How Valid Are These 4 Popular Arguments For Brexit?
Over the past number of months, I have heard a lot of arguments for Brexit and against. “Brexit” stands for “British Exit”, the possibility that Britain would leave the European Union. In this article, I want to examine some of the “Vote Leave” important arguments – they don’t hold much weight when considered comprehensively. My objective is to lay out the facts, and to avoid unnecessary appeals to emotions or fear.
The referendum on Britain’s membership of the EU will take place on the 23rd June 2016. How valid is the Brexit argument?
In the interests of disclosure, I am in a small business owner and I’m against Brexit. I don’t believe that the EU is perfect, but there is a lot that can be done in the coming years to improve the operation of the bloc. I believe changes can be made with proper participation.
However, on balance I think it’s far better to be in than out. That said, I have made a deliberate effort to seek out and examine the “Leave” arguments because I wanted to challenge my own views and question all assumptions. This is what has led me to pen this piece, it is an independent piece.
1. The #1 among arguments for Brexit isn’t exactly
an argument: the “Them and Us” rhetoric
I’ve noticed something rather strange about the language of the debate in the UK and that is how the EU seems to be a third party. The EU is often referred to as “they” or “Brussels”. However, the UK is the second largest economy and population member of the EU. Surely it would have immense influence at the very highest echelons of the EU institutions. Surely, with its deep heritage of sovereignty and independence, it has been making its voice heard as the EU leaders shape the future of the largest economic bloc of the world. Surely, it hasn’t been “keeping its mouth shut” all this time.
However, a third of UK seats in the Parliament are held by UKIP representatives whose sole purpose of being there is to get out. These representatives are absent for a third of votes: this means they don’t take the opportunities they could to influence those very same policies they criticise, including the Financial Transaction Tax and bonus caps. The nineteen Conservative MEPs defected from the largest party in the Parliament, namely the EPP (European People’s Party), and sit in a protest group with little or no influence and the twenty Labour MEPs have few senior positions in the marginalised Socialist group. There are just ten others comprised of Liberal Democrats, Greens, SNPs, Plaid Cymru, Sinn Féin, UUP and DUP.
A common retort is that “this is only the Parliament and the real work is done in the Commission.” Let’s look at that, then. In 2004, there were 9.6% British Permanent Representatives in the Commission, despite the UK’s population representing 12% of the EU. By 2014, this had fallen to 4.5% and primarily because most people in the UK don’t have a second language as opposed to any real barrier to access. But this can’t fully account for the issue because in Ireland the Irish are proportionally overrepresented in the Commission.
The proportion of officials from France, with a population roughly equivalent to Britain’s, is 13%. Therefore, when the “Leave” side talk about how you can’t get rid of the unelected bureaucrats in the Commission, the fact is that they’re not actually putting very many of them in, to advocate for UK interests.
Now, on to the individual arguments for BREXIT:
2. “We spend £55 million a day on our
membership of the EU”.
As arguments for Brexit go, this one is put forward most often. This is an exorbitant amount of money, which accumulates to over £20 billion a year, but I wondered if this was the whole story. A House of Commons Library Briefing Paper, published on 19th January 2016, has the following table:
In 2016, the UK is going to approximately contribute that amount (i.e. £19.6 billion), but in gross terms. After you take away the rebate and what the public sector receives, the amount is £11.1 billion. Further, the private sector received £1.4 billion last year too, so that brings the amount down to £9.4 billion. Now, this is the real picture in terms of what the UK contributes on a net basis to the EU.
What is the return on that investment? The UK government estimates that the single market brings in between 5 and 15 times the UK net contribution to the EU budget.
While there is a very large difference between the two, it’s clear that first, the ROI (Return on Investment) is positive, and second, it’s significant. I have yet to hear anybody on the “Leave” side talk about what they propose to do with this money, and how they are going to use it so that it can deliver in the same way.
If it’s to be invested in health or education, it’s not so easy to measure ROI, I accept that; and even if you could, there are lots of intangible benefits to this expenditure which would make this measure a crude exercise to undertake.
However, I would like to hear what plans they put forward: the amount of money is irrelevant, it’s what they intend to do with it that counts.
3. “We will be free to make our own deals with
growing economies across the world,
unencumbered by the dictates of
other EU countries”
Another popular argument for Brexit. Let’s start with the largest trade partners and work our way forward. In the screenshot below, taken from the ONS Pink Book, we can see that the UK carries out a double digit billion pound trade with Germany, France, Italy, Spain, Netherlands, Belgium and Ireland, both export and import.
Given that the EU is a trade bloc, the UK could not organise a bilateral trade agreement with any one of the EU member states. Now, we don’t know how trade would be affected after Brexit because we don’t have a precedent.
