David Davis, Brexit: what would it look like? – 4 February 2016
It has been over 43 years since Britain joined the European Economic Community. For all that time there have been calls for Europe to reform. For Europe to be more democratic, more competitive, more functional. And for Britain to lead that reform.
The result? If anything Europe has become less democratic, less competitive and more dysfunctional. And Britain has become more side-lined.
The EU has been in decline for some time now. There is no change of course in sight. The risks involved in staying are clear for all to see – low growth, high unemployment, and waning influence.
In 1975 the EU was the bright future, a vision of a better world. Now it is a crumbling relic from a gloomy past. We must raise our eyes to the wider world.
The UK has been a persistent advocate of reforming and modernising the EU.
Even a decade ago there was hope of radical reform, as the EU expanded from 15 nations to 28. Some thought the new members, only recently independent themselves, would shift the EU away from its centralising, statist destination, and towards a more democratic, more trade-focussed direction.
The hope was that Europe would become ‘wider, not deeper’. With hindsight, this hope now looks ridiculous. The siren calls for ‘more Europe’ have only increased.
The UK also proselytised for a ‘two-tier’ or ‘two speed’ Europe, with a loose decentralised group around a more centralised Franco-German core. With the Eurozone, we now have a de facto two-tier Europe, but one that works to the detriment of the non-Eurozone countries.
Centred on Germany, the EU’s largest and most powerful nation and the paymaster of Europe, the Eurozone constitutes a dominant majority.
This is downright dangerous. The core Eurozone countries will not accept any curtailment of the decisions they need to make to save the Euro. At the same time, the non-Eurozone countries cannot accept decisions that are against their interests, imposed on them by the Eurozone core.
It will only lead to conflict, conflict that can only be prevented by veto procedures that would be unacceptable to either side.
Economic growth on the continent has ground to a halt. Since the turn of the century, the EU has grown at a third of the rate of the global average, and the Eurozone has grown even more slowly than that. Europe’s share of global GDP is falling, as is its share of global trade. This trend is expected to continue.
When we last voted on our membership in 1975, trade with Europe was the vast majority of our total trade. This has fallen since then, and in 2008 the UK started to trade more with the rest of the world than with Europe. The fact is that Europe is becoming less and less important.
The Euro has become a destroyer of jobs. Unemployment across the continent is running at almost 10%, with youth unemployment double that at 20%. For individual countries, these figures are even worse.
Greece and Spain are suffering from youth unemployment rates of nearly 50%, and Italy almost 40%. Unemployment is destroying the prospects of a whole generation of young Europeans.
The Euro is an experiment that has failed. In its short life it is already responsible for sovereign debt crises in several European countries, high unemployment, and dramatic trade imbalances across the Eurozone.
But then the European project has been a litany of failures. From economic catastrophe, the collapsing single currency experiment, a poor record on increasing trade, the damage done by merging home affairs, to the undoubted foreign policy failures.
Then there is the Schengen Zone. The passport-less travel area once held up as the pinnacle of European integration is crumbling before our very eyes. The migration crisis that has brought more than a million refugees to Europe’s shores, with many more expected to come, is a stake in the heart of a borderless Europe.
The strength of any policy can only be judged by how it copes with crisis. Schengen, just like the Euro, is failing under the pressure.
Even with justice, the EU causes conflict.
From the faulty European Arrest Warrant, that has led to innocent Brits being detained for months overseas in terrible conditions without trial, to the slow steady creep of the jurisdiction of the European Court of Justice, we are increasingly finding that our justice system is incompatible with the one on the continent.
So the problems facing the EU are mounting up. Economic stagnation, high debt, high unemployment, high regulation, ineffective foreign policy and failing internal policies.
This is the backdrop to the Government’s renegotiation of our term of membership.
The Government has four strands to its renegotiation:
• economic governance, ensuring that the Union operates for the benefit of all 28 members;
• competitiveness, and a target to cut the regulatory burden for business;
• sovereignty, and an opt-out for Britain from ‘ever closer union’;
• and finally immigration, and the proposed ‘emergency brake’.
This renegotiation is a once in a generation opportunity. Unfortunately, the Government has spent ed this opportunity on demands are so unambitious as to be a waste of time.
