It is now time to bring the strands of the analysis together. There is no single, exact number for the damage that EU membership does the UK, but vast damage has been done. Chapter 1 established that the direct fiscal cost of the UK’s EU membership is now 1¼% of gross domestic product each year; chapter 2 examined the damage of EU regulation in terms of employment and energy use, and in the international financial sector (i.e., ‘the City’), and also discussed small business closures because of substance and product authorisation regulations, and arrived at a number of between 5% and 6% of GDP each year at present, but growing over time; chapter 3 borrowed from work by the OECD and Minford to reach an estimate that resource misallocation due to the EU’s trade regime costs the UK over 3% of its GDP each year; chapter 4 argued that, because the UK labour market had been too open to immigration from Eastern Europe, over 100,000 UK-born people had been without jobs over a significant length of time, with a cost that may be difficult to quantify, but might be 3/8% of GDP for the relevant period; chapter 5 surveyed the costs of waste, fraud and corruption, and argued that the Common Fisheries Policy, the Common Agricultural Policy, environmental directives, and fraud and corruption in EU- or EU-related administration led to waste that in total might be 3/8% of GDP; and chapter 6 looked at actual and potential losses from ‘health tourism’, ‘benefit tourism’, fines from the European Court of Justice and ‘contingent liabilities’, which added another ¼% of GDP.
So we can now add up the numbers and reach our answer. It is 11% of GDP. The precision of the figure should not be pressed too far, but – as a ballpark number – this is about right. Roughly speaking, the UK is worse-off each year by a bit more than a tenth of its national output because it is a member of the EU. It would be appreciably better-off if it left the EU and became, like most of the world’s countries, independent and sovereign except for the obligations involved in belonging to the World Trade Organization, the IMF and so on. The vital role of these institutions needs to be remembered. The proposal to leave the EU is emphatically not an exercise in ‘little England-ism’. On the contrary, it recognises that the supranational and multilateral institutions set up in the mid-1940s have been vital to global peace and prosperity in the last few decades
Understanding the 11% figure: a flow relative to GDP
In one of the paragraphs above the phrase ‘each year’ followed the cost estimate. This was necessary, so that the cost could be compared with the UK’s annual GDP. The word ‘cost’ does need to be qualified and pinned down in this way, as it is sometimes used without sufficient care. What kinds of misuse are we thinking about?
First, the ‘cost’ may be a one-off hit of some sort. A particular interpretation of an EU regulation may cause harm in a particular year, but not be on-going1; or the demand for the capitalization or recapitalization of an EU institution may be a once-for-all event; or the UK may be asked to contribute to an EU-sponsored emergency foreign aid package to a country devastated by civil war or famine, where the civil war or famine are not expected to go on for ever; and so on. One-off hits are not included in the 11% number, because it is difficult to allow for them. Arguably, the annual figure should include an allowance for the expected probability in any one-year period of one-off hits.
Secondly, the cost is an annual number (i.e., the flow in a one-year period), not a capital value (i.e., a number – like a net present value of discounted costs – which attempts to calculate one number for the stock of disadvantages to the UK of EU membership, in effect, a number that expresses the cost ‘for all time’). Estimates of the capital value raise many uncertainties. Policies may change at a later date, while the discount rate applied to costs in future years is contentious. In some of the footnotes to these pages crude attempts have been made at capitalization, particularly where the damaging effect of regulations is cumulative and the current year understates the cost to the UK.2 The preference has been for a high rate of discount, because of all the imponderables. Nevertheless, there can be little doubt that the UK’s membership of the EU – which is now defensible only on political grounds (see below) – has an economic cost, in capital terms, running into the trillions of pounds.3
Understanding the 11% figure: the problem of the counterfactual
A fundamental criticism of the analysis here, and particularly of the analyses in chapters 2 and 3, is that the costs are overstated because the counterfactual – the situation in which the UK has left the EU – has not been adequately spelt out and explained. Specifically, as regards the costs of regulation, UK departure from the EU would not mean that the UK’s industries were totally unregulated and estimates of the cost of EU membership depend on the assumptions made about the severity of the UK’s domestic regulatory regimes if we were outside the EU. Cynics might suggest that the UK would have ferociously tight regulation, which would hurt British industry and finance even more than EU regulation. The same kind of objection can be made to this study’s estimate of the costs of resource misallocation. The UK’s departure from the EU would allow us to adopt unilateral free trade, which economists tend to regard as the best policy, but in the hurly-burly of practical politics there is no guarantee that – outside the EU – the UK would in fact be a free-trade nation. (It was not before 1973.) So the estimates of the cost of resource misallocation made in this study can be attacked for falsely taking for granted that the alternative to EU membership would be free trade.
