In Defence of Liberty

Driven by data; ridden with liberty.

On the EU: Economic Consequences

On-the-EU-Economic-Consequences-IBTimes

Continuing with the next theme of the cost-benefit analysis of European Union membership is a consideration of the common policies: on agriculture, fisheries and the common regulations of the European single market.

Common policies

The Common Agricultural Policy intends to support farming in two ways: firstly, through a centralised system of subsidies across the EU member states; secondly, through the common external tariffs on agricultural products from outside of the European Union. The principal criticism of the CAP are that it inflate food prices, which is not good for consumers. Simultaneously, the CAP elongates agricultural decline — at least as a share of GDP — meaning productive resources are drawn into farming, and not into business areas where member states have comparative advantages. The support provided by the CAP has drastically shrank over the past twenty years, due to reforms and to agriculture no longer being a major component of developed economies.

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The distortion that the CAP induces is also diminishing. (Source: House of Commons Library)

 

This exclusion from the CAP found by being outside the EU is definitely beneficial to the economic welfare of customers, but removing agricultural subsidies are a political matter subject to diffuse gains and concentrated losses.

As the House of Commons Library report into the economic effects of EU membership states [1]:

The UK’s share of direct support to producers in 2011 from the EU budget was around €6.7bn. Total support paid by consumers in 2011 was estimated by the OECD to be €7bn, of which the share paid by UK consumers would be around €1bn.

It is easy to advocate the removal of all farming subsidies and all tariffs against agricultural products. Such radical proposals may not be pursued due to political circumstances.

Harmonisation

Legislation covering common standards over goods and services within the European single market are an important aspect of our membership, and of alternatives to EU membership. Normally, the gross costs of any regulation — from initial implementation to annual costs — are cited. These business and economic regulations will often replace existing legislation made by the member states, rather than imposing a whole new regulation on the British economy, meaning it is the net effect that is of interest.

A 2009 British Chambers of Commerce report suggested only a small minority of net regulations could be attributed to the European Union [2]:

In terms of the number of regulations, the EU this year accounted for only 20%. The reduction from the previous EU level of about 30% is the primary reason for the overall decline in 2007/08. By value, EU legislation was only responsible for about £1.9m net costs to business (0.1%). It would appear that, for this year, virtually all regulatory activity can be attributed to Whitehall. With a developing single market, business regulation should be needed for the EU as a whole or not at all. UK regulations that are additional to those enacted across the EU reduce British business competitiveness.

The proposed models for a British secession are that of Norway, as a member of the European Economic Area, or that of Switzerland, holding bilateral agreements with the EU. When looking at gross costs associated with EU regulations, the vast majority relate to the single market, meaning EEA countries have to implement them. As the Open Europe report on the economic consequences of British withdrawal states [3]:

There are different measures of the share of EU law applying to Norway – in particular when set against the UK which itself has several opt-outs from EU law. Essentially, EEA membership means accepting the application of EU single market law according to its broadest possible definition: the Working Time Directive, banking rules, REACH, climate change legislation, full free movement of people and other measures.

To illustrate the extent to which Norway is affected by EU legislation, of the 100 costliest EU-derived rules in force in the UK – which collectively impose a cost of £33.3bn on the UK economy – 93 of them would apply if the UK joined the EEA (the original agreement, not the Norwegian ‘add-ons’).

Whilst gross costs associated with EU legislation are cited, removing all regulations that will be inherited if Britain secedes the European Union is not politically feasible, and so should not be used as the counterfactual when assessing the costs and effects of membership.

For instance, the EU’s General Data Protection Regulation will apply to any organisation involved in the processing of personal data of any EU citizen, and so cannot be avoided by stepping outside of the EU itself [4].

There is a strong case that the EU over-regulates, and regulates in some areas where member states are better placed [5], but the reducible effects are overstated.

Immigration

The third tranche of effects are from the freedoms of movement and capital. The freedom of movement within the European Union is intimately related to the immigration debate within Britain, which has been a consistently key issue with the British electorate.

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Immigration is a persistently top issue. (Source: YouGov)

The freedom of movement was enacted through the 2004 directive, meaning that all EU citizens have the right to move between member states without visas, and no limitations may be placed on the length of their stay [6].