The concessions outlined by the Prime Minister on Tuesday will have little, if any, impact on the nature of the EU. They will do almost nothing to address the very issues that the Government itself has identified.
265,000 people migrated to the UK from the EU in the last year. Many of them from poorer, Eastern European countries.
Such high levels of migration are to be expected given the enormous wage differentials across Europe. There are 6 EU members where the average wage is less than a third of the UK’s minimum wage, and a further 8 countries where it is less than half.
Given such incentives, it is surprising that more people are not making the journey.
This has consistently been a top issue for voters for over a decade.
The Government’s answer? That an ‘emergency brake’ system be put in place, that would allow member states to partly deny in-work benefits to new arrivals for up to four years.
But the big caveat is that it would be necessary to prove that services were under strain, and secure the approval of a majority of other EU states.
It is rumoured that a French negotiator told his British counterpart that they were, “happy to give the British anything they wanted, so long as it was nothing of substance.” He must have had the emergency brake in mind when he said it.
When you look at the figures, it is clear that even should the measure be introduced, the emergency brake will have no impact whatsoever.
This is for two reasons.
The first is that very few EU arrivals claim in-work benefits in their first four years.
In the first year after arrival, only 10% of EU nationals claim tax credits. This number jumps to around 20% by the fourth year.
This is because 50% of migrants from the continent are single and childless, with a further 25% not single but also childless. This means that 75% of EU migrants will only be eligible for very low levels of in-work benefits, if at all.
By the time the referendum takes place, a single earner without children on the minimum wage will be entitled to less than £10 per month in tax credits.
Not even with a very generous leap of imagination can anyone believe that the loss of this amount would dissuade people from coming to this country.
The other problem with the brake is that the Government’s own policy to dramatically raise the minimum wage in the form of the national living wage will have the effect of abolishing in-work benefits.
By 2020, when the living wage is due to be £9 per hour, and the personal tax allowance has risen further, in-work benefits will be minimal. And the minimum wage in this country will be an even greater multiple of the average wage of the poorest EU members.
The Government has said that ‘no calculation has been done on how much the proposed brake will cut EU immigration’. This is hardly surprising given the number will be very close to zero.
Then there is the matter of Parliamentary sovereignty.
The primary reason that I believe Britain should vote for Brexit is not economic, it is political.
It is so that the United Kingdom, the first great liberal democracy of the modern era, the fifth largest economy in the world, can recover control of her own destiny.
The renegotiation does not call for any repatriation of powers. It offers no confirmation of Parliament’s sovereignty. All the Government has demanded is an exemption from ‘ever closer union’, and the Government’s proposed ‘red card’ system to block unwanted laws.
Given the ‘ratchet’ nature of the European Union, the exemption from ‘ever closer union’ is not worth the paper it is written on. And the ‘red card’ proposal is worth even less.
The ‘red card’ system only operates on draft laws, only works if there is a ‘subsidiarity’ argument, and needs the agreement 55% of EU Parliaments.
This is the much the same as the old ‘yellow card’ system, that was also unworkable and which William Hague previously claimed is too difficult to satisfy.
Just consider: a blocking minority in the European Council is 35%. If this 35% cannot be reached, then it is inconceivable that there will be simultaneous rebellions in 15 European Parliaments on the same issue.
The red card is not, on any interpretation, a parliamentary veto. It returns no power to Parliament, does not help us protect our national interests and offers no protection from EU lawmakers.
On the Government’s calls for greater competitiveness, there has not been a single year that has gone by without European council meetings concluding with rallying cries to cut regulation and increase competitiveness.
Yet year after year the regulatory burden increases and Europe’s competitiveness declines. No specific regulations have been identified to be culled. No pro-competitive measures have been unveiled.
There is no reason to think that President Tusk’s almost detail-less commitment to greater competitiveness will be any different to all the other commitments that have gone before.
In summary, the Government’s renegotiation boils down to a few vague measures that either won’t have any effect, or will change so little as to not be worth the effort.
The most common reaction from the press and the public seems to be, “is that it?”
We have squandered our only opportunity to gain any meaningful reform for Europe.
