In Defence of Liberty

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On the EU: Economic Effects

On-the-EU-Economic-Effects-Economy

What are the economic effects of the EU? (Edited: Europe Word)

Membership of the European Union influences the British economy in many ways. The single market is not merely a free trade zone, but a bloc of countries where trade barriers for goods have been substantially diminished, common policies on product regulation have been adopted, and the four freedoms — of goods, of labour movement, of capital, of services — have been established. These freedoms are not equally enacted, particularly in services, as shown by the desire for the “completion” of the European digital single market [1]. In other words, the European single market may be thought of as a customs union: meaning it is an internal free trade bloc with a common policy on external tariffs.

Cost-Benefit Analysis

There is no definitive economic cost-benefit analysis of EU membership, or equivalently of British withdrawal from the EU. These studies are prone to differing methodologies and subjective assumptions, particularly over their choice of the counterfactual. For instance, the gross costs on British business of EU-derived regulations are often stated as if this is the figure that Britain would ‘save’ by leaving the European Union. This claim implies that the counterfactual is that Britain would not have any regulation in that area of business at all, which is ahistorical and often politically unfeasible.

Economic studies will also not include many intangible and diffuse costs and benefits that people may derive from Britain’s membership or secession from the EU, such as legislative capacities being held in the House of Commons, the amplification of diplomatic voices and of the ease of travelling to and from other EU nations.

In 2010, the UK Independence Party released a report that estimated the “combined annual direct and indirect costs of EU membership” were “£77 billion Net” [2]. It was not expressed as a percentage of gross domestic product, but would be equivalent to suggesting that EU membership dampened British GDP by around 5%. In typically sober commentary, the UKIP report suggested it was “absolute madness” and that we “might as well burn the money on a bonfire!

In the same year, written evidence to the Lords EU Select Committee claimed that EU membership had elevated Britain’s GDP per capita by 6%. Other cost-benefit analyses suggested intermediate amounts [3].

The House of Commons Library produced a study of the economic effects of Britain’s EU membership in 2013 [4]. The think-tank Open Europe released a report into the economic consequences of British withdrawal from the European Union, in 2015 [5].

Membership Costs

The most calculable effect of Britain’s membership of the European Union is the membership cost. Each country pays a gross amount based upon the government revenue from Valued Added Tax and the gross national income, calculated in the EU single currency. In the fiscal year 2014-15, this payment was £18.2bn [6]. The UK also reduces its gross payment, called the rebate, which was £4.8bn in 2014-15. This means that the actual membership fee paid to the European Union in that year was £13.4bn.

The European Union then spends these monies on various projects within its member states, amounting to £4.6bn in 2014-15. This gives the net contribution to the EU budget of £8.8bn in 2014-15. The UK total managed expenditure in 2014-15 was £735.5bn, so the net contribution to the EU was around 1.2% of total government spending in Britain [7]. In the same year, the NHS budget was £111.9bn, meaning that Britain’s EU contribution was only 7.9% of what the government spends on healthcare.

On-the-EU-Economic-Effects-Budget

Being outside of the EU does not mean ceasing to contribute to the EU’s budget, as both Norway and Switzerland have learned. According to the House of Commons Library, Norway had a net contribution of £106 per capita in 2011, compared to £128 per capita in Britain. Under the emulation of Norway, Britain’s contributions to the EU would be reduced by around 17%. Switzerland has an equivalent payment of £53 per head, so following the Swiss model of bilateral agreements would mean British net contributions to the EU budget falling by approximately 59%.

Goods and services

The first tranche of economic effects are the free movement of goods and services within the European single market. The theoretical gains are the reduction of trade barriers mean nations can specialise in the goods and services in which they have a comparative advantage, then trading to mutual benefit. It opens up domestic companies to foreign competition, and drastically increases the size of the potential market for those firms who wants to sell their goods and services, leading to economies of scale within firms. The effects are to lower prices for consumers, and so improve the overall economic welfare. The EU, however, applies a system of common tariffs to all goods outside of its shared borders, which has a diversionary consequence on inward trade.

