Thursday, February 24, 2005

UK and EU - Who is Profiting?

THE LEGACY OF THE BRITISH EMPIRE

In our opinion, the British Empire, which not that far ago spanned 25% of the globe, was certainly a product of the fact that the peoples of the United Kingdom are a very smart group.

In view of recent discussions in the United Kingdom (UK) about the place of the UK in the European Union (EU), where many in the UK think that the UK is getting a bad deal in the EU, we must ask: "Have the people of the British Isles lost their magic touch as far as the EU is concerned? or who is actually getting the better of whom?"

HOW IS THE UK DOING ECONOMICALLY IN THE EU?

We were puzzled by The United Kingdom Agri-Food Country Profile 2003 which tells us that:

"Over the last ten years the UK economy has averaged year on year growth of almost 3% (compared to an EU average of 2.3%), and inflation has remained consistently below 4% since 1992. This is the first period of extended low inflation in over 50 years."

IS THE UK ACTUALLY PROSPERING FROM EU MEMBERSHIP?

Those figures surely looked prosperous to us.

Hence, we thought we would turn the entire EU-UK issue around and examine it from an opposite perspective. Could it be, contrary to the opinion of many in the UK, that the UK is the one profiting from the EU relationship? Those clever Brits?

Certainly Germany, which has a 10% unemployment rate, and rising, should ponder why the UK's rate of unemployment is still at less than 5%, even though there have been "133,000 applicants [in the UK] for work permits under the Worker Registration Scheme (WRS) for workers from the ten new accession countries, 123,000 of which have been issued. See "Poles lead the way as rush from new EU states dwarfs predictions", by John Steele, Home Affairs Correspondent, February 23, 2005, where he writes: "[T]he Home Office said workers were coming "to fill gaps in industries such as hospitality and catering, administration, business, management, agriculture, health and construction". It added: "Accession workers contributed an estimated £240 million to the economy between May and December.""

SOME SIMPLE INTERNATIONAL ECONOMICS

International economics - at its simplest understandable level - is trade. What does one country produce that another needs, and vice versa? To understand the position of the UK in the EU one has to ask, what does the UK produce that the other countries of the EU need, and, conversely, what do the other countries of the EU produce that the UK needs. Without such complementary needs, trade would be impossible, since there would be nothing to exchange.

THE UK IS AN IMPORTER OF FOOD AND MANUFACTURED GOODS AND AN EXPORTER OF SERVICES

According to Patrick Minford of the The Julian Hodge Institute of Applied Macroeconomics, the UK is both a large NET IMPORTER of food from the EU as well as a large NET IMPORTER of manufactured goods from the EU.

At the same time, the UK is a large NET EXPORTER of service industries to the EU, for which Minford lists the examples of insurance, banking, airlines, ground transportation, communication and electricity.

THE UK SERVICE AND INDUSTRIAL SECTORS AND THE LABOUR FORCE

The UK service sector accounts for 73% of GDP (Gross Domestic Product). Breaking the data down differently:

"Industry accounts for 25.3% of total GDP, and employs 30% of the workforce. Manufacturing and construction employ 17.5% of the labour force, and the energy sector employs 1.2%. The agricultural sector comprises 1.7% of total GDP, and employs 1.2% of the workforce."

By our reckoning, that means that 50% of the labor force works in service industries which account for 73% of GDP - and the question is, service to whom?

A large part of the market for UK services is in the EU. An example would be Vodafone, which describes itself as the world's largest mobile community, and the world's 2nd largest wireless phone services provider, after China Mobile. (We are not sure who is really the biggest.)

THE UK BALANCE OF TRADE

The United Kingdom Agri-Food Country Profile 2003 informs us that:

"The UK exported US$287 billion worth of goods in 2001. Exports consisted primarily of manufactured goods, fuels, chemicals, food, beverages and tobacco. The UK's exports were dominated by shipments to countries in the EU. The EU as a whole received 54% of the UK's total exports. The US received 15% of the UK's exports and was the country's largest single export market followed by Germany 11%, France 9%, Netherlands 7% and Ireland 7%.

The UK imported US$337 billion worth of goods in 2001. A majority of imports were manufactured goods, machinery, fuels and foodstuffs. Collectively the EU dominates the UK import market, controlling 48% of total imports. The US is the UK's single largest source of imports controlling 13% of the import market, followed by Germany 11%, France 7% and the Netherlands 6%."


