Vermeend & Van der Ploeg: Why the UK needs the EU

Economists Willem Vermeend and Rick van der Ploeg think the chances that Britain will leave the EU are negligible.

Last week the international news was dominated by British prime minister David Cameron’s speech on his country’s future in Europe. In it he promised a referendum on the British membership of the EU, to be held no later than 2017. Why now? The answer is that the beleaguered Tory prime minster did not have much of a choice.

His own Conservative Party is becoming increasingly anti Europe. Many conservative MPs are openly campaigning for a British exit from the EU. They feel Brussels has become too powerful and that the UK would be better off on its own. The party is also losing votes to the UK Independence Party. This national party is clamouring for an immediate British exit. On top of this, Cameron is stuck with a badly performing economy which is not doing his party any favours in the polls. His speech should be regarded as nothing more than a barely disguised attempt to win votes so the conservatives will be able to continue in power after the 2015 elections. Cameron is pointing the finger at Brussels to divert attention away from his failure to get the ailing British economy back on track.

What does Cameron want?

Although it is far from certain that he will win the next elections, something which also puts the referendum in doubt, Cameron’s first priority is to negotiate a treaty change with the other member states. The British prime minister wants certain rights and powers handed over to Brussels when Britain entered the EU to be returned. In his speech he also declared he would campaign in favour of British membership but only if the EU is prepared to abolish a number of European rules he considers detrimental to UK interests, such as labour market regulations and certain legal and economic requirements.

Other European countries, including the Netherlands, have also proposed a review to see which legal and economic measures are better left to the member states themselves. The VVD-Labour accord describes this as ‘less Brussels’ on the one hand and ‘more Brussels’ on the other. The latter refers to Europe’s financial and economic policy: in order to solve the banking and debt crisis and guarantee the survival of the euro, all EU member states must strive for a sound financial economic basis and form closer ties in the process. The Dutch cabinet, along with most other EU members, supports European regulation in this area which gives Brussels the powers to deal with the crisis more effectively.

Pick ‘n mix

Although Cameron intimated in his speech that he considers the Netherlands to be his ally, nothing could be further from the truth. Cameron wants a fundamental overhaul of the EU but one which would mainly benefit the UK. He wants a more flexible membership: a EU à la carte. Cameron wants a European Union which will exempt the UK from certain basic EU rules concerning a united policy and use it as a policy pick ‘n mix sweet shop. The sweets of choice are fewer European rules for British businesses, more room for manoeuvre for the British financial sector in London and a reduced British contribution to the EU.

Many member states think of the UK as a bit of a pain in the European backside. It is always trying not to do as others do, often with success. The UK did not join the euro, doesn’t abide by the European budgetary rules and declined to become a member of the Schengen group.

The French often protested against Britain’s special position in the past but in the end a majority of countries always caved in to British demands. Many countries decided it was worth it for having an economically important country such as the UK  in their midst which could also serve as a useful ally against the dominant Paris-Berlin axis. Will those countries give Cameron the fundamental changes he is asking for? Not a chance. At most they will agree to a few cosmetic changes in some minor areas which will curtail the power of Brussels somewhat, and perhaps a couple of concessions on some legal points. But that will be pretty much it. Cameron will not get his flexible membership. If he did, it would mean the end of the EU as we know it and signed up for. There is, moreover, a large majority in favour of more cooperation to strengthen the European Union as a single economic power and giving Brussels the powers to promote this.

Trading advantages

Although many British citizens think differently, the UK’s economic might has long since become a thing of the past. According to international predictions it may not even be in the top ten of world economic powers by 2020. International business interest is also cooling, a trend that became apparent after the UK decided not to join the euro. Companies from Japan, Canada and the US which were considering the UK as a basis quickly changed their minds and opted for the eurozone. Globalisation and other factors have made international business decide in favour of the trading advantages and the smaller likelihood of currency risks that go with a big economic block and a stable global currency. This is good for the eurozone and not very good for the UK. By leaving the EU Britain’s position will only worsen.

The uncertainty created by Cameron will cost jobs and economic growth. If the UK leaves the EU it will lose the free trade advantages of the internal market. Chances are that the British economy has already left itself open to quite a lot of damage in the next few years. More and more emerging economies, like China, Brazil, India and Russia will avoid the UK and come to mainland Europe. International companies don’t like unknowns and won’t set up shop on an ‘isolated’ island at risk of losing the trade advantages of the EU. British businesses which make their money exporting to the EU may decide to cut back on investment in the light of this potential loss. It is an illusion to think that the UK, once it has placed itself outside the EU, will be able to bilaterally negotiate their way out of this.

All this makes it very unlikely that Britain will leave the EU. If the referendum goes in favour of an exit, Britain will lose its free trade advantages. That would be disastrous for the British economy. David Cameron is in danger of overplaying his hand. The EU states will not be dancing to his election tune. They will tell him in no uncertain terms that as far as the free trade zone is concerned the UK will have to take the bitter with the sweet (s). British voters will find out soon enough that while Europe can do without Britain, Britain will not be able to do without the EU.

 

Willem Vermeend is a former State Secretary of Finance and Minister of Social Affairs in the Dutch government and currently entrepreneur and professor at the University of Maastricht

Rick van der Ploeg is a former State Secretary for Eduction, Culture and Science in the Dutc government and professor of economics at the University of Oxford.

This article appeared earlier in the Financial Telegraaf

 

 


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