Given the disastrous direction of Europe, its 40 year long inexorable and irreversible trend to more centralisation, and the lack of meaningful change, in my view the safest option for Britain is to leave.
It is not just that exit from Europe is nothing to fear. For Britain to remain as a member of the European Union would be to bind us to an institution that is creating a slew of unnecessary risks, would be to forgo control of our own destiny, and to give up on real opportunities to improve the lot of our people.
Economic Consequences of Brexit
So given that the safe course for Britain is to leave, it is vital to set out how we will leave, and what sort of relationship we can expect once we do.
There are some who are nervous of laying out in detail how we see it playing out. I am not.
This is the biggest question we will face in a generation. It is our democratic duty to make the consequences clear. The options are very good ones. And you cannot beat something with nothing, even if that something is membership of the creaking edifice that is the EU.
In 2006 Professor Patrick Minford assessed that the net effect of the EU on costs and competitiveness was so detrimental that departure from it was likely to prove beneficial even if all the government managed to negotiate in Brexit was WTO terms of trade – ie. the minimum legally possible.
At the time I thought that was an optimistic view of Brexit. However, that was before I took a hard look at the numbers.
The starting point is to ask what benefits we derive from our membership of the EU, namely trade, investment and access to global markets.
It has long been claimed that membership of the EU increases trade, and with it wealth and welfare, among its members.
Well let us just assess how accurate that is.
Now understanding and explaining movements in trade is difficult. They can be effected by bank crises, oil shocks, global disruptions like the collapse of the Soviet empire, new members joining the community, new competitors and so on. The best way to assess whether we got an advantage from entering Europe is to compare our export performance into Europe against that of a comparable group of similarly developed competitor countries who did not enter.
This exercise has been done by Michael Burrage in an exercise for the Civitas think tank. He took the European export performance of the UK and measured it against the European export performance of a group consisting of America, Australia, Canada, Iceland, Japan, Norway, and Switzerland.
The three graphs below show this performance in three distinct periods. Before entry into the EU, then after entry in what you might think of as the Common Market period, and then in what might be termed the Single Market period.
Given that the stated intent of the Single Market was to improve on the trading performance of the Common Market, you would expect our performance to get progressively better in each graph. The actual facts are illuminating. Red is the UK, black is the OECD group.
Thanks to Michael Burrage and Civitas
The first graph shows how, prior to our entry into the European Community, we actually performed worse than our non-EU OECD competitors, at least until we were about to enter when we had a sudden sprint.
Then, as the second graph shows, once we were inside the Common Market, our trade with Europe performed better, as you would expect.
The final graph is the most telling. In the Single Market period our exports grew if anything slower than our OECD competitors, despite our membership. During the Single Market period, despite all the costs incurred, the treaties signed, the regulations implemented, despite all the controversies of the European project, our performance in selling to Europe was worse than our competitors outside the EU.
Why is this?
There are two possible reasons. One is that the burden of the Single Market bureaucracy handicapped us against our competitors. This is almost certainly true to some extent, but the far bigger reason is that during the common market period there were high external tariff around Europe.
Trade tariffs during the 1980’s and 1990’s were far higher than they are today, before they were reduced by the World Trade Organisation and its predecessor the General Agreement on Tariffs and Trade. Our success in the 80s and early 90s was the result of being inside a trade protectionist barrier, and little else. That is now largely gone, and with it we are now at a disadvantage to our global competitors.
Foreign Direct Investment
Another benefit that we have supposedly derived from our membership is increased foreign direct investment in our economy.
It is certainly true that at the beginning of the Common Market period there was a spike in foreign investment in this country.
However, since the barriers have come down we have received far less foreign investment than either Norway or Switzerland, both outside of the EU, even once we have accounted for their oil industry and financial services.
So there seems to have been no discernible benefits to our trade or to foreign direct investment.
The final supposed benefit of our membership is how the EU ‘increases our influence on the world stage’, and increases our ‘clout’, allowing us to secure more favourable trade terms across the world.
Put to one side how our adding our ‘clout’ has not improved the EU’s dreadfully weak foreign policy.
