The EU Referendum in Britain tomorrow is nothing more than a homage to guesswork.
It must be made clear that the EEC/ EC/ EU is not an economics project. The goal of the founding fathers of the European movement was to maintain peace and to ensure, in their words, that there would never be a civil war in Europe again, and this was to be achieved by replacing a myriad of competing national aims by one of a unified Europe.
The first steps were in the economics arena with the creation of the European Coal and Steel Community in 1952 and the European Economic Community, aka the common market, in 1958. In turn this became the European Community and then the current European Union. This task of integration will only be complete when those who see themselves protecting the holy grail of European Union deem the process complete and this is still a long way away.
As a colleague and I wrote in 1971, “the EEC cannot stand still, it must go forward and complete integration ….. or it must move back to a looser structure where independent actions based on self interest would not be so harmful to other trading partners.” This is still the position.
Unless fiscal policy is integrated so that the EU adjusts as one instead of putting the onus of adjustment on a few countries with disastrous results for growth, employment and social cohesion, then the Eurozone is not sustainable. Some countries will have to adjust via exchange rate changes. So even if the UK remains in the EU there will be no status-quo.
As the EU is not really about economics but a host of other things it’s not for economists to give judgement on what the result of the referendum should be. Indeed the British public know that the EU is much more than just economics and this is why they are so concerned by issues such as immigration. The political elite, by trying to concentrate matters on economic issues, have lost control of the referendum to the Remain side’s discomfort. Added to this, the statistics used by both sides are highly questionable and the public has realized this and it has diminished the power of the economic-cum-business argument.
In our 1971 paper on The Common Market – The price, we said, “these then are the major issues to be considered. Britain is faced with the virtual certainty of intensified problems in the short run with only the hope of ultimate gains. If industry takes up the challenge and decides to compete, entry may eventually be justified but if British enterprise persists in pressing Government to insulate it from the cold wind of the market place, little good can come from the exercise.”
In the event, the UK did become more competitive and indeed GDP grew 103% over the period since we joined in 1973. Some argue that this was due to the invigorating effects of membership, but others say it was the result of the policies of the Thatcher Government that increased competition, improved the behaviour of business and organized labour and thereby increased efficiency. Furthermore, as the rapid growth of the EEC had diminished by the time the UK joined, and now it is the sick man of the world’s economy, the role of the EEC/ EC/ EU in improving the UK’s performance can at least be questioned.
A dismal record of prophecy
Deciding which way to vote is difficult, especially as what are presented as facts are in truth only guesses. For the majority of voters, choice will be based on a balance of probabilities rather than on reasonable doubt and certainly not on proof-positive. As said above it will be factors other than economic such as immigration, education, security, cultural sustainability and more that will make us decide. Matters are not helped by key statistics that have been revealed to be hopeless, or opinions by individuals and bodies that have a dismal record of prophecy.
So, the Remain figure that on average households will be £4,300 a year a worse off has been comprehensively shredded whilst the Leave claim that with no annual contributions to the EU, necessary households will save £300 a year has been shown to be equally fanciful.
The best guesses are of £1,600 and under £150 respectively. Equally hopeless is the assertion that the 3M jobs dependent on trade with the EU will be lost. No body has suggested no trade with the EU. In fact, even if trade falls, most will survive.
Much of the business community has come out for Remain. This is the same ‘business’ that wanted the UK to join the ERM and then the Euro. This would not have been a good idea. In the 1970s the CBI was against trade union reforms as it would have rocked the boat.
When people in business are asked for their views as individuals the answer can be different to the attitudes of industry as a whole. For instance, 75% of senior auto retail executives want to remain but an on-line readers’ poll by the Automotive Management magazine revealed that 53% wanted to leave. In Wales the figure was 75% wanted to Leave. Very different to the country’s political establishment.