Indeed, the trade balance deficit in 2001 for the UK was US$50 billion. The UK imported far more than it exported. We do not have more updated statistics, but these will likely not diverge much in subsequent years.

FINANCIAL SYSTEMS OF THE UK AND OTHER EU COUNTRIES ARE SIMILAR

Joseph P. Byrne and E. Philip Davis in the NIESR "A Comparison of Balance Sheet Structures in Major EU Countries" point out that there is a myth concerning EU and UK financial systems:

"The UK is commonly viewed as having a ‘market oriented’ financial system, in contrast to other European countries which are seen as ‘bank dominated’. In the light of this supposition, we investigate sectoral balance sheet data for evidence of differences in financial structure between the UK and other major EU countries. It is found that the UK has much in common with Continental countries, in particular France, and they are themselves markedly heterogeneous. There is also some evidence of convergence towards a more market-oriented financial system, even in the most bank-dominated economy, Germany."

THE NET RESULT FOR THE UK

We repeat again this unexpected economic revelation:

"Over the last ten years the UK economy has averaged year on year growth of almost 3% (compared to an EU average of 2.3%), and inflation has remained consistently below 4% since 1992. This is the first period of extended low inflation in over 50 years." [emphasis supplied]

Is that thanks to the EU?

That same source writes:

"One of the key economic issues involving the government is the proposed referendum on the UK joining the euro. While initially planned for this term, ending in 2006, most believe that the referendum is unlikely to come. The delay can be largely blamed on the good performance of the UK economy in comparison to its EU partners. This has made it very difficult for the government to sell the population on the benefits of joining the European Monetary Union (EMU) it consistently outperforms."

But that logic may be completely faulty. Indeed, the UK may be outperforming the rest of the EU precisely BECAUSE it IS a member of the EU, where its non-tariffed service industries are reaping large profits in the EU market. Should the EU rather than UK be the ones complaining?

WHAT WOULD THINGS BE LIKE IF THE UK WERE NOT IN THE EU?

What would happen economically to the UK if it were not a member of the EU?

As Minford notes, "The EU is ... a customs union."

The UK Agri-Food Country Profile writes:

"The EU now forms a single market. It levies a common tariff on imported products coming from non-EU countries. The EU also has among other things, a Common Agricultural Policy, joint transportation policy, and free movement of goods and capital within member states."

Indeed, the history of the EU is rooted in the concept of an "Economic Community". Countries that are "in the club" have benefits AND responsibilities and those outside have no responsibilities BUT no benefits. And each pays its dues to be in the club.

If UK were not a member of the EU, then of course it would have to pay higher prices for food products imported from the EU than the UK does presently, because the rest of the EU would still be subsidizing the French farmers, who get EU subsidies to produce food for all us. The Member States would then not foot the subsidy bill and give the UK a free ride. Of course, the UK could then subsidize their own farmers, also costly, or import more food from elsewhere overseas, and rely on those markets, which might ultimately also turn out to be costly.

At the same time, since the UK would then be "out" of the club, the UK would have to pay a premium - through tariffs - to provide the services of its service industries to the EU Member States. There would also no longer be free movement of manufactured goods OR capital from the UK to the EU and vice versa, and that would be very expensive for the UK.

IS THE UK MEMERSHIP IN THE CLUB OF EUROPE A GOOD DEAL?

To this observer, UK membership in the "Club of Europe", i.e. the EU, looks like a pretty good thing for the UK and less a good deal for the EU. Over the last ten years, according to HM Treasury (European Community Finances, Statement on the 2004 EC Budget and measures to counter fraud and mismanagement, April 2004), Britain’s net contribution to the EU was £2.6 billion a year, equivalent to 0.25% of GDP. [emphasis added]

WHAT DOES EACH EU MEMBER STATE ACTUALLY PAY INTO THE EU?

Looking at all the EU Member Countries, the budget of the EU according to the UK National Statistics is less than 1% of GNI (Gross National Income) of the Member States, running at 0.98% of EU Gross National Income in 2004.

Compare that general 1% figure, however, to the ENORMOUS comparable sums spent by the national governments of the various EU Member States in their own government spending.

AN ANALYSIS (NOT OURS) WHICH IS CONTRA TO OUR THINKING

Civitas writes:

The 'cost' of leaving the EU will actually be a net gain of at least £15 billion a year, more likely £40 billion.

