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Brin or Brexit? Part One

The first in a series of blogs looking at the facts and figures regarding the EU membership vote.

Last week we held an investment dinner during which there was an open discussion on the global economy but which became particularly animated over one topic – “Brexit”, or the potential exit of the United Kingdom from the European Union (EU).

Of course, there were both Eurosceptics and Europhiles around the table fighting their respective corners but consensus broke out in agreement that this is a BIG topic, and one where we are all expected to vote. So saying that, where are the hard facts, and the raw data upon which we are to base our vote?

Last week the Financial Times under the headline “Brexit stays off company board agendas”, explained that: “UK company boards are not discussing the risks of a potential British exit from the EU, despite the likely outcome of a referendum on the issue being finely balanced”.

Well, the great and good of UK board rooms may be indifferent but we agree with our dinner guests that this is a very important decision for us all. Remember, no country has ever left the European Union and you will be asked to cast a straight yes or no vote.

As such, we at Equilibrium want to help the debate. If we can use our resources to inform and analyse - rather than influence - then we can hopefully improve the chances that we all make the right choices.

This blog marks the start of a series on the topic that we will be producing over the coming months, and today we will kick off with some basic questions and facts. So, let’s start at beginning…

Exit from what?

An exit from the European Union would mean leaving the economic union in which – in theory – there is free movement of goods and services. In practice this means that there are few trade barriers between member states. There are 28 members of the EU, with an internal market of 500 million citizens. EU citizens can travel freely within its borders, sometimes without passport checks at national borders, and work without needing a permit or visa.

In addition to the economic union, there are legal and political institutions. The EU has three key law making institutions: the European Commission, the European Council and the European Parliament. It also has at least 65 other institutions, bodies and agencies including The European Court of Justice and the Committee of the Regions, which represents local authorities.

Economically, would we be better off staying in or coming out?

This is the crunch question and one that is not easy to answer.

Different organisations have tried to evaluate the cost or benefit of EU membership over time. The chart below, from the Economic Impact of EU Membership on the UK report*, summarises the conclusions of a number of these studies showing the range of the results which go from a 5% (of UK’s gross domestic product) cost to a 6% benefit:-

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For notes and source please see the end of the blog

 

Most of the studies that found a significant net cost to membership take a static approach, calculating the various impacts – fiscal, regulatory, trade-related etc. – in a given year and summing them to produce an overall cost. Those studies that found a net benefit tend to look at the longer-run effects of the UK being a member of the EU versus some more restrictive trading arrangement, with gains accruing each year in the form of higher trade flows and foreign direct investment.

The bottom line is, however, that no one has the definitive answer.

One major think-tank, named Open Europe, has gone further and reasonably pointed out that the impact of Brexit depends on what Britain does about it after the exit.

There are a number of scenarios from a no trade deal with the EU (and falling back to the World Trade Organization trading rules) through to the best scenario of a full-on trade agreement with the EU, but also the other major trading nations of the world. In addition to the boost to trade they would also see an uplift in economic growth from lower regulatory costs. The outcomes of this range is shown in the graphic below in terms of growth in GDP in 2030:-

Nealgraph2.png

Source: “What if..?, The Consequences, challenges & opportunities facing Britain outside EU” Report, Open Europe, March 2015

Thus, in Open Europe’s view, the UK’s economic fate is in many ways in its own hands in how it manages trade agreements post exit from the EU.

This is an important point because the UK is a major trading nation. If you look at the table below you can see how important trade in goods (at 44.7% of GDP) and the trade in services (at 18.1%) are in comparison to most other developed nations:-

nealgraph3.png

The openness of the UK economy to world trade, the strong rule of law and the ease of capital- raising are extremely valuable credentials for the country. This is particularly underlined by the last column in this table. FDI is foreign direct investment, and essentially is the investment by overseas investors in assets in the UK – whether it be Nissan building a car factory on Teeside, the Chinese company that owns Pizza Express opening another shop or General Electric setting up a new European headquarters in the UK.

This inward flow of capital is an important component in our balance of payments. Currently around 50% of the investment comes from Europe, 30% from the US and the remaining from Asia and the rest of the world.

The point here is that, to a degree, the UK attracts this investment because it is in the EU. General Electric may have set up its European HQ in the UK on the basis that the UK remains in the EU – if it exits the EU, does that inward flow of capital dry up?

This highlights the point raised above that much depends on how the UK manages the trade relationships in the event of an exit.

Where are we now?

For the moment the UK government under the Conservatives is working to stay in the EU but create a ‘twin track’ Europe where countries can choose to opt out of the full economic and political union but remain in the trading union.

On Tuesday of this week the UK Prime Minister, David Cameron, set out some of the key areas of difference where he would like UK to beat to a different drum than the rest of the EU. He wants:-

  • The EU to acknowledge that the EU will remain a multi-currency union, thereby allowing the UK to opt out of adoption of the Euro,
  • To be able to reduce the burden of EU regulations on UK business,
  • To exclude the UK from further commitment to a “ever closer union”,
  • To be able to control the flow of migrants and enforce a four year period of tax payment before they have the right to draw benefits.

 

The initial response from EU members have been from “do-able” to “highly problematic”, although the German Chancellor, Angela Merkel, sounded a conciliatory note saying: “There are some that are difficult, and some that are less difficult. But if you have a willingness to solve this then I am confident we can resolve it."

Clearly, this whole situation is evolving and we shall be monitoring and analysing it as it unravels.

In the next blog on this topic we will be looking at more key economic, regulatory and political factors for consideration, including a look at what the betting companies are saying in how the voting may go on Referendum Day.

 *Taken from the Economic Impact of EU Membership on the UK, Sept 2013, House of Commons Library

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