Leaving the EU would raise more questions than answers
Open Europe has today published a new report outlining the potential alternatives to EU membership if the UK decided to the leave the EU altogether, and their implications for British economic and political interests.
While acknowledging that the cost of EU membership remains far too high, the EU continues, on a purely trade basis, to be the most beneficial arrangement for Britain. The alternatives often suggested – the Norwegian, Swiss and Turkish models – would all come with major economic drawbacks, not least for key UK industries such as car manufacturing and financial services, with the Norwegian model being particularly ill-suited for Britain.
However, the UK public is growing increasingly frustrated with the EU exactly at the same point as the Eurozone is moving towards more integration. In order to justify continuing EU membership and avoid being driven by the electorate inexorably towards the exit door, Britain needs a new set of membership terms. This would involve the UK remaining a full member of the EU customs union and single market in goods and services – allowing it to remain at the heart of European cross-border trade - but substantially reducing the non-trade EU involvement and costs whenever possible, including bringing powers back to the UK.
Open Europe’s Director Mats Persson said,
“Growing public frustration with the costs of EU membership is unsustainable in the long-term and cannot be ignored. However, there is no clear-cut or easy option for the UK outside the EU. If Britain chose to leave tomorrow, it would raise more questions than answers, and contrary to popular belief, still require complex negotiations with and approval from other European governments.”
“But given the growing public hostility to the EU and events in the Eurozone, the status quo isn’t an option either. Therefore, it is in the UK’s interests to stay in the EU but renegotiate a new model for membership founded on a continued commitment to EU-wide trade but substantially less EU involvement in other areas.”
“The longer we go on without genuine EU reform or if the eurozone crisis drives a new wave of protectionism, the weaker the case for EU membership will get. The UK cannot afford to miss out on growth opportunities in the rest of the world.”
To read Open Europe's briefing in full, click here:
Membership of the EU customs union, and the free movement of goods, remains a benefit to UK firms exporting to the EU. The UK has been instrumental in developing the Single Market in goods and promoting EU enlargement, which has helped to generate new markets, increased competition and reduced costs.
The EU remains by far the biggest destination for UK trade in goods, but for exports in services the picture is less positive. Services account for 71% of total EU GDP but only 3.2% of this is a result of intra-EU trade. The failure to liberalise services within the Single Market and member states’ reluctance to compete on the global stage in this sector means the EU is punching below its weight in global talks on services, to the detriment of UK interests.
Plainly, trade is only one part of the equation when it comes to assessing the costs and benefits of EU membership. There is a value to the UK’s ability to influence not simply the terms of trade but also EU foreign policy and enlargement.
However, the price of membership remains high. Many of these costs are not directly related to trade, such as the UK’s contribution to the EU budget, the loss of national control over key political decisions that affect the British economy and society, and an increasing regulatory burden. Growing frustration with these costs has led some to suggest the following alternative trading arrangements outside the EU:
- The ‘Norwegian’ model or EEA membership: This would free the UK from the CAP, EU fishing rules, EU-wide regional policy, and reduce its budget contribution. However, while guaranteeing access to the Single Market in services and goods, outside the customs union, access for goods would be subject to complex rules of origin and Britain would still be subject to EU regulations on employment and financial services but with no formal ability to shape them.
- The ‘Swiss’ model or free trade agreement: The Swiss-EU bilateral deal, without the CAP, EU fishing rules, EU-wide regional policy, and reduced financial contribution, offers more sovereignty and less EU regulation. However, the UK’s access to the Single Market would be dependent on the deal it could negotiate with the EU – the Swiss deal currently excludes the vast majority of services, including financial services.
- The ‘Turkey+’ model: The UK would continue to benefit from full access to the EU’s Single Market in goods by remaining in customs union with the EU but Britain would be bound by any external deals that the EU strikes in trade in goods without any formal way of shaping them. A separate deal on services would be required to maintain UK access to the Single Market in these sectors. It would be free from EU social and employment regulation, the CAP, CFP and EU-wide regional policy.
- The ‘full break’: If the UK left the EU without securing a version of the options above, the UK could fall back on its World Trade Organisation membership. This would see some exports facing relatively high tariffs (i.e. 10% on car exports) and market access for services would be limited.
From purely a trade perspective, therefore, all these options come with major drawbacks and EU membership remains the best option for the UK. Additionally, contrary to popular belief, all the alternatives to EU membership, except the ‘WTO option’, would require negotiation with and the agreement of the other member states, which would come with unpredictable political and economic risks.
This means that negotiating a new UK relationship with Europe outside the EU Treaties, i.e. leaving the EU, would present similar difficulties to renegotiating membership terms while remaining a member of the EU.
However, there are three factors that could alter the cost-benefit analysis of the EU in future:
1) If EU trade liberalisation stalls over the long-term;
2) If the EU moves in a more protectionist direction in the wake of the eurozone crisis;
3) If the EU prevents the UK from taking advantage of growth opportunities in non-EU countries in future trade talks. Based on current trends, the export markets with the greatest potential will be located outside Europe. The UK relies on the EU to negotiate on its behalf, which can be a disadvantage if UK interests are watered down as part of an EU compromise deal.
In light of these trends and an increasingly sceptical UK public, in order to justify continued membership, the UK Government should seek to achieve a new model for EU cooperation based on different – and equally legitimate – circles of EU membership. In this structure, the UK should remain a full member of the single market in goods and services and of the EU’s customs union, but take a ‘pick and mix’ approach in other areas of EU policy. This would achieve a vital reduction in the non-trade costs of EU membership, such as the EU budget and the burden of regulation, while allowing the UK to remain at the heart of the EU’s cross-border trade.
A new model for UK membership of the EU
As the Eurozone is likely to need a new set of EU Treaty arrangements to move towards further integration, which the UK must approve, Britain will have a unique opportunity to stake out its own model for EU membership.
The briefing also sets out a number of proposals that would help the UK achieve greater EU trade benefits in future, including launching a new and far more sophisticated and proactive programme for building free trade alliances in Europe; securing one of the commercial portfolios in the European Commission in 2014 and making more use of EU Treaty provisions allowing a smaller group of countries to pursue further liberalisation if not possible at the level of all 27 member states. In addition, the UK Government should continue and step up its much welcome ‘commercial diplomacy’, promoting UK businesses and exports to non-EU countries to facilitate trade.
NOTES FOR EDITORS
1) For more information, please contact the office on 0044 (0)207 197 2333, Mats Persson on 0044 (0)779 946 0691, Stephen Booth on 0044 (0)788 162 5889, or Christopher Howarth on 0044 (0)796 041 7148.
2) Open Europe is an independent think-tank calling for reform of the European Union. Its supporters include: Lord Leach of Fairford, Director, Jardine Matheson Holdings Ltd; Lord Wolfson, Chief Executive, Next Plc; Hugh Sloane, Co-Founder and Chief Executive, Sloane Robinson; Derek Scott, Economic Advisor, Vestra Wealth LLP; Sir Stuart Rose, former Chairman, Marks and Spencer Plc; Jeremy Hosking, Director, Marathon Asset Management; Sir Martin Jacomb, former Chairman, Prudential Plc; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury Plc; Michael Dobson, Chief Executive, Schroders Plc; David Mayhew, former Chairman, JP Morgan Cazenove; David Ord, Managing Director, Bristol Port Company.
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