Britain still has border checks, as it is outside the Schengen area.

According to the ONS passenger surveys, which form the basis of its immigration figures, EU migration occurs primarily for the purpose of work or study [7]. EU nationals typically have a higher employment rate than UK nationals: 79.1% for the EU-27 countries against 74.6% for UK citizens in the final quarter of 2015 [8].

In the House of Commons Library paper, it is recognised that there is no definitive study of the total economic impact of immigration, and the studied effect on wages and salaries depends on the type of migration under consideration. The summation of present research is that, whilst immigration has a total modest and positive effect on average wages, it is associated with a small decline in wages for workers in the lowest tiers of pay.

The 2008 Centre for Research and Analysis of Migration paper [9], led by Christian Dustmann, found “the impact of an inflow of immigrants of the size of 1% of the native population would lead to a 0.6% decrease in the 5th wage percentile and a 0.4% decrease in the 10th wage percentile”. However, the paper also says that “it would lead to an almost 0.7% increase in the median wage and a 0.5% increase in the 90th percentile”.

Both of the common alternative proposals for Britain is either to follow Norway or Switzerland, both of which have to accept free movement of labour as part of their access to the European single market. It will be incumbent on negotiations between Britain and the EU to strike this balance between the desire for goods and services made abroad and the desire for restriction of immigration at home.

On-the-EU-Economic-Consequences-FDI

This is taken from the cogent House of Commons Library paper. (Source: House of Commons Library)

 

The House of Commons Library paper finds that untangling the variety of effects that EU membership and British attractiveness has over foreign direct investment is “very difficult”.

Consequences

The Open Europe paper modelled the economic consequences of a British withdrawal, estimating the effect on British GDP in 2030. The best case scenario — based upon the rapid proliferation of free trade agreements — stands at 1.6%, against a worst case scenario of World Trade Organisation rules at -2.2%. The politically feasible range, determined by an agreement with the EU, is between -0.8% and 0.6%.

On-the-EU-Economic-Consequences-OE

British membership of the European Union would appear to have a slightly positive effect on the British economy.

Brexit would not be disastrous, but not all of the outcomes are good.

References

[1] Thompson, G., and Harari, D., 2013. The economic impact of EU membership of the UK. House of Commons Library. Available from: http://researchbriefings.files.parliament.uk/documents/SN06730/SN06730.pdf [Accessed: 8th March 2016]

[2] Ambler, T., and Chittenden, F., 2009. Worlds Apart: The EU and British regulatory systems. British Chambers of Commerce. Available from: http://www.britishchambers.org.uk/assets/downloads/policy_reports/BCC_report_Worlds_Apart.pdf [Accessed: 8th March 2016]

[3] 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: 8th March 2016]

[4] Stringer, N., 2016. What is the EU General Data Protection Regulation (GDPR) & why should you care? Econsultancy. Available from: https://econsultancy.com/blog/67540-what-is-the-eu-general-data-protection-regulation-gdpr-why-should-you-care/ [Accessed: 8th March 2016]

[5] Masters, A., 2013. Golden Oil. In Defence of Liberty. Available from: https://anthonymasters.wordpress.com/2013/05/29/golden-oil/ [Accessed: 8th March 2016]

[6] EUR-Lex, 2004. Directive 2004/38/EC of the European Parliament and of the Council. Available from: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:158:0077:0123:en:PDF [Accessed: 8th March 2016]

[7] ONS, 2016. Migration Statistics Quarterly Report: February 2016. Available from: http://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/migrationstatisticsquarterlyreport/february2016 [Accessed: 8th March 2016]

[8] ONS, 2016. UK Labour Market: February 2016. Available from: http://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/february2016 [Accessed: 8th March 2016]

[9] Dustmann, C., Frattini, T., and Preston, I., 2008. The Effect of Immigration along the Distribution of Wages. Centre for Research and Analysis of Migration. Available from: http://www.ucl.ac.uk/~uctpb21/Cpapers/CDP_03_08.pdf [Accessed: 8th March 2016]

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This entry was posted on March 19, 2016 by in European Politics and tagged , , .
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