The consequential effects of our EU membership on trade, both of goods and services, is then wholly determined by what the counterfactual proposal is. If Britain were outside the EU, but the principles of the World Trade Organisation had meant that Britain were treated as a ‘most favoured nation’, then the tariffs would vary by economic sector. The average ‘most favoured nation’ tariff of the European Union has been declining over the years, meaning this particular benefit of EU membership has diminished.

On-the-EU-Economic-Effects-MFT-averageThe EU’s average MFN tariff was just above 1% in 2011, but this masks some high tariffs in popular goods for British consumers.

The 2013 House of Commons Library report says:

Without any change, a 32% tariff would be levied on imports of wines, for instance, and a 9.8% tariff on motor vehicles.

The reason that free trade agreements take considerable time is that they often seek to alleviate non-tariff barriers to trade, such as discrepancies in product standards and anti-dumping measures. This is combined with the long quest of determining what goods and services will have the tariffs mutually reduced between the signatory countries.

On-the-EU-Economic-Effects-Tariffs

(Visualisation: Tableau)

 

Another proposal is that Britain will become, like Norway, a member of the European Economic Area (EEA) and the European Free Trade Association. This will mean that Britain trades in the European single market along with the other members of the EEA. However, Britain will also have to keep aligned to the EU product standards, whilst lacking any direct influence over what those rules are.

Trade deals

Exiting the EU — even as a member of the EEA — would mean Britain regains the capacity to enter in certain types of trade deals. This does not mean, at present, that Britain is restricted into entering commercial agreements with other nations. The EU does have the sole power over tariffs and regulation of trade between non-EU states and its member states.

The typical reasoning behind regaining this ability is that Britain can return to its preferential policies with the Commonwealth countries. This historical preference had to be abandoned as Britain entered in the EU’s common tariffs policy. As Steve Peers at the London School of Economics notes [8]:

The result of this change in policy is that the EU has agreed free trade agreements (FTAs), or is in the process of negotiating free trade agreements, with the vast majority of Commonwealth states — a full 90% of the 50 Commonwealth countries that are not in the EU. This includes the six Commonwealth states that accounted (in 2011) for 84% of Commonwealth trade — and many more besides.

The EU has failed to secure preferential trade agreements with Brazil, India or China. However, it is not certain whether Britain — with this trading capacity restored — would fare much better, even with its great history for trade.

References

[1] Europa, 2016. Digital Single Market. Available from: https://ec.europa.eu/digital-single-market/digital-single-market [Accessed: 7th March 2016]

[2] UKIP, 2010. How much does the European Union cost the UK? Available from: http://www.ukipmeps.org/uploads/file/Cost_of_the_EU_25_5_11.pdf [Accessed: 7th March 2016]

[3] House of Lords, 2010. Inquiry into Re-Launching the Single Market – Oral and associated written evidence. Available from: http://www.parliament.uk/documents/lords-committees/eu-sub-com-b/singlemarketinquiry/singlemarketwo.pdf#page=110 [Accessed: 7th March 2016]

[4] Thompson, G., and Harari, D., 2013. The economic impact of EU membership on the UK. House of Commons Library. Available from: http://researchbriefings.files.parliament.uk/documents/SN06730/SN06730.pdf [Accessed: 7th March 2016]

[5] Open Europe, 2015. What if…? The consequences, challenges and opportunities facing Britain outside the EU. Available from: http://openeurope.org.uk/intelligence/britain-and-the-eu/what-if-there-were-a-brexit/ [Accessed: 7th March 2016]

[6] HM Treasury, 2015. European Union Finances 2015. Available from: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483344/EU_finances_2015_final_web_09122015.pdf [Accessed: 7th March 2016]

[7] HM Treasury, 2015. Summer Budget 2015. Available from: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443232/50325_Summer_Budget_15_Web_Accessible.pdf [Accessed: 7th March 2016]

[8] Peers, S., 2015. The Commonwealth and the EU: let’s do (trade with) both. Available from: http://blogs.lse.ac.uk/brexitvote/2015/12/10/the-commonwealth-and-the-eu-lets-do-trade-with-both/ [Accessed: 7th March 2016]

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This entry was posted on March 18, 2016 by in European Politics and tagged , , .
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