Why Britain Should Remain European

Simon Johnson
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Britain EU flags



WASHINGTON, DC – On June 23, the United Kingdom will hold a referendum on whether to leave the European Union. On the economic side of the “Brexit” debate are three main questions: Do European rules impose growth-stifling regulation on the UK? Would leaving the EU increase opportunities for British exports? And what would be the likely impact of withdrawal on financial stability?
 
These are complex issues, but the June 2014 report by the Centre for European Reform (CER) provides a sensible guide on the first two questions. And now the Bank of England (BoE) has weighed in clearly on the third. In economic terms, the facts favor staying in the EU.
 
Heated and relatively technical debates of this nature require one to decide which experts to trust. The commission that prepared the CER report comprised sensible British and European economic thinkers and former policymakers with no illusions about how the EU really works. Likewise, the BoE’s Financial Policy Committee was designed after the 2008 crisis to speak truth to authority on where systemic risks really lurk – and what to do about them.
 
The CER report is strongest on the real (nonfinancial) economic issues. The most contentious point here is whether the British economy is held back in some way by red tape imposed by Brussels or by European treaty obligations.
 
It is very hard to find any such stifling effect in the data. The CER points out that product- and labor-market regulation in the UK are closer to that of the United States than to Western Europe, and the same broad pattern emerges from the OECD’s assessment of barriers to entrepreneurship.
 
The CER’s assessment is confirmed by the latest available information from the World Bank’s 2016 Doing Business indicators, which have the advantage of covering almost all countries in the world. These indicators are not perfect, but they do get at red-tape-related issues. Britain is ranked sixth in the world – one place above the United States and behind only some very pro-business countries, such as Singapore, Hong Kong, and New Zealand.
 
Other leading EU countries have more impediments to doing business. For example, Germany is ranked 15th and France is 27th. Italy, ranked 45th, surely has something to worry about – but its problems do not stem from Brussels. There is no sign here of the UK being dragged down by the EU.
 
If anything, the UK might aim to be a bit more like Denmark (an EU member, ranked third in the world) on some dimensions of the business environment, including property registration, construction permits, and paperwork reduction in international trade.
 
On the issue of trade, the assessment is even more straightforward. At the heart of European integration is the idea that barriers to trade – including tariffs and other impediments – can be and have been reduced. In the CER’s view, EU membership has increased UK trade in goods with other member states by more than 50%.
 
Would leaving the EU create new robust trade possibilities that otherwise would not exist, either within the British Commonwealth or with emerging markets such as China? This seems highly unlikely.
 
And the biggest trade agreement on the horizon that will affect the UK is between the United States and the European Union – the Trans-Atlantic Trade and Investment Partnership (TTIP). Such mega-regional trade agreements are complex, with many devils in the detail. The TTIP will most likely move forward after the US presidential election, and Britain most definitely needs to be at the negotiating table.
 
International trade is about getting access to a bigger market, and trade agreements involve mutual reduction of barriers, including all kinds of non-tariff rules that minimize competition in the provision of services. Britain will do well from this kind of service-sector trade liberalization. But any country involved directly in such talks generally does better.
 
In terms of Brexit’s impact on the financial sector – in addition to broader stability concerns – the BoE’s Financial Policy Committee is quite clear. “[H]eightened and prolonged uncertainty,” owing to the impending referendum, “has the potential to increase the risk premia investors require on a wider range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers.” This is not likely to be good for consumers or for business investment.
 
Over the longer term, the UK financial sector needs to be well regulated; no one wants another major financial disruption. But such rules are entirely possible within the existing international and European framework.
 
Some other economic issues that have come up in the Brexit debate are either minor or red herrings.
 
As the CER report shows, immigration from EU member states, for example, benefits the UK economy, because it brings in more young people who pay taxes. And the post-Brexit reduction in UK government spending would most likely be minor.
 
Of course, EU membership is not just about economics. There is also an important debate about Britain’s role in the world. But it is difficult to see how the UK’s global stature and influence would increase if it left the EU – particularly given the significant adverse impact such an outcome would have on the British economy.
 
 

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