Don’t Brexit Fixit! A personal viewpoint

One good thing about the British referendum on 23rd June on whether to stay or leave the European Union, is that it has got everyone talking about it.

 Now we need to get serious about why to stay or leave. The people who are passionately against the EU have three main arguments for leaving: the democratic deficit, the cost and complexity of it and the worry of uncontrolled immigration. What has yet to be heard is a solid plan for what we should do if we do leave?

Even those that feel strongly we should leave recognise that the UK has huge economic, cultural and social links with the EU. Fifty percent of our trade goes to the EU. According to the ONS there were 3.0m EU citizens living and working in the UK in 2014. Each of these represents a network of connections between the UK and the Continent. If you add the fact that many people stay for a few years and then leave, several million more EU citizens have experienced living and working in the UK and return to their home countries with many contacts in the UK. Don’t forget there are also over 2.0 million UK citizens living in the EU. In 2014 Europeans made 300 million trips to other EU countries of which, 52 million were made by Brits going to the EU and roughly 45 million by Europeans visiting the UK. All this adds up to a massive increase in those economic, cultural and social links.

Those that would leave maintain that none of this needs to change. We would make a new free trade deal, the EU citizens could stay, our citizens abroad would be fine and tourism would flourish. But this seems slightly disingenuous. A large part of the reason why people wish to leave is to control our borders better. But any trade deal with the EU would require equal treatment of all EU citizens. It would not be possible for the UK to pick and choose, which EU citizens could enter freely. So those who would restrict immigration from Eastern European countries could only do so by restricting all EU citizens. Without free movement of people there would be no free trade deal. Without the free trade deal, we would undoubtedly suffer an economic shock.

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Many in Europe would see the act of the UK leaving the EU as a betrayal. Given that any new trade agreement would require the unanimous support of the remaining 27 countries, it is highly unlikely that any such deal would be easy or on good terms. Complaints about EU extravagance and waste may have some validity, but today the UK’s net contribution is about Euro 5.0 billion. Expect that contribution to triple if we want to gain access to the EU Free Market from the outside and we wouldn’t even have a vote. Our only negotiating power would be to deny the UK market to the EU on favourable terms. However, the UK only represents about 10% of EU exports (Russia by comparison is 5%), so whilst that would be annoying for the EU it would not be devastating. It would also upset UK consumers who are clearly very partial to EU products (German cars, French wine, Italian food), which would become more expensive.

Another aspect is the soft effect on investment. A relatively small group of people who run very large global businesses make investment decisions based on long term perspectives. These people are conservative and the likelihood is that they will either change plans or wait before they continue to invest in the UK. It is one of the UK’s hidden strengths that Foreign Direct Investment (FDI) is second only to the USA and stands at $1.5 trillion. Those that advocate leaving believe that we could attract more investment if we were out because we would be more dynamic. But many non-EU countries see the UK as a port of entry to the vast EU market and if we left it, they would have to pick another port. We will not lose all of this investment of course, but even a 5% reduction could have a huge impact on the economy and jobs.

There seems to be muddled thinking about what exactly we can achieve outside the EU. People need to understand that any deal with the EU, whether inside it or outside it, requires some loss of sovereignty. Like any international agreement, no one country can have it all its own way. The EU is big, so it can demand a lot of those that want free access. Gaining that access will impinge on the UK as much as being part of the EU except that it will cost more and we will not get a vote, much less a veto.

When confronted with this reality, many of those in favour of leaving say, fine, we will leave them to it. We will rely on the GATT treaty instead and once set free from all that bureaucracy the British economy will transform into a buzzing, dynamic, thrusting, all conquering champion of the world economy. However this cannot be a certainty, more of a hope and hope is not a strategy. In short, there is no plan of what to do if the UK leaves the EU. What is certain is that there will be a lot of doubt and doubt will bring a severe economic shock that could last many years.

Fixit

If the UK stays in the EU we need to help fix it to make it work properly. The EU has got itself into a mess because it has conflicting visions about what it should be. Some Europeans have tried to bring about the United States of Europe by subterfuge via the EU and it has not worked. Indeed it has proved to be nearly fatal to the fabric of the EU.

The Euro and the Schengen Agreement have each created the crises at the heart of the EU today. They have created the problems because both these treaties test the willingness of each country to accept the problems of other countries without question.

With any common currency zone it is a requirement to transfer cash from richer regions to poorer regions because the normal response of devaluing one currency against another is not an option. In the USA, the Federal Government transfers money from California to Alabama. In the UK the government transfers money from London to everywhere else. People accept this because they feel American or British. Just like the Germans accepted for West Germany to pay for the East. However, it is clear that the Germans are not willing to pay for the Greeks or anyone else. Unless citizens can vote directly for the politicians that then make these decisions, there will always be an issue here. The Euro is fundamentally fragile and this situation will only be resolved through political union of the Euro countries or dissolution.

Open borders create a similar problem. The Germans can welcome one million refugees if they want, but because they have open borders with all the other Schengen countries, any of those refugees can go anywhere in that area legally. This means that Germany has imposed its generosity on everyone else. So it is not surprising that border controls are being re-instated across the Schengen area. It must be the case that open borders are only possible across a single super-state, with a single government directly elected by all the people of that super-state. Otherwise there will be trouble.

None of this should negate the great achievements of the EU. The Single European act which enables the freedom of movement of people, capital and goods has had huge benefits to all the countries of the EU. It has created prosperity and peace, encouraged cross-border travel and mutual understanding. These benefits are so well embedded that it is hard to split them out from our day-to-day lives. What we need to do is get our colleagues in the EU to set some clear limits on what the EU ought to be. If they wish to pursue a multi-speed Europe we should let them (provided it does not prejudice our current rights). A European super-state, if it is desired, is probably best started by a few, more homogenous countries in any case.

Instead we ought to push that action is taken to re-establish general respect for the EU institutions and for what the EU does. If the EU is seen as corrupt and venal, that is because commissioners and MEPs are paid large, tax free salaries and get substantial expense accounts with little accountability. I would tax the Commissioners and MEPs based on their home country tax rate and limit their expenses severely. I would certainly forbid any MEP to employ any relative (common practice). Such simple action would change popular perspectives and so regain respect.

The European parliament moves every six months from Strasbourg to Brussels and back again. This is a colossal waste of money. It should be stopped. The Common Agricultural Policy (CAP) needs reform to adapt to modern reality. It is not as bad as it once was, but institutions need constant pressure to change.

With a limited, but clear mandate, the EU can be sold to all citizens of the EU as an economic and social benefit. One of the ironies of the Brexit vote is that the EU is today pretty much what the Leaver’s want in terms of free trade. The parts that make them fearful (the Euro, Schengen and an eventual U.S.E.) have not really worked. The Euro is likely to stay for a while due to the political will of Germany and France, but it will not last without real political union. Schengen on the other hand is already breaking down and it is likely that it will be heavily modified or abandoned unless political union comes about.

If the UK stays in the EU, we can exert great influence. It is predicted that in ten years, the UK economy will be the largest in the EU due to demographic changes. Britain should use its power, excellent reputation and natural pragmatism to steer the EU towards sensible objectives, focused on economic benefits that promote prosperity and the common good. Let’s stay and fix it.

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Justin Wheatley

Justin Wheatley

Group Chief Executive, StatPro Group

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