We can test out how well that ‘clout’ has served our interest if we look at the EU’s performance on trade agreements.
When negotiating trade agreements with other countries, the EU has to balance the interests of the 28 different member states. This has had dire consequences for the UK.
To start with trade agreements negotiated by the EU take a very long time to conclude. We still don’t have free trade agreements with China, India or the US. The talks with India have been ongoing for almost a decade.
Our interests are not well represented in trade negotiations. The majority of free trade agreements that have been successfully negotiated by the EU are with North African or South American countries, with far more historical and cultural links to Mediterranean countries than to us.
The only Commonwealth country to enjoy a free trade agreement with the EU so far is South Africa, and that has more to do with Nelson Mandela than the UK’s ‘clout’. Other than that the first will be Canada, which is just pending.
This is all a function of how marginalised Britain’s interests are within the EU. It is no surprise than we have been outvoted in the Council more than twice as often as any other country.
The consequence of this is that these trade deals are not tailored to our requirements.
Much has been made of how hard it would be for a single country to negotiate successful trade deals on its own. But if we compare the EU’s trade deals to those that Switzerland have negotiated, with its small population and limited global influence, then we see something interesting.
Thanks to Michael Burrage and Civitas
Switzerland have seen an increase in growth rates in trade as a result of two thirds of their free trade agreements. The UK has only seen an increase in growth rates in trade from one third of the EU’s free trade deals.
So little Switzerland, with its population of 8 million, is able to negotiate better trade deals for itself than the EU does on our behalf.
Does anyone seriously believe that Britain, the fifth largest economy in the world, would not be able to negotiate by itself at least as successfully as Switzerland?
Just as damning is that the majority of these trade agreements do not include services. Services account for over three quarters of all the UK’s economic activity. They have provided much of our economic growth in recent years, as well as most new employment.
Our creative industries, our financial services and legal services are some of the best in the world. It seems certain that they would be included in any trade deal negotiated by the UK.
So on trade, on investment, and on access to overseas markets the benefits we have supposedly derived from the EU are far less than commonly understood. They may well be negative.
As I said, I was initially doubtful of Professor Minford’s assessment that we would be better off outside of the EU irrespective of the EU’s response. But he is very likely to be right.
Those business groups such as Goldman Sachs and the CBI, who have warned of catastrophe should we leave, are likely to be wrong.
It is not surprising that these business are making the argument to stay in.
At the end of the day these businesses are arguing for their own, very narrow interest. Indeed, I think we should all raise an eyebrow at the tremendous concern that these companies are showing for our national welfare, given that at least six of Britain’s ten biggest multinationals pay no corporation tax at all.
Nevertheless, we should pay attention to their concerns. They have huge sunk costs in distribution and supply networks, and worry about losing access to existing EU markets. And whilst they are not job creators or particularly good innovators, they still represent an important component of our economy.
These businesses can relax. There is no doubt that such access would continue in the event of British exit. No-one can reasonably say that the UK would cease to have access to European markets.
The worst case scenario is that the UK would revert to trade on a World Trade Organisation basis, with tariffs imposed on our exports into the EU.
WTO Trade Position
Let us leave aside cars and food for the moment. Everything else has relatively small barriers, and these are almost certainly negotiable down to zero.
If Europe wants to stick to trading on a WTO basis, they are very badly positioned to do so.
Everyone knows that the balance of trade is in Europe’s favour.
We currently import £59 billion more from Europe than we export. After Brexit we would be Europe’s largest export market, worth £289 billion in 2014, larger than China.
To see our importance to Europe, you only need to walk down the street. More than a quarter of all cars sold in this country are Mercedes, BMWs, Audis or VWs. And those are just some of the German brands. We are Europe’s second largest, and fastest growing car market.
This negotiation will primarily be about politics, and our European colleagues pre-eminently concerned about their national interest.
We are too valuable a market for Europe to shut off. Within minutes of a vote for Brexit the CEO’s of Mercedes, BMW, VW and Audi will be knocking down Chancellor Merkel’s door demanding that there be no barriers to German access to the British market.
And while they are at it they will be demanding that those British companies that they own will have uninterrupted access to Europe. We are talking Mini and Rolls Royce, owned by BMW, and Bentley, owned by Volkswagen. Premium brands with healthy demand across Europe.
