From ‘Grexit’ to ‘Brexit’....
Although sovereignty and democratic accountability in the governance of the EU are also important in the current debate, it is mainly migration that is behind the current re-examining of our relationship with Europe....
The referendum date is approaching with the outcome still looking far from certain. Yet the result will be crucial for the future of the UK and its standing in the global scene. As long ago as 2012, when Greece was going through the first crisis and people started talking of ‘Grexit’ I wrote a chapter in the first edition of my book ’Greekonomics’ entitled: 'Why Britain may leave Europe before Greece quits the Euro! ' At the time I thought I was perhaps overstretching it a bit. Well, Greece is still in the Euro - if only just - and who knows what may happen on June 23!
Britain’s love/ hate relationship with Europe has long been linked to Europe’s relative economic performance. For British economic policy makers, Europe was a compelling example to follow in the 1960s and 1970s. Even into to the 1980s, UK growth rates compared unfavourably with those of the main EC players. By the 1990s however, after the ‘big bang’ financial liberalisation and increasing openness of the UK economy, it was Britain that outperformed its main European rivals - especially Germany, which was struggling under the cost of integrating the former East Germany following the collapse of the Soviet Union. But the massive migration that followed after the opening of our border earlier than others to workers from eastern Europe when their countries joined the EU in the early 2000s - migration that continued after the financial crisis as the UK recovered more strongly after its initial shock. Although sovereignty and democratic accountability in the governance of the EU are also important in the current debate, it is mainly migration that is behind the current re-examining of our relationship with Europe.
Does it, though, make sense to throw the baby out with the bathwater? In truth, studies show that migration, though it may have kept wages lower for a while at the bottom end of the market has in fact contributed significantly to growth and to government finances. Migrant workers tend to take less out of the fiscal system – and are in fact net positive contributors to the Exchequer. The Office for Budget Responsibility (OBR) argues that both the deficit and the debt to GDP ratios would be higher without their contribution on unchanged tax policies. Companies have been able to fill skills at all levels much more easily than would otherwise be the case. Indeed since the recession all sectors have seen the hiring of people with higher skills, which is good for longer term productivity even though lack of investment so far has kept productivity growth below earlier trends. The new sectors of the economy such as creative industries, the digital market and fin tech as well as the traditional sectors such as the City depend crucially on access to foreign labour. The forecast growth in GDP by the Office for Budget Responsibility, even though lower than earlier expectations, depends crucially on continued net migration of over 200,000 per annum.
And trade matters. There is no doubt in the minds of most economists, even those who advocate Brexit, that trade with a large area on our doorstep has helped encourage economies of scale. And the competition within it has been beneficial for innovation and productivity, compared to what it otherwise would have been. Foreign direct investment coming into the UK because of the proximity with Europe has been contributing to this and overall the consumer has benefited from increased competition and less price discrimination, with prices lower than they otherwise would have been. Often quoted examples are the airline sector with the massive increases in passenger numbers and low fares due to competition encouraged by ‘open skies’ policy; and also telecoms with mobile roaming charges - the next ones to be coming down as a result of EU policy. But they are by no means the only ones - the impact has been felt across the economies of Europe.
The EU has its problems -and the Euro experience has marred its image and that of its institutions. Businesses complain about over-regulation - but that applies equally to Westminster. And regulation is important to ensure common standards across Europe which allow for a level playing field and reduce barriers to entry. And the UK needs a strong and stable Europe to trade with and has been much more influential in its development, including that of the Euro area, than people normally assume. Both camps are in agreement overall that the shock and uncertainty it will create if we vote to leave will be detrimental to growth in the short term. There is disagreement over the longer term, centreing on whether or what agreement the UK could arrange with the rest of Europe and how fast. A treasury paper produced by my ex-colleagues in the Government Economic Service has looked at alternatives to our current trading arrangements and concluded that in each case Britain was likely to be worse off. Many business people have agreed. Others have expressed their personal view that Brexit would be good for Britain.
But business is much less divided than this would suggest. CBI surveys found that 4 out of 5 members want to stay in. Among the smaller firms with a turnover of under £5m, 71% of them wanted to stay. At the British Chambers of Commerce 60% of their members want to stay irrespective of concessions to the UK, and with only 30% wanting to leave. The EEF, the manufacturers’ body is campaigning actively to stay in, as its members see the benefit of exporting to the region which after all buys some 45% of our exports. Services are likely to be further integrated in the next few years, which can only be good - even better if we are in and able to influence the path, given our comparative strength in this area.
Vicky Pryce is Past master 2010-2011 and author amongst others of ‘Greekonomics’, The Euro Crisis and Why Politicians Don't Get It', Biteback, 2013 (second edition) and co-author with Ross and Urwin of ‘It’s the Economy , Stupid, Economics for Voters’, Biteback, 2015