this group would dominate decision-making in the EU overall. So things would only get worse. The items negotiated by David Cameron, i.e. that the UK will be exempt from ‘ever closer Union’ and that there will be certain safe-guards for the interests of non-EMU members, are seen as little protection. Fears of loss of sovereignty and democratic control thus feature strongly in the debate on BREXIT.

BREXIT and Scottish independence

There is a fear that a ‘Leave’-vote would lead to a break-up of the United Kingdom, with the successful Scottish National Party (SNP) pushing towards a renewed independence vote. Such a vote is very likely to take place in case of a BREXIT.

However, it is not obvious that such a vote would come out in favour of independence. In the last referendum, it was mostly the fear of economic costs of and the uncertainty linked with a break-up that swung the majority in favour of remaining with the UK. It is likely that such considerations might play an even more accentuated role as Scotland would have to negotiate renewed entry into the EU and it is questionable whether it would be given a derogation of EMU membership. If not, this creates a major problem as Scotland’s trade with the non-UK EU amounts to about 16% of non-oil exports, while its exports to England are over 40%. Hence BREXIT would create a major problem for the Scottish economy which is so highly integrated with England.

This is thus an issue in favour of the ‘Stay’-camp, but it seems to feature less in the debate around BREXIT than one might have expected.

Security and Britain’s weight in the world

The debate on the implications for security is very lively and the public is exposed to widely opposing and often confusing arguments. Many of the security and military experts argue that security cooperation (such as access to joint databases) within the EU has made a significant contribution to UK security. However, the ‘Leave’-campaigners minimise the role of security cooperation within the EU and see NATO as the main institution in which military cooperation takes place and which is thus a guarantor of UK security. They even argue that security cooperation with EU partners by imposing certain regulations is counter-productive. Further, they come up with the rather odd arguments that the existence of the EU itself creates a security risk as it is a dysfunctional entity, generates social and economic misery and thus creates a security threat.

Britain and Europe’s future

This – in my opinion – is the most depressing part of the debate in Britain. The impact which BREXIT might have on Europe as a whole and European integration in particular features little in the debate. People are just not concerned about this or at least very few are. Most of the debate is simply couched in terms of ‘what is best for Britain’.

One might argue that a referendum of this type would in most countries be seen mainly from the point of view of how it would affect the country in question. However, in the British case it seems to me as if the lack of care for potential negative spillover effects on the rest of Europe is particularly strong and reflects the tradition in Britain of the lack of historical involvement in the European integration process. It was a latecomer to EU membership, and most of its negotiations thereafter reflected a very low level of commitment to giving up resources for the sake of advancing the aims of stronger European integration.

However, the implications of BREXIT could be very substantial for the EU and European developments as a whole. It would be the very first time that a country leaves the EU and this is likely to have a demonstration effect. Referenda on this issue are gaining popularity in quite a number of countries and it is always difficult to argue against referenda. We are currently going through a phase when there is a resurgence of nationalism as a source of protection against economic change, social insecurity and in reaction to the rather bad handling of the economic and financial crisis in Europe. For the first time after WWII there is a possibility of a significant reversal of processes of cooperation and integration in Europe.

Large sections of the UK population, however, see themselves as external on-lookers of these developments and make their decision more on the basis of how they can insulate themselves from these tendencies rather than as being a core country which could play a role in countering them. However, the fact is that BREXIT would mean that the EU loses a country with significant foreign policy experience and international connections, a country with military resources and experience and an agent occupying an important position in the spectrum of opinions which drive the social and economic policy agenda in the EU. The exit of the UK from the EU would be of historical significance for the future of Europe.

 

 

Cited:

Dustmann, C. (2011), The Impact of Migration on the Provision of UK Public Services, Report prepared for the Migration Advisory Committee (with T. Frattini and I. Preston), London.

Portes, J. (2016), Immigration, free movement and the EU referendum, National Institute Economic Review, May.

UK Government (2016), HM Treasury Analysis: the long-term economic impact of EU membership and the alternatives, London.