And this is not just German cars. The same will happen with Shell and Unilever in the Netherlands, EDF, EADS and the viticultural trade associations in France, Seat in Spain, and Fiat and the fashion designers in Italy.
The pressure from European companies for a free trade deal between the UK and the remaining member of the European Union would be huge.
We have far more to gain than we have to lose, while the opposite is true for the EU. People have spoken, wrongly, about 3.3 million British jobs being ‘linked’ to our membership of the EU. Well there are over 5 million jobs on the continent that are linked to trade with Britain.
Access to our market is more important to Europe than our access to theirs.
To put it bluntly, the most powerful country in Europe needs this negotiation to succeed to the tune of a million jobs, on cars alone. The second most powerful needs it to the tune of half a million jobs, on wine and cheese alone. The first few months may be hysterical, but the leaders of France, Germany, Spain, Italy Poland and the rest know that the way to lose elections is to destroy your own industries. That is a powerful advantage for us.
And then there are the absolute benefits that Britain would gain. Our food imports would be cheaper outside of the common external tariff. We would be free to reduce our regulatory burden, making our businesses more competitive. We would be able to negotiate our own trade deals, opening up new markets.
And then there is the City.
The prevailing thought seems to be that the City would be damaged should we leave the EU. This is extremely unlikely, and it would be perfectly possible to negotiate proper protection for any significant areas at risk.
There are two obvious examples where the City might gain.
TTIP, the upcoming EU-US trade deal looks likely to exclude financial services, due to a tiff between American and French film makers, and American concerns about having to recognise .
Any UK-US trade deal would not omit one of the UK’s most important sectors.
And then is the Financial Transaction Tax. Within the EU we would face the circumstance where French bonds sold in the City would have to have the tax charged on them, and then remitted to the French Treasury.
Outside the EU, the city would be free to work as before, such as trading in euro-denominated bonds, while ensuring that it is free of the threat of an FTT, as well as being free of all the other stifling European legislation.
And any action taken against an independent City would de facto be also against New York and Hong Kong, which would be too stupid for words.
In total, it is easy to see Britain could be better off out, even on such terms. And this is the very worst case scenario.
Some people have suggested that we should look to Norway, or to Switzerland, to see what terms we can expect once we have left.
The idea that we have to fit our future into some Procrustean bed created for far smaller countries is nonsense.
The conventional options are laid out in the table, with a reminder of what they involve. We do not need to disappear into the details – always a problem with discussions on Europe – but let me outline what we should take from them.
The first one, EEA membership, often called the ‘Norway option’, works well for Norway but is not really appropriate for a major power like the UK.
Sometimes pejoratively described as ‘government by fax’, the balance of power looks to be squarely on the EU side. The disparity is exaggerated – Norway is represented on 200 EU committees, it does not have to accept every ruling, half its financial contributions are voluntary, and many of the EU’s regulations are copied from other international organisations’ requests – organisations on which Norway is represented and we are not!
Nevertheless, as it stands this model would not work for us. To make it viable it would need an arbitration court (not the ECJ), a dispute resolution procedure, and a number of other institutional changes. It would be possible to design and even negotiate such a structure, but it would take much more than 2 years.
The Swiss option, EFTA membership plus a host of bilateral treaties, is the best starting place and is informative in many ways.
It is not perfect for us however. It incorporates ‘free movement of people’ for the moment, although there is a clash coming on that, after a Swiss referendum was carried in favour of applying an emergency brake – a real one this time!
However, understand the comparative negotiating position.
Switzerland is a small country surrounded by the EU. Its trade is absolutely dominated by the EU – over 62% of its exports go to Europe. It runs a large trade surplus, and it is not big enough to be a critical market for any EU nation.
The negotiation between the EU and Switzerland in the 1990s was marked by some hostility after it rejected EU membership, and yet it struck a decent deal.
The optimum aim for us would be similar, but without the free movement of peoples. That would not be on the table. Essentially we would be looking for a full scale free trade agreement. And it has just been done by another country.