The problem of the counterfactual is basic not only to any discussion of the UK’s membership of the EU, but also to the yet more fundamental debates on the right governing ‘philosophy’ for the UK as a nation and its general geo-political stance. Implicitly in this study it is assumed that Britain is, above all, a nation with an enduring ‘public philosophy’ that upholds the freedom of the individual and the non-discriminatory rule of law.4 Further understood commitments are to the free market economy and, hence, to the defence of private property rights. Given that, the implicit counterfactual in the cost estimates in this study is that, outside the EU, the UK would be a free-trade nation with light regulations and low taxes. Of course that counterfactual is open to review and criticism.
A further clarification must also be emphasized here. To say that the cost to the UK of EU membership is about 11% of GDP is not to claim that, within hours of our exit from the EU, everyone in our country would better-off – visibly and without further ado – by that amount. It is not that incomes would be higher at the next pay date by 11%, while prices would be the same. That is not what is being said. By exiting the EU, the UK would indeed be moving – within relatively short order – to saving almost 1% of GDP, because it would not have to pay the direct fiscal cost discussed in chapter 1.5 Within a year or two we would gain from preventing benefits and health ‘tourism’, we would stop the fish discards, we would adopt more sensible water standards and so on, and we would chuck the ECJ fine notices in the bin. Altogether we are talking about perhaps another ½% – 1% of GDP quite quickly.
But the savings from unravelling the acquis (and discarding it with the debris of the dead fish in the North Sea, where many of the regulations belong) would take several years to emerge, while the welfare improvements from improved resource allocation would never appear in a pay cheque or a profit-and-loss statement. The gains from improved resource allocation would nevertheless be real enough and would be evident in, for example, a sharp fall in the relative price of food and increased purchasing power. Over five or ten years the British people would see a material improvement in their living standards from leaving the EU, and their economy would move onto a higher growth path. Small businesses that have closed because of EU regulations would re-open, jobs ended because of burdensome ‘social’ legislation would be advertised and filled again, factories shut because of excessive energy bills would be rebuilt, and so on.
Understanding the 11% figure: the effect on the budget deficit
In the year since the 2012 edition of this study was published, the author has come across a recurrent misunderstanding of its analysis. The 11%-of-GDP figure is the economic cost to Britain as a nation. The concept of the economy of a nation has to be sharply distinguished from the public finances of that nation. Fortunately, nations are much more than their governments, while the wealth of a nation is ultimately owned only by its people as individuals and is a high multiple of public debt.
The misunderstanding is to think that the 11%-of-GDP cost is the cost to government. A leap is then made to conclude that, if we left the EU, the whole £165 billion would be available ‘to reduce the budget deficit’. Sorry, no, that is not the case. If we left the EU, the budget deficit would indeed decline as a result, in two main ways. First, as already noted, both the UK as a nation and the UK government would save in short order about 1% of GDP from ending our financial contributions to EU institutions (i.e., the ‘direct fiscal cost’ discussed in chapter one), and there would also quite quickly be the savings from avoiding ‘health tourism’, ‘benefit tourism’, the ECJ fines and so on. But overall we are talking at most of 1½% – 2 % of GDP of direct and fairly early benefit to the budget balance. Second, the ditching of the acquis communautaire would – also as explained – be followed by the return of small businesses, the renewed employment of people forced out of jobs by excessive regulation, the rebuilding of factories, and so on. After, say, a decade outside the EU the regulatory cost of EU membership (i.e., the 5% – 6% of GDP discussed in chapter 2) would no longer handicap the economy. It would be history. In that decade growth would be ½% a year higher than it would have been inside the EU, and the level of full-employment output at its end would be about 5% more. Some of that output would be paid to the government in the form of taxation, with 40% being a reasonable proportion to assume. So the tax take would be 2% of GDP higher (i.e., 40% of the 5% uplift to national output).
