In the past few months, I’ve written an article about how popular pro-Brexit arguments  (i.e. the EU is a third party diktat, the UK will save £ 55 million per day, it’s going to be easy to make trade deals afterwards and the EU will agree to a free trade agreement as well as control of borders) don’t hold up to substantial analysis.  I’ve been participating in various debates, panel discussions and Twitter conversations on the subject and now I’ve noticed a distinct change in the direction of the narrative.

It seems to me that the economic argument has taken a back seat and one of the key issues that has been driving the plebiscite in the first place, namely immigration has now taken centre stage.

I think that many have now acknowledged that Brexit would be bad for the UK economy, with three recent developments (Also argued in my previous Brexit article).

➢ Obama’s “back of the queue” comment and his assertion that it could take up to five or ten years to complete an agreement highlighted the reality of a post-Brexit scenario. I’m firmly of the view that it would take a long time to achieve solid trade agreements. As I referred to in my previous Brexit article , Switzerland have achieved 17 treaties and 120 bilateral agreements… in nine years.  Brexiteers posit that the UK is much bigger and the world’s leaders will be beating down the doors of Westminster to establish preferential arrangements, but as anybody in the diplomatic service will tell you, it takes a long time to go through the painstaking detail of these international documents. As a result, there would be high opportunity costs of trade lost in that interim.

Hilary Clinton has also weighed in with a warning against Brexit while Donald Trump says “I don’t want to say front (of the queue) or anything else…. I mean, I’m going to treat everybody fairly but it wouldn’t make any difference to me whether they were in the EU or not.”

➢  The second is that Mark Carney didn’t mince his words last week when he said that a vote to leave the EU would lead the UK to a “material slowdown in growth”, a “notable rise in inflation” and a potential increase in interest rates to balance the two.

Since the 22nd January 2013 when Cameron announced that there would be a referendum about the UK’s membership of the EU if the Tories were voted back in, the seeds of uncertainty were sown. Fast forward and the Bank of England quoted in its press release that “there are increasing signs that uncertainty associated with the EU referendum has begun to weigh on (economic) activity”.

Also, there was clear visibility on the likely path of the exchange rate: “Sterling is also likely to depreciate further, perhaps sharply” and points towards the 9% contraction of the value of the pound between its peak value last year and today. The markets have already voted with their feet as there has been a significant withdrawal of money out of the sterling, which has led to this decline. This helps exporters, hinders importers and leads to imported inflation for UK citizens but the point is that the financial markets don’t like the sound of Brexit. The  press release puts forward that “the combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than in the central projections set out in the May Inflation Report”

➢  Further, Martin Sandbu, Financial Times, notes that “almost every influential economist known to the public, and many more who are not, have already issued the same warning” and “It is now fair to say that the debate on the economics has been won by the Remain side.”

However, I’ve had numerous conversations with people on the Vote Leave side who say that they’re willing to trade some economic prosperity for control over their borders . Jonathan Portes went so far as to connect the two in a paper published by the National Institute of Economic and Social Research ; he said that a cut of 100,000 immigrants would equate to a 2p income tax increase.

In light of the fact that the UK Brexit zeitgeist echoes Nigel Farage’s sentiments that he would swap some prosperity for lower immigration, let’s reframe the BREXIT conversation around immigration.

Just before I do, as I’ve outlined previously, please do remember that any Swiss-like or Norway-like Free Trade Agreement with the EU that’s being proposed as an alternative to the status quo involves the free movement of labour , so Brexit would mean the same as now, but with less influence in Europe. In other words, if it wanted negotiated trade agreements, the UK would need to accept EU migrants .

If the UK wants negotiated trade agreements after #BREXIT, it will have to accept EU migrants
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One could posit that the UK could invoke the “emergency brake” if, and only if, it left the EU and joined the European Economic Area. However, this would only occur in an emergency situation and be a temporary measure as outlined in Article 112 of  Agreement on the European Economic Area 2014 ;

1. If serious economic, societal or environmental difficulties of a sectorial or regional nature liable to persist are arising, a Contracting Party may unilaterally take appropriate measures under the conditions and procedures laid down in Article 113.

2. Such safeguard measures shall be restricted with regard to their scope and duration to what is strictly necessary in order to remedy the situation. Priority shall be given to such measures as will least disturb the functioning of this Agreement.

3. The safeguard measures shall apply with regard to all Contracting Parties

As a result, this would not be a long term solution to the issue put forward by the Leave side.

So, let’s first understand why the UK is discussing walking away from a preferential position in the largest trading bloc in the world because of immigration.

Is it more densely populated than other EU countries, to the point that it can’t take in any more? MigrationWatch UK have taken the Eurostat figures as well as those from ONS, so as to find the UK’s position in this. They also provide the position of England as the most popular destination for EU migrants within the United Kingdom.

Yes, the UK has high population density in comparison to other countries, but it’s not “through the roof”.

In that same briefing paper, MigrationWatch also diligently looked forward and identified the following trends:

UK population density (the green line on the chart) isn’t set to catch up with Belgium (red line) and the Netherlands (brown, at the top) this century and it would be 2055 before the English population would catch up to the Netherlands. Of course, there is a plethora of variables that can change in the meantime, which MigrationWatch acknowledge.

This Eurostat chart highlights that the percentage of the population of foreign and foreign-born population is in the broad average of the EU countries.

So far, we can discern that the UK landbase hasn’t been overrun with EU migration, either now or in the foreseeable future, so let’s now look into the economics of this migration.

