BREAKING UP IS HARD TO DO... BRITAIN and EUROPE’S dysfunctional relationship Edited by PATRICK MINFORD & J. R. SHACKLETON Breaking Up Is Hard To Do This publication is based on research that forms part of the Paragon Initiative. This five-year project will provide a fundamental reassessment of what government should – and should not – do. It will put every area of government activity under the microscope and analyse the failure of current policies. The project will put forward clear and considered solutions to the UK’s problems. It will also identify the areas of government activity that can be put back into the hands of individuals, families, civil society, local government, charities and markets. The Paragon Initiative will create a blueprint for a better, freer Britain – and provide a clear vision of a new relationship between the state and society. BREAKING UP IS HARD TO DO Britain and Europe’s Dysfunctional Relationship EDITED BY PATRICK MINFORD AND J. R. SHACKLETON with contributions from PHILIP BOOTH • MARTIN HOWE • PHILIPPE LEGRAIN DAVID MAYES • PATRICK MINFORD • KRISTIAN NIEMIETZ GWYTHIAN PRINS • SEAN RICKARD • MARTIN RICKETTS J. R. SHACKLETON • MATTHEW SINCLAIR CHRISTOPHER SNOWDON • RACHEL TINGLE ROLAND VAUBEL • RICHARD WELLINGS • GEOFFREY WOOD First published in Great Britain in 2016 by The Institute of Economic Affairs 2 Lord North Street Westminster London SW1P 3LB in association with London Publishing Partnership Ltd www.londonpublishingpartnership.co.uk The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. Copyright © The Institute of Economic Affairs 2016 The moral rights of the authors have been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photo- copying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. A CIP catalogue record for this book is available from the British Library. ISBN 978-0-255-36723-3 (interactive PDF) Many IEA publications are translated into languages other than English or are reprinted. Permission to translate or to reprint should be sought from the Director General at the address above. Typeset in Kepler by T&T Productions Ltd www.tandtproductions.com CONTENTS The authors xi Foreword xviii Summary xxi List of tables and figures xxiv 1 Introduction 1 Patrick Minford and J. R. Shackleton Principles 4 Policies 8 Change has to come 19 References 22 2 Assigning responsibilities in a federal system 23 Martin Ricketts Introduction 23 Public goods and interjurisdictional spillovers 25 Competition between jurisdictions 30 The race to the bottom 33 Conclusion 36 References 39 3 Institutions for European cooperation 40 Roland Vaubel The renegotiation 40 Which institutions does European cooperation require? A summary 44 v COntents Cooperation – for what? 45 The institutions of a common market 47 Institutions for joint policies regarding external and scale economies 51 Institutions for redistribution among member countries 55 Conclusion 55 References 56 4 Beyond the ghosts: does EU membership nourish or consume Britain’s interests and global influence? 58 Gwythian Prins Economic measurements are insufficient to judge this question 58 How best to nourish British interests: two paradoxes 58 Why the EU and its fears are older than you think 60 The transforming consequences of the euro 65 The flaw in Europeanism 67 What the ghosts did 70 To the July crisis: the hollowing out of European politics 71 Gulliver and the balance of competences 74 Successful negotiation requires informed statesmanship 78 References 79 5 Transforming the UK’s relationship with the EU: the legal framework 82 Martin Howe How to transform our relationship with the EU 82 How UK withdrawal from the EU would work 83 Renegotiation from within 97 References 100 6 Freedom of movement 101 Philippe Legrain Why freedom of movement is the right policy 103 vi COntents Why EU membership offers the best of both worlds 113 References 115 7 Evaluating European trading arrangements 117 Patrick Minford What trade theory has to say about the EU customs union 117 The cost of EU protection 120 The CGE model 124 Considerations of ‘Brexit’ 132 What about a trade agreement with the EU? 133 Opposing views 135 Conclusions 139 References 140 8 UK employment regulation in or out of the EU 142 J. R. Shackleton Europe’s reach 142 European law and the labour market 145 Why intervention? 149 European political economy 153 Would repatriation of powers over the labour market make enough of a difference? 156 A minimum level of regulation? 160 References 161 9 Prospects for a reformed agricultural policy 164 Séan Rickard Introduction 164 A politically driven policy 165 An inefficient and ineffective policy 168 Prospects for radical reform of the CAP 172 Visualising a reformed UK agricultural policy outside the EU 175 End piece 180 References 180 vii COntents 10 Freedom for fisheries? 