Leaving the EU would help is restoring balance to the UK’s public finances. A side-effect of withdrawal would be a big reduction in the budget deficit, which is now over 7% of GDP. Roughly a halving of the deficit might be envisaged. But the 11%-of-GDP cost of EU membership is the cost to Britain as a nation, largely from over-regulation and resource misallocation, and this must not be confused with the direct fiscal cost to the British government.
Benefits of EU membership?
Enthusiasts for the UK’s continued membership of the EU may counter that our answer is one-sided, because no benefits have been identified and the benefits have not been balanced against the costs. But that begs the question, ‘what economic benefits does the UK receive from EU membership?’. (The politics are another matter and are mentioned briefly in the final section.)
The only serious answer that the Europhiles give – indeed, the only substantive benefit that the UK could be said to receive from EU membership – is that British companies enjoy free trade in industrial products with their most immediate neighbours. To the extent that the EEC/EU has promoted industrial free trade since its founding in 1957, the citizens of Britain and the rest of European should be grateful to it. When in a 2004 speech to the CBI, the pro-EU politician, Peter Mandelson, wanted to identify something to offset the cost of EU regulations to business, it was entirely understandable that he should point to the benefits of the single European market.
It was true that in the early 1970s, when the UK sought Common Market membership, the full opening of the EEC area to British companies would prove advantageous to the UK.6 But that was 40 years ago, when international trade was still hampered by high tariff barriers and other restrictions. Today the situation is utterly different, because of radical trade liberalization across the globe. Before the Tokyo Round of trade liberalization under GATT auspices, which ran from 1973 to 1979, many tariffs on industrial products were in the 10% – 20% area, with effective rates of protection sometimes being well over 30%.7 The Tokyo Round brought tariffs down to under 5% in principle. The next round – known as ‘the Uruguay Round’ – lowered tariffs further and also extended the key principles of the GATT to trade in services.8
But another trend was perhaps yet more important than the GATT trade rounds. From the 1980s onwards the governing elites of many developing countries, including such formerly (or nominally) communist countries as China, realized that unilateral trade liberalization was of enormous economic benefit. The result has been a radical transformation of the international business environment. In the early 1970s the European Common Market was an oasis of (relatively) free trade in a world where virtually entire continents, including most of Asia and Latin America, were deserts of protectionism. Today the EU’s single market may be larger and more attractive for British companies than the Common Market was in the late 1970s and early 1980s, but the difference is hardly revolutionary. Much more important, countries that were virtually closed to British exporters in the early 1970s, such as China, Russia and Brazil, are now quite open to our products. The European single market, with its free-trade arena in our backyard, is not the only ‘game in town’. In effect, industrial free trade has become available globally.
Free trade with the EU, but outside it
This is not to deny that, if the UK’s exit from the EU led to the end of industrial free trade with existing EU member states, the UK would lose valuable gains from trade. The logic is straightforward, and we can appeal again – as in chapter 3 – to Adam Smith’s exposition in The Wealth of Nations. If late-18th-century Scotland had slapped 2,000% tariffs on imports of wine, grapes might have been grown in ‘glasses, hotbeds and hot walls’, to recall Smith’s words, and wine might be made from the grapes and a prodigious application of labour. But Scotland would have been far poorer than if it had imported wine from Spain and Portugal, and paid for the imports of wine with exports of whisky. In general, nations benefit from specializing ‘according to comparative advantage’.9 Whether the UK is inside or outside the EU, we should want free trade with our European neighbours.