However, as I listen to the debate, it seems that it’s not the “freedom of movement of labour” that is the issue, but the afeared “freedom of movement of benefits”. Again, MigrationWatch UK has a startling figure on its web site which is “ Immigration to the UK has resulted in a high cost to the UK Exchequer of at least £114 billion, or about £18m a day, in the period 1995-2011 ”.

It’s important to point out that this figure doesn’t differentiate between EU and non-EU migration, whereas the Brexit referendum discussion obviously pertains only to the former. If we focus just on the cohort in question then what do we find?

First, EU citizens account for approximately 48% of total non-British inflow , so slightly less than half.

Second, they’re significantly younger than the UK population with about 50% of EU migrants in the UK under the age of 34 versus approximately 42% of the UK population and dramatically fewer people in the 65+ age group:

In addition, EU migrants are actually more economically active than the British themselves. The Labour Force Survey statistics published in August 2015 show that 79.4 % of the 16-64 year-old EU migrant citizens in the UK are in employment (rising to 84.6% of those from the new EU Member States), compared to 73.5 % of British citizens.

In a paper prepared by Oxford University , the following sectoral analysis was outlined: “EU migrant citizens from Old Europe work predominantly in high-skilled service sectors , such as financial industries, education and health care (48 %), whereas those from Central and Eastern European countries primarily work in the distribution and hospitality sector (34 %) and in manufacturing (22.7 %), with a small but significant proportion working in agriculture (3.3 %). Bulgarians and Romanians predominantly work in construction (29.3 %), but also in banking and financial services (20.7 %).”

Does that mean they’re taking UK nationals’ jobs and pushing wages down? The Bank of England has checked this out and pointed to a minimal effect on salary depression , but the presence of EU immigrants who are able and willing to take on lower paid work does act as a safety valve and keeps costs down.

It seems to me that the educated, quality workforce of more economically developed EU members would be highly desirable for the UK: these people contribute very highly to the economy. The UK also needs people who are willing to work in areas that offer low wages, unsocial hours, temporary work and poor promotion opportunities. There are several industries where the UK has actively gone out to the world looking for people with certain skills (e.g. the NHS recruits one in four nurses from abroad ).

Further, these people are as educated, if not more educated, than the British themselves . The Guardian reports that more than 60% of new migrants from Western and Southern Europe, who account for 900,000 of the 2 million who work here, are now university graduates. For eastern Europeans, 25% are graduates – similar to the proportion in the UK-born workforce.

So, we can see that EU migrants are working, but are they actually having any impact on the economy? The University of London confirms this in the “ Fiscal Impact of Immigration to the UK ”; European migrants made a net contribution of £20bn to UK public finances between 2000 and 2011. Those from the 15 pre-2004 EU countries contributed £15bn more in taxes than they received in welfare – and eastern European migrants contributed 12%, equivalent to £5bn more.

University of London: EU migrants made a £20bn net contribution to UK public finances 2000 & 11
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So we have established that the number of EU migrants who come to the UK , isn’t overwhelming as a percentage of the population, a high percentage are well educated, they’re happy to work right across the sector spectrum and they contribute more in taxes than benefits.

So where are those that don’t? There have been lots of soundbytes around hordes of immigrants arriving in the EU to claim benefits.

I checked the latest data from the House of Commons Library , published in February 2016, and its states “In February 2015, 113,960 of these (working-age claimants of DWP benefits – The Department for Work and Pensions) were EU nationals, (representing) 30.7% of non-UK claimants and 2.2% of total claimants”. Therefore, 2.2% of all the claimants of benefits in the UK are EU migrants .

BREXIT: Only 2.2% of all the claimants of benefits in the UK are EU migrants
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Finally, there has been a huge amount of attention on the pressure that immigration puts on public services . The London School of Economics carried out a study on this and quoted in the Executive Summary: “Immigrants do not have a negative effect on local services such as crime, education, health, or social housing”. As you delve into the details on page 13 of that report, it goes on to state categorically that EU immigrants “are bringing extra resources that could be used to increase spending on local health and education for the UK-born. In other words, reducing EU immigration would generate the need for greater austerity ”.

London School of Economics: reducing EU immigration would cause greater austerity
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I could of course point out the obvious fact that migration goes both ways and talk about how Brexit would affect the mobility of the one third of British students who want to study abroad or the 1.2 million Britons who live in the EU , but again, they don’t seem to factor as important in the immigration discussion.

The UK is experiencing an immigration problem: it wouldn’t invoke a referendum of this nature if it wasn’t, but the UK population is treating Brexit as an instrument that’s going to fix it .

It’s not.

What’s more, many voters seem willing to give up some economic prosperity for what is not, in fact, a solution to the perceived problem.

Are #BREXIT #Leave voters giving up economic prosperity for what is NOT a solution to immigration?
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EU migrants are a crucial part of the UK’s economic fabric and are being tarred with a xenophobic brush, using arguments that have no real basis in reality. If this really is the issue that the Brexit result is going to come down to, then each person who is going to vote needs to answer the actual question being asked.

In summary, I believe Brexit would be bad for Britain,  Northern Ireland  and Europe. I’m of course aware that there are a number of issues like fisheries etc that need reform, but it’s far better to be at the heart of the discussions, leveraging political clout (which I think has fallen far short of what it could have been) and driving forward on reforms from the inside rather than at a distance.

It’s important to look at the long term ramifications and how this decision will affect future generations of British people. As outlined in my previous Brexit article , Britain can be more influential in Europe, if it sets smart objectives and participates more at all EU levels, to bring about a Europe largely shaped by Britain, the second largest economy in the Europe.

Susan HayesCulleton CFA – Positive Economist

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