184 Rachel Tingle 1957–69: the conception and early development of the CFP 186 1970–82: the establishment of common Community waters 187 1983–92: the development of a fisheries management system 191 1993–2002: the introduction of vessel licensing and effort controls 195 2003–13: reform of the CFP 196 2014 onwards: last chance for the CFP? 201 Appendix: the UK system for apportioning national fishing quotas 204 References 207 11 Stuck in Brussels: should transport policy be determined at EU level? 209 Kristian Niemietz and Richard Wellings Introduction 209 The aims of EU transport policy 210 Key policy initiatives 211 Economic impact 212 Centralisation versus competition and discovery 220 Regulatory scale as market discovery process 222 Conclusion 226 References 227 12 Bank regulation: starting over 229 David Mayes and Geoffrey Wood Banks and bank failures 230 Liquidity and the lender of last resort 232 Loss of capital in the nineteenth century 236 Banking in the twenty-first century 238 Size and structure 240 Incentives 241 Cross-border 242 Capital 243 viii COntents Depositors 244 The EU response 246 Concluding remarks 249 References 252 13 Young, single, but not free – the EU market for financial services 253 Philip Booth Introduction 253 The regulation of insurance companies pre-1970 255 The EU, the single market and free trade 256 The beginning of the end of mutual recognition and deregulation 258 From common market to single market, harmonisation and centralisation 260 Single market or free market? 261 The costs and benefits of uniform EU regulation 263 Other areas of EU financial regulation 267 Conclusion 269 References 272 14 Better energy and climate policy 274 Matthew Sinclair The problem 276 The EU response 280 Targets for emissions reduction 281 Emissions trading 284 Renewable energy subsidies 286 Green taxes 287 An alternative 290 Resilience 292 Adaptation 292 Technology 294 Conclusions 295 References 297 ix COntents 15 EU lifestyle regulation 301 Christopher Snowdon Introduction 301 Competence and EU law 302 Ad hoc prohibitions 307 State-funded activists: pushing the envelope 311 Implications of a ‘Brexit’ 312 Conclusion 314 References 316 About the IEA 320 x THE AUTHORS Philip Booth Philip Booth is Editorial and Programme Director at the Insti- tute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He was for- merly Professor of Insurance and Risk Management at the Cass Business School, where he also served as Associate Dean. He has an undergraduate degree in economics from the University of Durham and a PhD in Finance. He is a Fellow of the Institute of Actuaries and of the Royal Statistical Society. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues. He has written widely, including a number of books, on investment, finance, social insurance and pensions, as well as on the relationship between Catholic social teaching and economics. Martin Howe Martin Howe QC specialises in European Union law, particular- ly in the field of intellectual property and the free movement of goods and services between Member States. His practice regu- larly involves appearances at the European Court at Luxembourg. He has published extensively on EU legal and constitutional issues, including (jointly authored with Brian Hindley) the IEA publication Better Off Out? The Benefits or Costs of EU Membership (1996, revised 2001). xi The authOrs Philippe Legrain Philippe Legrain is a writer and thinker. A visiting senior fellow at the London School of Economics’ European Institute, column- ist for Project Syndicate, Foreign Policy and CapX, and independ- ent consultant, he was economic adviser to the President of the European Commission and head of the team providing President Barroso with strategic policy advice from 2011 to 2014. He has also been special adviser to World Trade Organisation Direc- tor-General Mike Moore and trade and economics correspond- ent for The Economist. Philippe is the author of four critically acclaimed books. They include Immigrants: Your Country Needs Them, which was shortlisted for the Financial Times Business Book of the Year 2007, and European Spring: Why Our Economies and Politics are in a Mess – And How to Put Them Right, which was one of the Financial Times’s Best Books of 2014. David Mayes David G. Mayes is Professor of Banking and Financial Institu- tions and Director of the New Zealand Governance Centre at the University of Auckland Business School. He is also Visiting Professor at the University of Buckingham. His main areas of re- search are the regulation and governance of the financial sector and financial firms, on which he has published widely. He has focused particularly on cross-border issues and on the process of closer integration, especially in Europe.