Article 50 of the Lisbon Treaty would be triggered: this would mean that the 27 other states would work out how the UK would leave the EU, without the UK being at that discussion table. We don’t know if this will result in trade barriers. This could take up to two years, spelling uncertainty. After that, the UK could work out a Free Trade Agreement with the bloc itself. A lot of water would flow under the bridge during that time.
I’ve so often heard that other countries have Free Trade Agreements with the EU and are perfectly happy, so what’s the problem? I think it’s important at this stage to point out the grounds on which this referendum is being sought: contribution to the EU, immigration and regulation. (There is the issue of sovereignty also and I will pick up on that later.) Now, if we look to the other trade agreements, how does each of these fare? As the Chinese say, “If you want to know the road ahead, ask those coming back”.
- Norway isn’t a member of the EU, but pays fees to the EU so as to participate in free trade. Between 2009 and 2014, it only contributed 9% per capita less than the UK. This means that for every €100 equivalent that the EU receives from the UK, Norway pays €92 equivalent. Therefore, even though it hadn’t any say in how regulations are made or rules are articulated, it still had to pay almost as much as the UK did over that period. Also, Norway takes in twice as many immigrants as the UK, adopts EU single market laws, accepts rulings of an EEA court which often follows decisions by the European Court of Justice and has access to the single market. As a result, if the UK was to pursue a Norway-like trade agreement with the EU, it wouldn’t address the main issues that the Leave proponents are putting forward. Brexit doesn’t solve their problems and maintain trade with the EU as it stands.
- Switzerland pays some fees towards the EU and accepts free movement of people. (It held a referendum to cap migration recently and the bloc threatened to cut off its market access if this was implemented, so this is now off the table). It negotiates everything sector by sector and has now achieved 17 treaties and 120 bilateral agreements… in nine years. As a result, if the UK was to pursue a Swiss-like approach to trade, this approach wouldn’t address the immigration argument, still would incur a cost and is highly uncertain about regulation. Remember that regulation wouldn’t go away. Harmonised regulatory standards bring down trade barriers as they give a seal of approval that your product is fit for a customer’s’ purpose. If you want to continue serving that customers’ purpose, then you’re going to have to meet those standards. Therefore, just because you’re outside of the EU doesn’t mean you will be completely rid of regulatory burdens. For those who say that this would only affect exporters, I contend that it affects suppliers to the companies that are exporting. Of course, this change would have an impact, but I wouldn’t be so fast to presume that it would just be good (because these regulations would still need to be met to serve customers who need to adhere to them) or bad (because those who don’t serve EU customers may have less stringency to comply with…. if the UK itself doesn’t apply such stringency… whenever it will get around to it).
- The British have always pushed for enlargement and so far, the only country that hasn’t been fully brought into the bloc that they’ve put forward was Turkey. However, Ankara is part of the EU’s customs union, which means its external tariff is set by the EU and their exports to the UK are tariff free (which means it doesn’t have trade sovereignty). As a result, if the UK would pursue a Turkish-like incremental policy, its ability to influence the rules of engagement would be a lot lower than it is today. Is this what greater national sovereignty looks like?
I don’t think the “Leave” side would be happy with any or all of the above scenarios, which raises the question: is Brexit the cure-all it is advertised to be? In the post-Brexit scenario, would the contribution to the EU budget, immigration concerns or regulation considerations be resolved to their satisfaction? It’s one thing to say that you’re not happy with the status quo, but how would a post-Brexit UK tackle these specific issues? In fact, I see a reformed EU having a far better chance of keeping more people, on both sides, happier.
Next, let’s talk about the US and China, the two largest economies in the world. In the case of the former, the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US is already well underway and, ironically, it was Cameron who announced this, shoulder to shoulder with Obama. Similarly, the EU-China deal is already in discussion. Yes, the UK could negotiate independently with the two giants, but this would require starting from scratch and one would expect a very significant expansion of the diplomatic service. Recall the progress that it took Switzerland almost a decade to make.
Of course, you could say that the UK is the fifth largest economy in the world and the prime minister of any country in the world would be more than happy to take its call. Yes, it’s true – for now. But this relies on the assumption that the British economy, post Brexit, will be exactly the same as it is now.
For a start, the sterling could fall in value. The day Boris Johnson put his name behind the “Leave” campaign, the markets took that as a sign of momentum for Brexit and the pound sterling fell to a 7-year-low. This would be helpful for exporters, but is likely to increase the price of imports. Speaking of imports, there is a theoretical possibility that the low sterling rate might be accompanied by new trade tariffs on goods from the EU if the UK leaves the EU.
Second, we don’t know who would be in government: Brexit and the attending momentous changes could cause a general election or, at the very least, a change in the leadership of the Conservative party.