The author provides a range of estimates from 'rock bottom', through 'most likely', to 'high'. His rock-bottom figure draws largely on official sources and deploys the most cautious of assumptions. The net costs of EU membership are appraised in five areas: EU regulation, the common agricultural policy (CAP), net payments to EU institutions, the single market, and inward investment. Overall, the net cost of remaining in the EU ranges from the rock-bottom estimate of £15 billion to the 'most likely' of £40 billion.

EU Regulation: The rock-bottom estimate is £5 billion (rounded down from £6 billion) and the most likely, £20 billion. Based on the Government's own regulatory impact assessments (RIAs), the total cost of regulation between 1999 and 2004, according to the British Chambers of Commerce, was £7.91 billion per year. Based on information supplied by the House of Commons Library in May 2004, 83 per cent of the cost of regulations originated in EU directives. If rounded down to 80 per cent, then about £6.33 billion of the £7.91 billion total cost is due to the EU.

CAP: The rock-bottom figure is £5 billion (after rounding down from £6 billion) and the most likely, £15 billion. An OECD study put the total cost to the EU in 2002 at 1.4 per cent of GDP (the UK figure today would be £14 billion). Allowing for costs and subsidies not included in the OECD study, and for subsidies received by UK farmers, the most likely figure is £15 billion.

Payments to EU Institutions: The latest Pink Book shows net payments of £4.3 billion (rounded up to £5 billion).

Single Market: A study by the European Commission in 1996 is often quoted in support of the claim that the single market raised total EU output by between one and 1.5 per cent. However, a number of independent studies have found no hard evidence of net benefits. For example, the Bundesbank could find no evidence that it has helped German trade. The UK economy is unlikely to be any different. The Institute of Directors reviewed studies from the Commission, the OECD and others and noted the absence of persuasive evidence of the benefits of the single market. In 2003 an Institute of Directors' survey of members found that trading in the EU 14 was on balance unattractive and more costly than before the single market.

Inward Investment: Some studies, including one by the National Institute for Economic and Social Research, claim that inward investment would fall if the UK left the EU. The author questions this contention by looking at the earnings on all inward investment made by the main economic sectors. The two biggest are oil and gas (39 per cent of earnings) and financial services (18 per cent). He argues that oil and gas would continue to attract investment because they are high value products in a stable part of the world. Investments in financial services, another global industry, are mainly denominated in US dollars, and will go wherever the best return is to be found. The City has not suffered from the introduction of the euro and would be unlikely to suffer if the UK left the EU. The author accepts that investment in manufacturing of 'chemicals, plastics and fuel products' (10 per cent by earnings) and 'other industries' (11 per cent) might be influenced by our EU membership.

The EU will be of declining economic importance in the world

The author questions whether it is wise to link our fortunes to a region of the world with a poor record of economic growth and whose share of world markets is destined to fall. Even the European Commission takes a gloomy view of the EU's prospects. In its December 2002 review it forecast a 44 per cent decline in the EU-15 share of global GDP from 18 per cent in 2000 to ten per cent in 2050. In 2050, as in 1950 and 2000, the three most populous countries in the world are likely to be India, China, and the USA. The working-age population of the EU, even after its current enlargement to 25 members, is projected to decline by between 20 and 30 per cent by 2050.

Lord Weatherill calls for a full and open debate

According to Lord Weatherill, the most respected Speaker of the House of Commons in recent years, 'All our main political parties have denied the British people a full and open debate... Parliamentarians now have a sacred duty honestly to explain the pros and cons of our developing relationship with the European Union.'

AN ANALYSIS (NOT OURS) WHICH SUPPORTS OUR THINKING

Britain in Europe has this analysis posted online:

“A Cost Too Far?” by Ian Milne (Civitas) purports to be a rigorous and independent “analysis of the net economic costs and benefits for the UK of EU membership”. But in fact, it is a piece of anti-European propaganda riddled
with errors and exaggerations.

The author, Ian Milne, is the director of Global Britain, an anti-EU research institute and think tank that advocates complete British withdrawal from the EU. Global Britain was initially based from 1998-99 at the UK Independence Party (UKIP)’s London campaign office. Mr Milne was previously director of Bill Cash MP’s European Foundation in 1993-95, but they parted company because Mr Milne was too extremely anti-European for even Bill Cash!

The study’s main conclusion is that: “If the UK were to leave the EU, there would be no net loss of jobs or trade. In addition, we would be between £17 billion and £40 billion per year better off, possibly more.”

