The Economy and the EU

There were many reasons for setting up the European Union and its predecessors – and different people involved had different plans and objectives for it. However, for most of us in the UK, economics was at the heart of it. We joined the EEC in 1973 and that it was membership of that which was voted on in 1975. So we need to consider what it means for us.

Economics’ strength and weakness is that it touches everything. It’s a strength because it’s so powerful, capable of changing the lives and wealth of every person. And it’s a weakness because that makes it so hard to track. It’s like billions of drops of water. Impossible to monitor individually; but together can make a tidal wave heading for you.

It can only really be assessed after it has happened; or by modelling – and then you have the problems of assumptions, methodologies etc…More variables and so more things not to trust. So I’m going to try and go through Economics without using statistics.

Why do we trade?

We, as people, trade between communities, regions, counties and continents for all the same reason. Economies of scale and specialisation. If you live in a village and could only buy things from there, you are relying on the skills and materials of the people there. If someone can’t make something you want – tough. If you can make something that no one wants – tough. So there’s a lack of choice.

Start trading and you can find enough people who want what you do so that you can be a brilliant musician rather than a bad farmer. And if you need a specialist flute maker – you are more likely to get one in a market of millions than in one of hundreds. Since specialists are more efficient, the good is cheaper and better. You can also get the best, most efficient materials, again making it cheaper and better; and gain access to things you would never have seen before e.g. trade brings us fruit we would never see otherwise.

Bottom line is trade brings us more choice of better quality goods and gives us a chance to do the jobs and roles we’re best at. Which is why about the only thing historians and economists agree on (and aren’t many of these) is that trade is good.

What stops trade?

Trade barriers force people to buy from their local market, and that is not necessarily the best or cheapest. It also gives less incentive to a business to innovate and improve because they know they are protected from the outside world. So what barriers are there?

The first and most obvious barrier is a tax on imports so that goods and service from outside an area automatically cost more. This doesn’t happen as much nowadays under the World Trade Organisation (WTO) and that has helped international trade – though it is important to note that the WTO agreements do not cover services, which the UK is especially dependent on.

The reduction in such explicit rules has also meant that countries have had to get clever about how they put up barriers. Here are the some of the most common ones:

  • Quotas – only a certain amount of something is allowed in
  • Regulations – you have to have confirm to different regulations for you good in a different country so you can’t just sell what you made back home. A company ends up having to make 10 different widgets rather than just one.
  • Licenses – only licensed people are allowed to trade in your country. The requirements can be anything – though having a proper base in the country is a common one
  • Manipulating Exchange Rates – setting the exchange rate at a rate that makes imports more expensive
  • Subsidies – giving extra money directly to local companies so that they can sell their goods and services cheaper than competitors from outside.

Remove these barriers then and there will be more trade, and so more competition leading to better and cheaper goods. This affects every single one of us, which is why the UK was such a passionate force in pushing and securing the removal of these barriers in goods and services throughout Europe. This is the Single Market – and though it’s not complete – it does affect every one of us. And the UK’s departure from it would have an impact on trade. In fact, I don’t think anyone has disputed that.

So trade is definitely beneficial; which is why the foundation of our relationship was and is trade – there are plenty other elements to the European Union – many of which are debatable – but this post is just about trade and the economy. It’s fundamentally why we joined and why we have stayed. But there is an Economic and Financial Cost associated with that:

  • Financial cost – the UK pays a big and obvious lump sum to the EU, almost a fee to belong to the Single Market. It is debatable exactly what the actual net figure is (and, boy, has it been debated) but the independent UK Statistics Authority put it at £7.1bn per year.
  • Trade Negotiating cost – we don’t negotiate our own trade deals – we do it as part of a bigger team. This gives us less flexibility as we have to work as part of that team – and that is a cost. But if we get better deals because we’re part of a team with a stronger negotiating clout, then that balances out. So do we get a better deal than if we were on our own? It’s actually impossible to say for sure because there’s nothing comparable and we’d only know for certain after the fact. Having said that, we can think about comparable negotiating situations and ask ourselves: “Who gets a better deal with their suppliers – the Supermarket or the Corner Shop?”

Whether these economic and financial benefits outweigh the economic and financial costs is a judgement for all of us to make. We can listen to economists and experts; but they don’t all agree. However, I think it is fair to say that there is an overwhelming trend saying that we currently get more out of EU trade – in increased trade, growth, profits and thus tax – than we pay in. How much more is again something that is hotly debated.

Economic and Financial Impacts of Leaving

The UK now trades more with the rest of the world than with the EU (56% according to an Office of National Statistics report). That’s not going to stop. It’s possible – Leave say probable, though with no certain knowledge – that it will increase. However, if we were locked out of Europe it would need to double overnight for the UK not to be worse off – and that would be a huge and painful adjustment. Now, no one is seriously suggesting that is going to happen; but, clearly, what happens in our future trade relationship with EU is important as we would want that trade to continue.

So what would happen if we leave? The thing is, I don’t know. And nor do you. About the only thing we can say is that it would change. The only other thing we can say with certainty is that we don’t know what it would change to. We can’t. Europeans will, of course, want to still trade with us and sell us their cars, their cheeses etc; so some deal will be struck. But when and on what terms – no one knows.

But one last thought. If you got divorced, would you still expect to have the same access to the house and kids as before? Especially if you were the one that just upped and left?

Conclusion

The UK is and always has been a trading nation. It was the foundation of our wealth and our influence on the world and it was the reason we joined the EU and pushed for the creation of the Single Market. And I also think that it is Remain’s strongest argument. In this area, Leave comes across as fire-fighting, offering one potential solution after another; but nothing concrete and always desperately trying to moves the debate on. In a way, that’s inevitable as the future is notoriously hard to predict and they can offer nothing certain. But it’s a very big economic gamble.

Before anyone slams me for being biased and being a paid propagandist for Remain, I am not saying that there aren’t good Leave arguments – there are. It’s just Economics isn’t one of them.

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