Sunday, 30 December 2012

EU-phobia - the Allowable Bigotry

One of the features of David Cameron's leadership is that he has tried to fight the conservatives reputation as the nasty party. He has tried to position himself (and the party) as a fiscally conservative but socially liberal. His position is in stark contrast with the US Republicans. However on one issue the conservative party has actually become more extreme, its EU-phobia. Most conservatives were somewhat skeptical of the benefits of the euro. This position had been vindicated by events. However the lesson many conservatives seem to have learnt isn't one about the need for your own currency so that you can issue run a deficit during an economic downturn (in fact arguably the austerity policies indicate they have ignored this lesson), instead many conservatives seem to have concluded that the source of the UK problems is the EU. 

This position is superficially appealing. On the one side you have meddling foreign bureaucrats telling us how to run our country (and regulation our industry) and on the other side you have plucky politicians standing up for Britain against the meddling Europeans. However look a bit deeper and the issue quickly gets a bit more complicated and the risk of leaving become more apparent. At the moment Europe is our biggest trading partner taking 54% (based on WTO figures) - although the EU phobes try to deny these figures. Our membership of the EU gives as access to these markets at the "cost" of EU regulation. 

According to the EU phobes this EU regulation is prohibitively expensive and by leaving/renegotiating we could avoid this regulation. However they acknowledge that having left we would need to set up bilateral trade relationships between the UK and the EU. However they claim arrangements will result in more favourable trading conditions for the UK. The slight irony of this position is that on the one hand the EU phobes claim we don't have enough influence over EU policy from within the EU to stop regulation being forced on us. Yet somehow on leaving we will have a position of strength to avoid any regulations we don't like without any likely sanctions on us. It would seem the EU phobes are underplaying our currently influence and overplaying our "future" influence on leaving - or have a very strange idea of how to win friends. 

The classical examples used by the EU phobes for what the UK could become outside the EU are Switzerland and Norway. However Norway and Switzerland also do apply a lot of EU law (albeit without any influence on the development of the legislation as they have no representation in the EU parliament nor minister present for the council of minister meetings). The Norwegian foreign minister recently highlighted their one-sided relationship with the EU and questioned whether this would be appropriate for the UK

Equally there is little evidence that Norway has gain from being outside the EU. Norway's wealth can be largely attributed to a small population and significant oil reserves - this fortune of geography is entirely incidental to their status outside the EU! Meanwhile Switzerland as prospered thanks to a combination of strong international companies (such as Nestle, Novartis and ABB etc), good bilateral treaties with the EU and its famous secretive banks. Even so Switzerland has been coming under intense pressure from both the EU due to its banking secrecy and internal EU documents indicate pressure on that the EU has put a lot of pressure on Switzerland to comply with EU legislation. This shows that despite both countries  "independence" they are still subject to pressure from the large trading bloc on their doorstep. 

Anyway the UK is unlikely to be in the same position as either Norway or Switzerland. Both these countries have to some extent attained their current relationship with the EU on the basis of being potentially joining the EU at a later date (however unrealistic this arguably is/was). Also both countries have significantly smaller populations than the UK (Norway is 5 million and Switzerland 8m). This means that any punitive trade-barriers would achieve very little (in terms of protecting EU markets) whilst alienating a potential future EU member. Meanwhile the UK having left (and presumably freed from EU regulation) would without any trade barrier represent a significant threat to investment in the EU. Its difficult to see why the EU would have any incentive to tolerate such an arrangement. 

One argument is that the UK would despite this be in a strong position to negotiate with the EU because of the UK has a trade deficit with EU. This implies that the rest of the EU has more to lose that the UK in terms of loss of trade. However this is a very flawed argument. Firstly it is a strange argument from a free trade "liberal", given trade is supposed to benefit both parties. Many countries for example run trade deficits with China but still benefit from cheaper consumer electronics than they would have if they tried to manufacture it themselves. 

More importantly it ignores the relative worth of the trade in aggregate. Currently 54% of UK exports go to the EU. Statistics for the EU trade with the UK are harder to come by but if we use France and Germany as an example (they are both major EU economy), proportion of their exports to the UK are 7.8% and 6.6% respectively. Losing all these exports would hurt them significantly but losing 54% of our exports would hurt the UK MUCH more! Its difficult to see how this is negotiation from a position of strength!

However the argument that we can somehow attain better terms with the EU is only half the EU phobes argument. The second argument is that outside the EU we would be free to negotiate trading relations with faster growing nations. However this argument has a series of major flaws. Canada and Australia (in what EU phobes call the "anglosphere"), have enjoyed relatively high growth rates thanks to commodity prices. However, the economies of Canada and Australia are $1.78 trillion and $1.34 trillion. This sounds a lot but UK, France and Germany are respectively is $2.45 trillion, $2.77 trillion and $3.60 trillion. Canada and Australia are significantly further away than France and Germany making it significantly harder to export many goods and services.   

Many of the really high growth rates have come from countries are in sub-Saharan Africa and Asia. However according to world bank figures the GDP of sub Saharan Africa is $1.26 trillion (which presumably includes the relative wealth of South Africa). In other words many of the countries even with stellar growth rates have and will have small markets for the foreseeable future (and certainly not markets worth risking our position in the EU for)! In any case many of the markets in Africa and Asia (including the giants of China and India) have high levels of inequality which may mean that the market for European high-end brands is somehow more limited that the statistics would superficially imply. This is not to say that there are not trading opportunities in these growing economies. Germany has been able to export its high end technologies to China. Which ultimately shows that the EU is not an impediment to trading with such countries if you have a high value product that they need! 

So in summary leaving the EU is unlikely to strengthen our ability to trade with EU countries and is unlikely to open up new significant new markets assuming that we can sell them a high value protect that meets their requirements. This raises the question why the EU phobia has taken such a hold of the right wing of UK politics. Scrape away at the surface and emerges is an ugly combination of a very negative right wing libertarian worldview mixed with some populist politics. 

The negative liberatian view is based on the assessment that the UK needs to reduce its costs to trade with the developing world - rather than copying the German model developing high quality industries. No doubt removing regulations will help a few industrialists (whose industries would not be effected by worsening trading relations with the EU) squeeze some more productivity out of their labour forces and their increase margins. However this will potentially come at significant costs to some industries that are reliant on EU trade, weaker employment and environment protection and (probably) a net cost to our economy. These regressive views have managed to gain traction due to populist anti-EU (foreign meddling) sentiment.   

In many respect this closely parallel the approach adopted by the more extreme elements of the US republicans (regressive policies that advantage the richest mixed with some populist position on gun rights, women's right, gay rights and religion in the classroom). However unlike the US nobody seems to be willing to confront issue of EU phobia. Much of the popular press is happy to pander to the negative stereotypes of the EU meanwhile few of our political leaders have dared confront population with the difficult truth that there are no easy or risk free options for the outside of the EU. So instead of a debate on the risks of withdrawal and how we might (or might not) develop our economy country inside or outside the EU. We end up with a phony debate where on the one-side you have myths about eurocrats regulating bendy bananas and on the other side a land of milk and honey where we can be as rich as Norway (without having the oil). Perhaps before with laugh at the dysfunctional elements in US politics, we should look reflect on the more dysfunctional elements of our own politics and the (apparent) inability of much of the population to face the reality of our relationship with the EU. 

No comments:

Post a Comment