This highly dubious result is based on a series of scarcely credible
assumptions, namely that:

1. EU regulation costs £20 billion a year, without bringing any
corresponding benefits, and that these regulations would simply be
abolished if Britain left the EU, rather than replaced with equivalent
domestic regulations;

2. the Common Agricultural Policy costs £15 billion a year, and that
Britain would stop supporting its farmers if we left the EU;

3. Britain’s net financial contribution to the EU budget (including the CAP)
is £5 billion a year, rather than the £2.6 billion it has averaged over the
past ten years – a figure which includes the net cost of the CAP, and
that unlike Norway or Switzerland – Britain would not have to contribute
anything to the EU budget in order to enjoy access to the single market
if we left the EU;

4. the UK economy would not suffer outside the single market, although
economic theory and evidence suggests that eliminating trade barriers
within the EU has boosted the UK economy by 1.8% a year, or £20
billion a year;

5. leaving the EU would have no impact on inward investment in the UK,
although Britain’s share of inward investment in Europe doubled after
we joined the Common Market in 1973 and has collapsed since the
euro’s launch.

As the more detailed discussion of these assumptions below shows, they do
not stand up. There is no reason to believe that Britain would benefit
economically from leaving the EU. On the contrary, the most authoritative
independent study on the costs and benefits of EU membership, conducted by
the National Institute of Economic and Social Research (NIESR) in February
2000, estimates that withdrawal from the EU would lower Britain’s GDP by
2.25% permanently. Since GDP was around £1,100 billion in 2003, the cost to
the UK would be around £25 billion a year. [Footnote 1: Section 4.3 (page 32) of the NIESR study explains what they assume. On withdrawal, the UK government would stop paying to EU institutions, but would take over financial responsibility for the commitments (eg, agricultural support) undertaken by those institutions. The study assumes that some of the saving would be spent in other ways by the government and the rest used to reduce taxes (see the report for details). The upshot is that there would be a difference in the effect of withdrawal on GDP (a fall of 2.25%) and on real gross national income (a fall of 1.5-1.75%). GDP is calculated before net payments to EU institutions and real gross national income after taking account of these and other payments.]

Even allowing for financial savings from withdrawal, the UK would be 1.5% to 1.75% worse off if we left the EU: some £19 billion a year.

The five dodgy assumptions

1. EU regulation

The study claims that a “rock-bottom estimate” of the cost of EU regulation is £5 billion a year – and that the “most likely” figure is £20 billion. In fact, the “rock-bottom estimate” comes from an analysis by the British Chambers of Commerce based on the British government’s own regulatory impact assessments that the cost of regulation is £7.91 billion a year, of which
83% is said to derive from EU-inspired legislation. This comes to £6.3 billion a year.

The “most likely” figure is plucked from the assertion that the cost of EU regulation probably amounts to 2% of UK GDP, because the Dutch finance minister stated in a speech that the cost of EU regulation in his country amounted to around 2% of GDP.

In any case, it is nonsense to claim that Britain would be £20 billion – or even £5 billion – better off if we left the EU.

For a start, regulations – EU or otherwise – have benefits as well as costs. The benefits of sound regulations – the stipulation that cars must be fitted with seat-belts, for instance – far outweigh their costs. It is far-fetched to assume, as the study does, that EU regulations bring no benefits at all to offset their costs.

Moreover, insofar as regulations exist because stakeholders – consumers, trade unions, companies themselves – demand them, then it is more than likely that if Britain left the EU and abolished EU regulations, it would enact similar regulations with similar costs.

Indeed, there would be powerful reasons for enacting identical regulations – or simply not abolishing EU-inspired ones – so that business could export freely to the EU single market without the added burden of having to comply with a separate set of domestic UK regulations.
The vast majority of regulation that comes from Brussels replaces existing national regulations. This is necessary in order to complete the single market, so a company serving the whole of the EU only has to comply with one set of regulations and not fifteen. This means that, if repealed, the majority of EU regulation would have to be replaced by equivalent UK regulation. Moreover, the idea that the EU is constantly generating ever-increasing levels of regulation is a myth. Over the last decade more EU regulation has been repealed than put on the statute book.

In conclusion, although the net cost (or benefit) of EU regulation is very hard to assess, it is arguable that it is around zero.

2. The Common Agricultural Policy

The study claims that a “rock-bottom estimate” of the cost of the Common Agricultural Policy is £5 billion a year – and that the “most likely” figure is £15 billion. The “most likely” figure comes from an OECD study that estimates the cost of the CAP to be 1.4% of EU GDP.