If you want a model of how this would look, go on the European Commission website and look at the Canadian Comprehensive Economic and Trade Agreement that the EU has just struck.
It eliminates all customs duties, which the EU website excitedly describes as worth €470 million a year to EU business. A similar deal with Britain would save it 5 times that on cars alone.
This would be a perfectly good starting point for our discussions with the Commission.
At the same time these negotiations are going on Britain will need to undertake a massive programme of simultaneous negotiations to negotiate free trade agreements with target countries that will be key to a more global approach.
If you read as many assessments of Brexit as I have, you can easily come to the conclusion that each side of the argument tends to get exaggerated. I am certain that the catastrophic predictions of the Europhiles are simply nonsense. That is why Toyota, Nissan, Airbus, even BMW, Opel and Volkswagen have now said that Brexit will not hinder their investments in Britain, sometimes in reversal of previous positions.
On the pro Brexit side, too, there are a range of estimates from modestly to dramatically better off. The difference here depends most upon exactly what we choose to do with the country and its new found freedoms. The greatest improvements will come if we grasp the opportunities for free trade with both hands.
That means immediately seeking Free Trade Agreements with the biggest prospective markets as fast as possible. There is no reason why many of these cannot be achieved within two years. We can pick up the almost complete agreement between the EU and Canada, and if anything liberalise it. We can accelerate our component of the TTIP deal with the USA, and include financial services.
Diverting our current contributions to the EU will help to smooth the transition period following the referendum.
The most effective policy would be to continue, in the short term, all of the EU’s current spending within the UK.
This means continuing to support agriculture, separate from the Common Agricultural Policy, as well as continuing research grants and regional funding.
But this would not come near to accounting for our total contributions – around £18 billion gross and £9 billion net.
We should find a way of improving the global trade performance of our economy. The companies that find it hard to export are the small and medium ones, for obvious reasons. They do not have the huge international sales and transport departments of the biggest companies.
We could afford to fund a new Board of Trade, dedicated to helping British businesses create new links to countries with which we achieve trade deals.
The funding would be available to set up an office in every major commercial centre and capital, completely separate from the Foreign Office, staffed with experts who know the language, the customs and the regulations and are on hand to help British businesses develop links in the country.
Imagine an 0800 number and an email address where a small manufacturer in Lancashire can call Shanghai or Mumbai or Sao Paolo, and find out in English how to negotiate the import regulations, find a freight forwarder, hire a warehouse, translate a brochure, the simple things that stop too many small businesses from operating abroad. They may be small companies, but this is not small beer: I am talking a billion pound project here.
We must see Brexit as a great opportunity to refocus our economy on global, rather the regional, trade. This is an opportunity to renew our strong relationships with Commonwealth and Anglosphere countries.
These parts of the world are growing faster than Europe. We share history, culture and language. We have family ties. We even share similar legal systems. The usual barriers to trade are largely absent.
The Prime Minister has repeatedly stated that we are a trading nation with global horizons. This is undoubtedly true. So it is time we unshackled ourselves, and began to focus policy on trading with the wider world, rather than just within Europe.
We would also have the opportunity to reform our economy, pushing through the changes necessary to create a dynamic, modern economy. Competitive tax rates, a competitive labour market, and effective, rather than burdensome, regulation. After Brexit we can put all that right without asking Brussel’s permission.
The European Union was a noble vision. It was borne out of Europe’s history. A history of war, conflict, tyranny and destruction.
Two world wars ripped Western Europe apart. It is an entirely understandable, indeed an admirable, response to such horror to want to break down national barriers and increase bonds between peoples and countries.
Spain emerged from Franco’s tyranny. Portugal from Caetano. Greece shook off the rule of the Colonels. And after the Berlin Wall fell, whole swathes of Eastern Europe rediscovered democracy and liberty.
Faced with such a history it is entirely understandable that the European Union came into being. It is a profoundly peaceful project, dedicated to protecting democracy across Europe.
But this history is not our history. Britain has its own proud tradition of fighting tyranny, of protecting liberty and democracy both at home and abroad.
For us, Europe has always been about trade. For the continent, it is about so much more. This does not mean either side is wrong. But the European Project is not right for us. The Global Project is.