Where the automotive industry is concerned, 77% of SMMT members want to remain, however when you drill down from the generalisations of macro-analysis to the micro level it’s hard to see the auto sector being harmed whether in or out. Why? Over 83% of the UK car market and almost 90% of the CV market are imports, mainly from the EU. In one way or anther, German based factories and German owned firms have almost 40% of the UK car market, even the French have 15%. The CV market, other than that for buses, is deeply penetrated by German and Swedish producers. In addition, 60% by value of components used in British car factories are imported, and again mainly from Germany. Under these circumstances it is difficult to envisage Germany, France, Sweden and others objecting to a free trade agreement on automotive products. If the EU can establish such an arrangement with Turkey, the imperative to do so with the UK would be so much greater.
Interestingly, tariff protection afforded to vehicle making in the EU questions the efficiency of Continental vehicle making. In both Japan and the USA, the tariffs levied on car imports are zero. In the EU the Common External Tariff is 9.5% and that on CVs is almost 20% and this level of protection clearly penalizes the European car consumer and the truck users. These tariff barriers would not be insurmountable for cars made in the UK. This is because productivity measured in terms of gross value added per car employee is twice that in Spain, France and Italy and three times that in Poland the Czech Republic (source Eurostat).
However, that in Germany is very similar to the UK’s, meaning that Germany would have very effective tariff protection and this does not say much for the confidence of German car making.
The status quo is not an option
When tariffs are low, the need for a free trade agreement is also low. It is ironic that the need for a UK /EU agreement is due to EU inefficiency as exemplified by the high Common External Tariff on many products. So despite BREXIT not being a fatal blow to much of business, why are they enamored with Remain?
It is clear that there will be costs to BREXIT. Business will be orientated to taking advantage of the status quo and what they expect to persist in future. Consequently, they will arrange their investment and the way their businesses work to take maximum advantage of the UK/ EU membership.
Therefore it is no surprise that the majority, certainly of big firms, favour Remain. This is entirely natural. However, efficient firms are agile and despite even some entrepreneurs who you would think are used to taking risks claiming BREXIT would be disaster, business is capable of adjusting to a new environment. After all they did this when we joined in 1973. The irony is that they will have to do this in any event as the status quo is not an option as mention above.
Already, things are changing. As the rest of the world grows so much faster than the EU the proportion of Britain’s trade that is with it is falling. In 2006 the EU took 50% of our trade but in 2015 it was 40%. A continuation of sluggish EU growth could result in this proportion being around 30% in 2030. This is still large of course but much less dominant than hitherto. One really does wonder how much rigorous research business has done to really consider the nature of a post-BREXIT world.
My hunch is that the UK could exist comfortably outside the EU, however it may not be necessary for things to come to this. There is much common ground between in and out supporters that the EU is an unreformed, unrestructured, ponderous monolith, incapable of the agility needed to meet the challenges of a fast moving world. As it requires a 28-nation consensus by definition it takes ages to arrive at a decision and explains why the EU is incapable of changing direction even when circumstances dictate that it should. It does not look like a democratic organization.
Whether Britain votes to exit, or even if a small majority vote for Remain, will terrify this elite. Other member states could consider ‘out’ or at least demand a major overhaul of the EU, replacing authoritarianism with democracy. Under these conditions, the elite might rush back to the negotiating table to save their own skins. This could result in reform and restructuring acceptable to most BREXIT voters and this could result in the UK parking its leave decision to see what the negotiations do bring about.
This might result in the best of both worlds: A reformed EU with no democratic deficit and capable of commanding the loyalty of the British people. So not for the first time, the UK comes to the rescue of Europe with the removal the Brussels tyranny. Perhaps it’s for the young to decide as it is they who will have to live with the consequences of the referendum. Indeed it’s a salutary thought that one would have had to be born before 1956 to have any real memory of a UK outside the Brussels umbrella. Therefore to most people, the EU has become second nature.
© Prof Garel Rhys, CBE, Professor Emeritus Cardiff University