Europhiles sometimes talk as if the UK’s exit from the EU would leave us ‘isolated’, and hence in some sense marginalized and poorer.10 The severing of trade ties would indeed be a calamity, for both the UK and the rest of Europe, if that were to accompany our leaving the EU. But no diminution of trade is necessary or to be expected. First, the EU has industrial free trade with Norway, Switzerland and Turkey, and none of these three countries is an EU member. As the trade regime with the EU varies for each of the countries, and as the variations are complex and idiosyncratic, there is no space to go into detail here. But their prosperity demonstrates that EU membership is not a condition for close and extensive trade interaction with EU members, even for nations that are geographically in the European orbit. (Norway, Switzerland Turkey have all enjoyed substantial increases in income per head, at current prices and exchange rates, relative to the EU in the last 10 to 15 years.)
Secondly, and much more fundamentally, the EU has reached free trade agreements with nations that are distant from Europe, in terms of both geography and culture. Two salient such agreements are those with Israel, signed in 1995, but taking effect in 2000, and Mexico, agreed in 2000. In both cases industrial free trade is the heart of the FTA. At present negotiations are under way with the USA and Japan over a FTA. Ample precedent has therefore been set for the negotiation of a FTA between the UK and the continuing members of the EU, once the UK had left. If the EU is interested in free trade with Norway, Switzerland and Turkey, and even in free trade with Japan, Mexico and Israel, then it should be interested in free trade with the UK. Indeed, if the EU were not interested in a FTA with the UK once the UK had regained its independence, the whole basis of international cooperation since the 1950s would be challenged. There have been many lapses, by a large number of nations, from the free-trading ideal since the GATT began its work in the late 1940s. Nevertheless, on balance nations have eliminated tariff and non-tariff barriers to trade, trade has expanded faster than output, and living standards have increased everywhere as nations specialize according to comparative advantage. Surely, it would be bizarre for the EU to maintain FTAs with such nations as Mexico and Israel, and yet to refuse to contemplate a FTA with the UK. Further, one vital consideration – discussed in the next section – suggests that the EU would be foolish to disdain a FTA with us. Indeed, this consideration argues that open EU discrimination against goods and services exported from a fully independent UK would be so counter-productive as to be crazy.
Importance of EU trade surplus with UK
The UK is a massive exporter of goods and services to the rest of the EU. In 2011 these exports totalled over £222 billion. However, it is an even larger importer. In 2011 imports from other EU member states came to about £266½ billion. Further, people and companies in the EU27 (i.e. the EU without the UK) have made vast investments in the UK, owning, for example, big stakes in the various utility industries. Last year the EU27 received £74.1 billion in income from their investments in the UK, whereas the UK received £46.8 billion in income from its investments in the EU27. So other EU member states had a surplus on their transactions with us of altogether £71.6 billion, not much less than 5% of what we produce as a nation.11 Of course, relative to the economies of the other member states, £71.6 billion is much smaller, a bit more than ½% of their combined GDPs. Nevertheless, a surplus of ½% or so is worth having, particularly in the current global context when the financing of external deficits has become far more problematic than it was before the Great Recession
Suppose that the UK has left the EU. Suppose also that the UK has indicated to the other member states that it has every wish to maintain friendly and close trade relations. The aim would be that European exporters can sell as easily to British customers, and British exporters can sell as easily to European customers, as at present. Would the other EU member states (‘the 27’) be inclined to turn us down? The answer must be ‘of course not’. Precisely because they have a surplus on their trade with us, they have more to lose from ‘a trade war’ than we have. (And heaven forbid that the phrase ‘trade war’ has to be much repeated in this context.) The existence of a surplus on their trade with us must bias the 27 to want the retention of industrial free trade with the UK. In other words, outside the EU, the one aspect of our interaction with the EU membership that is genuinely beneficial – free trade in goods and services (outside the contentious areas of farming and fisheries) – would still be available to us.
In his 2004 speech to the CBI Mandelson said the single market was worth about 2% of GDP to the UK and contended that this benefit of EU membership had to be weighed in the balance against the cost of regulation, which was 4% of GDP. His claim does not stand up. The benefit of industrial free trade with our European neighbours can be enjoyed outside the EU, just as readily as it can be enjoyed inside it. A common argument in British political debate is that the UK must belong to the EU in order to participate in the industrial free trade that accompanies ‘the single market’. That argument is bogus. Sure, in exporting to the EU27 British companies would have to meet the EU’s regulatory requirements. But we can negotiate over the content of these regulations, just as Mexico, Israel and Japan have done in their FTAs. More generally, British companies have to meet national regulatory requirements when they export to the USA, China or India. But no one has proposed that the UK has to embrace full-scale political union with the USA, China or India in order for these exports to be acceptable in these important foreign markets.
