Background
David Cameron’s Conservative party has always been divided over the increasing influence of European regulation on UK law. Many claim that the European model which the UK joined in 1973 has today transformed out of recognition and that this new model is not what that UK signed up for and that it should now leave. In an effort to finally tackle the Eurosceptic element of his party David Cameron has committed to holding a referendum for all the UK citizens to decide on whether the UK should stay in the EU or leave it.
The word “Brexit” is now being used to refer to the UK leaving the EU.
Those who support Brexit say that it will:
- Allow the UK to regain control of immigration into the UK from EU countries, especially from countries in Eastern Europe.
- Allow the UK to make its own trade deals.
- Allow the UK to regain control of its own laws, and regulations.
- Develop and grow the Financial Services sector.
- Eliminate the annual UK contributions to the EU.
Let’s look at the key arguments on which the debate on Brexit is focusing in on:
1. Immigration
A lot of Brexit supporters claim that non skilled British workers are not able to compete with foreign immigrants for jobs in the British labour market. These supporters claim that a Brexit will restrict the flow of low skilled immigrant workers and allow British workers get their jobs back.
However what Brexit supporters do not say is how the UK economy has hugely benefited from these immigrants. A recent OECD report has stated that over 50% of UK growth since 2005 is due to immigrants. And over 2 million more jobs have been created.
The UK economy has been able to grow on the back of low interest rates because there has not been the need for wage rises and inflation due to the influx of immigrants.
Brexit supporters also claim that upon a UK exit from the EU, it will then be able to cherry pick the type of immigrant it wants to let into its economy. However in other parts of their arguments in support of a Brexit they also cite Switzerland & Norway’s relationship with the EU as potential example which the UK could follow. But this is where there is a flaw in this argument, as a deal to have free trade with the EU, Switzerland and Norway must allow free movement of labour. Thus unless the UK wants to lose 53% of its export market (the EU purchases of UK products) it will be required to retain the free movement of labour.
Then there is the issue of demand for products made in the UK. Not only would the price of UK products rise due to the sudden rise in the cost of low skilled labour, but who would actually replace the migrant labour to make these products?
2. Trade & Manufacturing
Over 53% of all UK exports are sold to the EU. This figure grows by another 10% to 63% when the other countries which the EU has trade agreements with are added into the mix.
Upon the UK’s departure from the EU it could lose free trade access to this market plus lose out on any of the associated free trade agreements which its exports have benefited from.
So what can it do?
It could make individual separate deals with EU countries. This may not be smooth sailing as the EU countries may make decision to punish the UK for leaving it EU and set an example for other countries to consider if they want to leave, this may lead to punitive trade restrictions placed on the UK.
Some say that the UK could make the same free trade deal as Norway & Switzerland. However if the UK wants to restrict free movement of labour this could not happen.
The UK may have to make some quick and easy trade deals which it can do due to Anglo history e.g. Canada and Australia, however it may be difficult with other countries such as the Republic of Ireland (4th biggest purchased of UK products) as this country is part of the EU.
As for the USA – President Barak Obama recently said that if the UK was to try and negotiate trade deals with the USA it would take more than 10 years for this to happen, whilst the EU/ USA trade deal looks set to be passed in 2017.
Another important is the ability of the UK to successfully negotiate of its own free trade deals. After all the UK has not conducted any trade negotiations since it joined the EU in 1973!
3. Regulation, Innovation and productivity
Brexit supporters say that a UK will be able to implement its own regulations to suit its market when it leaves the EU.
However the EU will still have a major say over UK regulations simple because products which the UK exports to the EU would have to meet EU regulations in order to be acceptable for sale to the EU.
As the UK moves away with its own regulations, the costs of imports of products may rise as foreign sellers have to tailor their massed produced products for the smaller UK market regulations instead of making a standard product for the EU. One current example to prove this issue is furniture. The cost of furniture products for UK customers is up to 20% higher compared to other EU countries. This is due to the fact that the UK currently has different standards for furniture products compared to the rest of Europe.
4. Financial Services & Investment
The Financial Services section is the UKs biggest sector. One of the key attractions for companies to invest and establish themselves in the UK is the fact that it is in the EU and the fact that the UK government can influence the EU market rules on financial services.
Brexit supporters claim that, if the UK leaves the EU, the financial services sector will be able to target other emerging markets which could, in the long run, benefit it more compared to its current position.
However a major point against this is the threat, if the UK leaves, that the European Central Bank (ECB) would be unlikely to permit forms of trading such as euro clearing to take place in the UK. This may drive such services from the UK to other EU countries such as the Republic of Ireland.
One thing that Investors and Financial Services crave is certainty. A Brexit will create the exact opposite of this. To only certainty that would come from a Brexit is that nobody knows what the implications will be and the repercussions will be.
5. UK Payments to the EU
Once of the biggest arguments in favour of a Brexit is that UK economy could save over £10 billion per annum in payments to the EU.
While there may be some savings, it will not be remotely in the region of this figure. The reason for this is as follows:
- The British taxpayer would have to step in to replace the EU where it was giving subsidies and handouts to sectors within the UK.
- If the UK wanted to keep access to the EU single market, it may still be required to make payments to the EU.
- Current Income on government import duties on products from certain countries may have to be sacrificed if the UK has to negotiate its own trade deal with the country.
Brexit – A European perspective
Pro Brexit campaigners offer no definitive alternative for the UKs relationship with the EU, with no defined alternative the UK could easily find itself settling as an Independent country alongside Albania, Bosnia, Serbia and the Ukraine. This is not an assuring path for the UK.
But what could happen to the EU if the UK was to leave?
If the UK was to leave EU, then Germany will be seen as the dominant power and this could fuel calls for more fragmentation with possible referendums in countries such as Sweden, Denmark and the Netherlands. In France there is a growing right wing treat and there are strong views that France should break away from Europe, close its borders and focus on supplying its domestic market.
With this complete disintegration of the EU, the UK could end up having to negotiate and agree 27 separate trade deals. If you look back to 1973 the purpose of the ECC was to establish free trade and eliminate these types of restrictive trade deals.
Apart from trade, if the UK leaves the EU, it will undermine the EU in geo political circles. This would reduce the EUs influence in North Africa, and the Middle East.
Conclusion
The UK has always struggled to define its relationship with the Europe. This referendum could be defined as the UK finally asking itself how it wants to deal on the global stage as part of united Europe whilst looking through the lens of how it historically dealt on the global stage with a divided Europe.