Should the UK leave the EU? To see more of our products visit our website at Andrew Robertson, Head of Economics and Business Studies, Alleyn’s School.

In December 2012 David Cameron announced that if the Conservatives won the next election he would renegotiate the UK’s relationship with the EU. C He would call a referendum on whether the UK should accept the new deal or leave the EU. C The likely year of the referendum would be C Referendum If the UK voted to exit, neatly termed ‘Brexit’, then after a period of changeover this would occur in C

The EU is a political and economic union of member states which are located primarily in Europe. C It is a single market with no barriers to trade between members and a common external tariff against imports from outside. C There is free movement of goods, persons, services and capital – the so- called Four Freedoms. C Definition of the EU It was created on 1 November 1993, when the Maastricht Treaty came into force and is governed by supra-national institutions. C The EU has approximately 500 million consumers and had 28 member states at the start of 2014, of which 18 use the common currency unit, the euro. C

The European project has delivered the longest stretch of peace in Europe in modern history. C This has provided the stability for growth, integration and interdependence. C The EU accounts for around half of the UK’s exports and imports. C The importance of the EU to the UK A recent government report cited six other studies, five of which said membership was worth up to 6.5% in extra GDP. The sixth one said GDP was 3% lower. C This range shows the wide variety of estimates that exist when trying to quantify the costs and benefits of such an enormous and complex organisation. C

With ‘Brexit’ there are broadly two main options. C The first is to reverse out of the EU’s political and legal influence as far as possible, while trying to keep free trading access to EU markets. C The second is to exit the EU free trade area completely and have a standard international, World Trade Organisation-style, relationship with the EU. C The current alternatives to EU membership This second choice would mean relatively high tariff rates, custom duties and non-tariff barriers. C

If the UK chooses to leave the EU if will be the first large state to reverse the continuous forward momentum of an ‘ever closer union’ and this may be seen as a threat to the European project. C Plus there is no guarantee of access to the European Free Trade Association (EFTA) or the European Economic Area (EEA). C The EU could decide to negotiate a very unfavourable deal for the UK. C The outcome of renegotiation is uncertain. However, the EU has always been a union of self-interested states and compromise has been a hallmark of its history. C The UK is also the EU’s largest export destination, so it is not in the EU’s interest to create a trade war of tariffs with the UK. C

The free movement of labour had by 2011 led to an estimated 2.3 million citizens of other EU countries living in the UK. C Also, about 710,000 UK citizens live in other EU countries. C Although some UK nationals have been out-competed for certain jobs by workers from the EU, the UK has gained many highly-skilled people. C The possible end of the free movement of labour With ‘Brexit’ EU migrants are unlikely to have free movement and the UK economy would be a net loser of this valuable resource. C

Leaving the EU is very likely to reduce the flow of capital to the UK’s financial services industry. C The City accounts for 10% of the UK’s GDP and 11% of its tax receipts. C Germany and France would love to see Europe’s financial centre move to Frankfurt or Paris. C The possible threat to London as the EU’s Financial Centre The City has already lost one-third of its workforce since 2007 and uncertainty regarding its place on the financial world map does not help its recovery. C

The most immediate and probably least significant benefit of ‘Brexit’ is the saving of about ￡ 8 billion a year in the UK’s net budget contributions to the EU. C This contribution may sound large, but it is only about 0.5% of UK GDP. C Norway, for example, spends more money per citizen on being an external member of the EU than the UK does as a member. C Reduced government spending and less red tape In 2010 the British Chambers of Commerce Burdens Barometer report estimated that a third of the country’s regulatory burden came from EU directives. C The study estimated the cumulative costs to UK businesses from EU- origin regulations implemented since was ￡ 60.8 billion. C

The immediate danger of David Cameron’s promise of a referendum is that it may reduce Foreign Direct Investment (FDI) because it creates uncertainty until Britain’s position is clear. C But inward FDI has actually risen from ￡ 42 billion in the year to June 2012 to ￡ 63bn in the year to June C More significantly outside the customs union, Britain’s ￡ 400 billion export revenues from the EU are likely to fall. C The effects on trade and investment will be significant 1 For example, dairy exports would be subject to an import tax of 55% to reach the EU market, and some items will have 200% tariffs. C

In 2010 Switzerland, which is a member of EFTA, exported four times as much per head to the EU as the UK did. C The Swiss negotiated a series of trade deals in the 1990s and fully participate in the free movement of goods, services, people and capital. C They also successfully avoid much of the unnecessary regulation the EU generates. C After ‘Brexit’ there would be the opportunity for the UK to establish low tariff arrangements with fast-growing countries. Currently China and India together barely account for 5% of UK exports. C The effects on trade and investment will be significant 2

However, in May 2013, President Obama warned that if the UK left the EU it would not be party to the Transatlantic Trade and Investment Partnership (TTIP). C This could be the biggest trade and investment deal in history and worth ￡ 6 billion a year to the UK alone. C It has been estimated that the deal could be worth an additional 1-2% of GDP on both sides of the Atlantic. C The TTIP is a free trade deal between the EU and US economies, which together represent over half the global economy and account for 30% of global trade. C Obama stated that he thought it unlikely there would be the political will to revisit the issue for the UK alone, should it exit the EU. C The effects on trade and investment will be significant 3

On the whole the UK’s politics tend to be to the right of most EU countries and its economics is more free-market oriented. C It is argued that the formulation of polices and laws in the EU is more interventionist, centralised and socialist than many free-market economists think is beneficial to the EU’s long term economic performance. C The US wants the UK to stay a full member of the EU to champion liberal, free-market values in Europe. C Conclusion But many in the UK feel that the UK cannot change the direction of the EU and so are primarily concerned with reducing the EU’s political, legal and economic power over the UK. C The British Chambers of Commerce in 2013 found that 57% of business wanted to remain in the EU while transferring specific powers regarding health and safety law, and employment law, back to Westminster. C Plus 58% of firms feel that withdrawing from EU membership would harm UK business interests. C The outcome of the next election and renegotiation is very important to the UK’s economic and political future. C