This estimate involves double-counting. The CAP is part of the EU budget; and Britain’s net contribution to EU finances is the next item on the list. In any case, Britain would not “save” £15 billion if we withdrew from the EU. British farmers received government support before we joined the Common Market in 1973 and would doubtless continue to receive support if we left the EU – if only to create a “level playing field” with their generously subsidised counterparts in the rest of the EU. At best, then, Britain would save a fraction of the £15 billion annual cost of the CAP if we left the EU.

3. Payments to EU Institutions

The study, citing the Office for National Statistics, claims our net financial contribution to the EU is £4.3 billion “rounded up to £5 billion”.

In fact, according to HM Treasury (European Community Finances, Statement on the 2004 EC Budget and measures to counter fraud and mismanagement, April 2004), Britain’s net contribution in 2003 was £3.7 billion, and the estimated figure for 2004 is £4.2 billion. In the last ten years, Britain’s average net contribution to the EU budget was £2.6 billion a year, or a 0.25% of GDP. [emphasis added]

Again, Britain would not save all of this if we left the EU. Both Norway and Switzerland, which are not members of the EU, make contributions to the EU budget in order to gain free access to the EU’s single market. Norway pays around 220 million euros a year to the EU, while the Swiss have agreed to pay 1 billion Swiss francs over 5 years, which works out at around 130 million
euros a year.

4. Single Market

The study’s “overall conclusion is that the balance of costs and benefits for the UK economy is zero, that it could be negative, and that the UK would not suffer economically by being outside the single market.”

The source for this scarcely credible claim is a study by the notoriously anti-European Institute of Directors. Yet economic theory suggests that eliminating trade barriers lowers prices, increases economic welfare, boosts competition, enables economies to benefit from greater specialisation and economies of scale and spreads new productivity-enhancing technologies, all of which boost economic growth. A free-market think-tank like Civitas could surely not
disagree with this.

Through the EU, British business has tariff-free access to 450 million consumers – the largest and richest single market in the world. Europe is our biggest market: 52% of our trade is with the EU. 750,000 British-based companies now trade with Europe.

3.5 million British jobs are linked to our exports to the EU, of which 2 million are in manufacturing.

The single market makes it easier for British businesses to export to their biggest market. The creation of the single market has cut company overheads by removing many of the costs and much of the red tape associated with exporting to EU countries. The abolition of customs forms saves British businesses an estimated £135 million a year. The single market ensures that EU countries recognise each others’ product standards. British manufacturers are therefore able to save the considerable costs of re-testing in each country and modifying products to comply with a multitude of different standards. British consumers benefit from cheaper imports because manufacturers from other EU countries save too. EU agreements give all firms the right to compete for contracts with local councils and public bodies across the EU. It puts strict limits on the use of state aid to support ailing industries, ensuring that European firms compete on a fair playing field. This increases competition and efficiency to the benefit of all. And self-employed people can set up a business anywhere in the EU.

The European Commission estimates (The Internal Market, Ten Years Without Frontiers) that EU GDP was 1.8% higher in 2002 thanks to the single market. This is equivalent to a benefit to the British economy of £20 billion a year. Intra-EU trade has risen from around 26% of the EU
economy in 1993 to 35% in 2001; intra-EU foreign investment has grown even faster; and foreign investment into the EU has also soared.

5. Inward Investment

The study claims that access to the single market is only one of the reasons why foreign companies invest in Britain and that if the UK left the EU “the impact on inward investment is likely to be neutral”.

This is fanciful. Britain’s share of inward investment in Europe leapt from around 15% in the 15 years before we joined to 30% in the subsequent 30 years. But since 1998, the year before the euro’s launch, our share has collapsed to 6.7% in 2002, according to the United Nations’ World Investment Report, the most comprehensive and reliable source on global foreign direct
investment. Britain has already suffered a big loss of inward investment by remaining outside the euro; we would doubtless suffer a further fall if we left the EU altogether, since foreign firms would find it easier to serve the EU single market by locating within it."


THE EXAMPLE OF NORWAY

Although Norway has twice rejected joining the EU by Referendum, most modern polls indicate that a majority of the population now regrets this decision.

CONCLUSION

There may be political and other reasons for a certain percentage of the UK population to not desire to be a part of the EU, but economic considerations do not seem to qualify as a grounds for complaint. Since we regard the people of the UK to be quite smart, based on the historical record, we think they will ultimately choose the road which is best for them in the long term, also as far as the question of the ratification of the EU Constitution is concerned, and we fully expect ratification, but only time will tell....

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