Rising cost of EU membership
So the UK can escape the heavy costs of the EU’s regulatory apparatus and other EU-related burdens by leaving the EU, and it can still secure the free trade with its neighbours that it has always wanted. If the Europhiles deny this proposition, can they perhaps explain the willingness – indeed the apparent keenness – of the EU bureaucracy to negotiate free trade arrangements with a variety of countries (i.e., Mexico, Israel and Japan) which are more remote from the EU than the UK and have far less trade with it? But this hints at a puzzle. Why do any nations belong to the EU? The same kind of calculations done in this study for the UK can be done for all the member states. Given the force of the analysis, in most cases the economic case for withdrawal is likely to be clear-cut.12 No doubt much of the explanation is to be sought in institutional inertia and popular apathy in virtually all the member states, and – for Germany and the East European countries – EU membership can perhaps be justified by geopolitics and history. (‘They are “too close” to Russia’, ‘Germany must atone for its past’, etc.) But also relevant is that the cost of EU membership has been rising over the decades. This trend has been slow and unobtrusive, and commentators have taken time to appreciate the damage being done. Only in the last few years has the EU’s image and reputation deteriorated significantly.
In the early years of the ‘European construction’ the move towards industrial free trade conferred substantial benefits on the original six members, causing widespread anxiety in the UK about relative economic decline. The British people ‘joined the Common Market’ because they were afraid that their country was becoming ‘the poor man of Europe’. In the 1970s and early 1980s the economic pluses and minuses of EU membership were indeed relatively balanced. The UK participated in and gained from the free trade area, while paying less in its fiscal contribution (relative to GDP) than today and postponing the implementation of such iniquities as the Common Fisheries Policy. If this study had been carried out in, say, 1983, it would not have reached such a negative verdict about EU membership. Here we come to a key point: the costs have increased since the late 1980s, mostly because the proliferation of regulations at the EU level of European ‘government’ has competed with and gained ground from existing regulations at the national level.
The wave of over-regulation is hardly secret. To quote from a recent press statement by John Longworth, the director-general of the British Chambers of Commerce, ‘British firms seem to feel that the balance of advantage of EU membership is lessening…[O]ne third of firms think that the negatives associated with…regulation outweigh the benefits of the single market’.13 Indeed, British business regards some new EU directives as downright nutty. Last year the European Parliament considered a directive which would require companies to measure employee happiness before and after a layoff. According to The Daily Telegraph (16th August, 2012), ‘The rules, drafted by Spanish MEP Alejandro Cercas, would make it mandatory for workplaces across the Union to assess mental health after redundancy. The results of such tests would then be used to determine if an employer should provide retraining, interview coaching and general job-seeking counsel to former employees.’ A representative from the Engineering Employers Federation described the idea as ‘ridiculous’.
The proliferation of regulations began with the 1986 Single European Act. The Single European Act was the first major transfer of competences to EU institutions since the founding treaties, as the then president of the Commission, Jacques Delors, was fully aware. The transfer of competences, and the proliferation of regulations, received further momentum in a sequence of further treaties, notably the Maastricht Treaty of 1992, the Amsterdam Treaty of 1997 and the Nice Treaty of 2000, with the process culminating in the Lisbon Treaty of 2007. In the early 1980s, the era of so-called ‘eurosclerosis’, most key government decisions on the European continent were taken in national capitals, and the different nations had distinctive legal and regulatory structures. Today the situation has been transformed. So many competences are now in the hands of EU institutions that most top policy decisions in the ‘domestic’ area (i.e., apart from foreign policy, diplomatic and military decisions) are taken in Brussels. Meanwhile the EU purports to have in the acquis communautaire a regulatory and legal framework for virtually the entire continent, with no regard for national boundaries.
