UK membership of the European Union Political and economic considerations 1. Summary • A referendum on the UK’s membership of the • This would leave around 90% of the UK’s goods European Union will take place by the end of 2017. exports to the EU facing new tariffs. The UK’s ability Autumn or late 2016 currently seem like the most to sell services into the EU – a sector where the UK likely times for the vote. has a trade surplus with the EU – could be significantly affected because of a series of non‑tariff barriers to • The government will put the results of its trade from non‑EU nations. renegotiation of the UK’s relationship with the EU to the country before the referendum. • It is not clear that leaving the EU would improve the UK’s ability to sell in faster growing regions of • Since 1977 an average 53% of UK voters have wanted the world. The EU is focused on expanding trade to remain in the EU and 47% have wanted to leave. with the rest of the world and has a number of such preferential trade agreements with fast‑growing • The EU is widely thought to have significantly increased economies. It is negotiating a number of others, trade and competition in Europe. The benefits for including the Transatlantic Trade and Investment consumers have come in the form of increased Partnership (TTIP) with the US. productivity, lower prices and greater choice. • Outside the EU the fundamental choices facing the • UK critics characterise the EU as an over‑regulated, UK would remain the same: the trade‑off between slow growth region. They point to the UK’s growing autonomy and accepting regulation in order to net contributions to the EU budget and the cost of gain access to overseas markets; the need to build the Common Agricultural Policy. Some see the free relationships and improve access to markets; and, movement of people in the EU as an unacceptable above all, the requirement to drive productivity and limit on the UK’s ability to control its borders. competitiveness at home. • A vote to leave would be the start of a long and complex • Ultimately the effects of leaving the EU hinge on two process of negotiation as the UK sought to create imponderables: the terms on which the UK leaves, a new position in the world. Leaving the EU is a leap in particular, whether the UK can retain access to into the unknown. There is no template for exit. The UK EU markets; and the ability of the UK to exploit the would need to decide on the balance between national freedoms and flexibility of being outside the EU. sovereignty and access to overseas markets. • What is clear is that a referendum will create • Switzerland and Norway are the most widely cited uncertainty for a probably prolonged period. The costs models of successful European countries outside the of exit would be seen very early on. Potential political EU. They make continued, albeit reduced budget and economic benefits from exiting the EU are more contributions, are not members of the CAP, can speculative and would likely be felt in the longer term. negotiate their own trade deals and accept free movement of goods, services, people and capital. • Some would argue that, even if accurate, such Contacts costs are a price worth paying to restore greater UK Ian Stewart • But these models would require the UK to accept sovereignty. The UK faces a choice between access to Chief UK Economist EU regulation while having no say in its design. European markets and national sovereignty. As ever 020 7007 9386 Moreover, they would offer the UK no control over in elections, economics only offers limited answers. [email protected] the movement of EU nationals into the UK. Political judgements loom far larger. • Alternatively the UK could opt for a more distant Alex Cole relationship with the EU and forgo preferential access Economist to EU markets. The UK could instead operate under 020 7007 2947 the so‑called most favoured nation (MFN) rules of the [email protected] World Trade Organisation (WTO) and negotiate free trade agreements with other countries and trading blocs. This would allow the UK to remove itself from EU regulations and budget constraints. UK membership of the European Union 2. Political background In the event of a No vote the UK would invoke Article 50 of the Lisbon Treaty requiring the EU to negotiate The last referendum on UK membership of the then a withdrawal agreement. The regulation allows for two European Economic Community (EEC) was held in years of negotiations, and more by mutual consent, 1975, just two years after the UK joined the EEC. during which time existing EU regulation would apply. The electorate voted by 67.2% to 32.8% to stay in. The terms of Britain’s exit would need to be agreed in negotiation with the European Commission and other Since 1975 the EEC has become the European Union, member states. growing from 9 to 28 members, expanding into Central and Eastern Europe, creating the Single Market and the 3. Public and business opinion Single Currency. The EU of today is far larger and more integrated than the Common Market of the mid‑1970s. UK voters have consistently been among the most euro‑sceptic in Europe. Nonetheless, in the last 40 or so The Prime Minister has said that the forthcoming years the public has been more likely to support staying referendum on membership of the EU will be held by in the EU than leaving. Since Ipsos MORI started polling the end of 2017. To allow for the renegotiation that the public in 1977 on average 53% of voters in a simple will precede the vote the earliest likely date for the yes/no poll have supported membership of the EU and referendum is June 2016 (the government has ruled out 47% have opposed it. Public support for the EU fell holding it on 5 May 2016, the same day as elections between a low of 26% in 1980 and a high of 63% in to devolved parliaments in Scotland, Wales and 1991. Over the last two years support for membership Northern Ireland and for London’s mayor). Autumn or has averaged 52% with the latest Ipsos Mori poll late 2016 are generally seen as the most likely dates showing 61% in favour of continued membership. for the referendum. A referendum in 2017 is perhaps a less attractive option, partly because it would extend Business opinion tends to be more favourable to the period of uncertainty about Britain’s relationship the EU than public opinion. The second quarter with Europe. The UK is also likely to want to avoid its 2015 Deloitte CFO Survey showed strong support position in Europe becoming an issue in the French and among the UK’s largest corporates for continued EU German elections, due to be held in April/May 2017 and membership. Nearly three‑quarters of CFOs (73%) September 2017 respectively. favour remaining in the EU, with 23% believing it is still “too early to say” (depends on results of the Voters will be presented with the conclusions of the renegotiation), 1% “don’t know” and just 3% of those government’s renegotiation of the UK’s relationship with polled preferring exit. A recent British Chambers of the EU. Mr Cameron’s list of aims includes protecting Commerce survey (published Q1 2015) shows a clear Britain’s position in the Single Market, returning powers majority of companies view withdrawal from the EU from Brussels, a role for national parliaments to block as an undesirable outcome. Chambers’ members see unwanted EU legislation and excluding the UK from the continued membership of the EU with some powers ideal of “ever closer union”. The Conservative manifesto being transferred back to the UK as the ideal outcome. also called for measures to limit the access of migrants to the British welfare system. However, small businesses are more likely to be split on the issue. Polling for the Federation of Small Businesses Mr Cameron had previously stated that he believed shows 47% of small businesses in favour of EU “proper, full‑on treaty change”1 would be required to membership, with 41% opposed and 11% undecided make some of these aims legally binding, although he (September 2015). The greater euro‑scepticism of has since softened his stance in the face of European smaller businesses illustrates how the costs and benefits opposition. The European Commission President of EU membership are distributed unevenly, with smaller Jean‑Claude Juncker has publicly ruled out any treaty businesses less likely to export and also often less negotiations on Britain’s relationship with Europe until able to deal with potentially costly or time consuming two years after any referendum. Downing Street has regulations. now conceded that the changes it seeks would not lead to treaty change before Britain votes in its referendum. Instead the official position is that Britain would aim for an “irreversible” and “legally binding” guarantee that agreed changes will be attached to the treaty in the years following a referendum. 1. http://www.theguardian. com/politics/2013/jan/23/ david-cameron-eu-speech- referendum, 23rd January 2015 UK membership of the European Union 2 The major British business groups (including the CBI, The next section demonstrates that if the aim of the the Engineering Employers Federation, the Chambers UK’s negotiators were to retain access to, and the of Commerce, the Institute of Directors, the British benefits of, the European Single Market, they would Bankers’ Association and CityUK) favour continued almost certainly have to continue to make budget membership of the EU and a renegotiation of contributions and accept a high proportion of EU Britain’s relationship with the EU.