Third, we don’t know what that United Kingdom would look like, as the SNP has categorically stated that it would push for a second independence referendum. Northern Ireland and Wales, if the plebiscite was put to them as a region currently, would both vote to stay, so the British question could question the very notion of geographic Britishness itself.
Finally, we don’t know what we don’t know. Who could have foreseen the decline in the oil price to such a level, the terrorism attacks in Paris and Belgium or that Donald Trump could contest Hilary Clinton in the US election? Of course, there could be surprises to the upside too, but I think the discourse about the issue shouldn’t make this simple assumption, but be cognizant that a lot could and will change between now and then.
It’s important to look at the long term ramifications and how this decision will affect future generations of British people. Britain’s membership to the EU makes Europe stronger. As a large trading bloc, can affect change, ever with it’s flaws, it has a better chance to influence world affairs than Britain would have on it’s own. Especially in a new world were the Asian and emerging economies are growing GDP and are becoming more and more powerful and influential. The world has changed and will keep doing so, a large European bloc would have considerable say in world affairs. As outlined above, Britain can be more influential in Europe, if 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.
Let’s look at Australia, New Zealand and Canada. In fact, let’s put them all together and we see that their combined population is lower than that of the UK and their collective GDP is just 15% higher than the UK, as it stands. For the admittedly slow-moving progress that the EU makes on issues, is it really worth leaving the bloc (which has 50 and growing Free Trade Agreements) just to start all over again?
4. “We will be able to make our own laws and can
control who comes into our country.”
Again, this argument for Brexit is correct. So, Brexit happens and after a maximum of two years, all 12,295 (currently) EU regulations cease to apply. What now? The House of Commons research estimates that EU-related law makes up at least a sixth of the UK statute book. This is going to be one messy, prolonged, loophole-ridden exercise that’s going to take a long time to sort out. This isn’t a reason to stay per se, but it does need to be considered. It’s alright to talk about what would happen when everything settles down, but what happens in the months, years and decades until then?
Let’s take one example of how this would work in practice. UCITS is a piece of regulation that enables funds suitable for retail investors (that’s you and me as opposed to institutions) to be marketed all over the 28 EU Member States. This is called a “European Passport”. If Brexit happens, then UK funds can no longer obtain the UCITS “badge” unless they move to an EU member state. In practise, this means that London as a financial centre (with direct access to the EU market) loses some of its appeal. It also means that many existing funds would have to consider setting up a base in another EU member city or state (e.g. Dublin, Luxembourg or Malta) so that the fund can obtain the European passport. Alternatively, they can withdraw from the European retail market. In either case, there is a strong possibility that they would either lose assets under management (AUM) or invoke higher costs.
On the other hand, a UK investor can only invest in what’s available to them. If a UCITS fund withdraws from the UK retail market, does this mean the investor needs to sell out of the fund and potentially trigger capital gains tax involuntarily? If the fund sets up another office in an EU member state to gain access to the European market, then will the cost of the fund increase and be passed on to the UK investor by virtue of a higher management fee and hence, a lower return? Rather than think about this only in the context of large wealth management funds comprising the billions of the mega-rich, remember that a lot of money is invested by people who aren’t trying to make a return so as to live an uber-rich lifestyle, but millions of individuals who have quasi-liabilities to meet (e.g. a mother who could be holding a small portfolio for her children to go to college or a man who is seeking to fund his own pension).
Migration is a particularly emotional topic and I’ve already mentioned the fact that Brexit isn’t necessarily the answer to Britain’s migration concerns. However, let’s ask the question: what have European immigrants ever done for the UK? European immigrants who arrived in the UK since 2000 have contributed more than £20bn to UK public finances between 2001 and 2011 and provided productive human capital that would have cost £6.8bn in spending on education.
There is a widespread, deeply rooted fear that “Immigrants are coming over here and taking our jobs”. Well it looks like the UK needs that to happen. According to the UK Commission for Employment and Skills (UKCES), almost 25% of job vacancies last year were caused by the widening skills crisis across the UK, and 14% per cent of employers report skills gaps in their existing workforce. This labour shortage is set to become more and more exacerbated with an ageing population. However, migration is not just one-way. There are as many UK citizens living in other EU Member States as the other way around. During this two-year discussion around how the UK will interact with the EU after triggering Article 50 of the Lisbon Treaty, the EU could impose visa requirements and integration rules on UK citizens. It is expected that UK students be awarded special treatment to study in other EU member states, as far as tuition fees or admission quotas are concerned. However, will this continue? Add to this the possibility that they would not necessarily have any rights to stay on after completing their courses.
– Susan HayesCulleton, CFA
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