This study has identified the heavy cost of the regulatory acquis as the biggest single cost to the UK of its EU membership. That message emerged in chapter 2 and is clear from Table 7.1. By implication, the drift of power to the Brussels bureaucracy since 1986 has been a disaster. Clearly, if it has been a disaster for the UK, it ought also to have been a disaster for other EU member states. The chart above shows the ‘trend’ rate of economic growth in the three largest original members of ‘the European construction’ (i.e., Germany, France and Italy) since 1984. (The ‘trend’ is taken – for simplicity – as the five-year moving average of the annual % rates of change. So the value for 1984 is the average of the growth rates in the period 1980 – 84 inclusive. More sophisticated methods of de- trending would no doubt have led to smoother lines, but the direction of the lines would certainly still have been downwards.) Many other forces have been at work to depress economic growth in this period. Even so, if the transfer of competences to EU institutions is supposed to have been an answer to ‘eurosclerosis’, some hard thinking now needs to be done. Economic growth in the original six members of the Common Market has come almost to a complete halt. (Growth continues in Eastern Europe, as the nations there have much catching-up still to do relative to Western Europe.) The truth is that the cost of EU membership has been rising for all of the member states and not just the UK.
What about the politics of exit?
Britain’s membership of the EU has a heavy economic cost. A large number of criticisms can of course be levelled against the analysis in this study, and some of the particular lines of argument and methods of calculation may be wrong. Nevertheless, the main features of the analysis are robust, in that they have been put together from a range of sources that both Europhiles and Europhobes recognize in discussing these topics. The conclusion has been that EU membership costs the UK about a tenth of its annual output. But – even if that number were halved – it would still be too high and unacceptable. The economic case for leaving the EU is overwhelming. Admittedly, the cost estimate made in this publication is at the high end of quite a wide spectrum.14 But it fits with other evidence, particularly in the collapse in the EU’s and Eurozone’s shares of world output in the last 25 years.15
The focus here has been on economics, not politics. Enthusiasts for the UK’s membership of the EU might counter that the case for staying in is essentially political in character. They might contend that European integration under the EEC/EU ‘brand’ has kept the continent at peace for over 50 years. They might further claim that the facts of geography dictate that the UK’s most enduring geopolitical commitments must be to the rest of Europe. This sort of rhetoric is often accompanied by claims that the UK must ‘sit at the top table’ and that it would lose international influence if it were ‘by itself’, out of the EU. As the present study is long enough already, this is not the place to put forward the political argument for withdrawal. The political argument for withdrawal may in fact be stronger than the economic. An imperative of the UK debate on ‘our place in the world’ must be to recall the distinctive constitutional and legal arrangements that until 1973 had served our country so well for centuries. Those arrangements (such as habeas corpus and trial by jury) are now being sidelined and forgotten in a European super-state.
The political case for leaving the EU is for another time and a separate piece of work. It cannot be emphasized too strongly that, when the UK joined ‘the Common Market’ in 1973, the benefits for the British people were sold as being predominantly economic in nature. Advocates of entry insisted, on numerous occasions, that national independence and sovereignty would be safeguarded. Events have shown that national independence and sovereignty were at risk, while the economic costs have exceeded the benefits by an ever-widening margin. As more people suffer from EU regulations, with jobs lost and livelihoods shattered, disillusionment and hostility are growing. Sooner or later a referendum on the UK’s membership of the EU will have to be held. A huge debate on the UK’s position in Europe is certain to precede the referendum. This study has established that, from an economic standpoint, the case for withdrawal is overwhelming. In the 2010 edition of this study Gerard Batten put down a challenge. To quote, ‘If the Coalition government believe that membership of the EU is financially and economically beneficial to Britain, then let them commission an independent cost-benefit analysis to prove it’.16 Quite so. Let all the facts and figures relevant to the UK’s EU membership be compiled and assessed by a group of well-qualified and unbiased experts, and let us see their verdict.
For over 40 years officialdom has lied to the British people about the UK’s membership of the EEC and the EU. They must be told the truth. The analysis in this document has at times been complex and technical, and may not always have been easy to follow. But its consistent purpose has been to tell the truth. To repeat its central conclusion, from an economic standpoint, the case for the UK’s withdrawal from the European Union is overwhelming.