Wednesday, May 29, 2013

Tilting at European windmills

Britain’s European debate is moving from process (referendum when? how?) to substance – the question of whether the costs of EU membership outweigh the benefits. This debate is healthy. What baffles me is that some of the most frequently made arguments in this debate are baseless yet enduring.

I have done a number of public debates with UKIP leader Nigel Farage and other zealous eurosceptics. Such debates are not part of my job: the Centre for European Reform is an independent think-tank, not a campaigning organisation. Yet as an analyst, I believe that the debate about Europe should be well informed.

Hard-core eurosceptics often base their arguments around claims that are simply not correct. Their pro-European counterparts are then left to protest lamely that the eurosceptics are economical with the truth. The eurosceptics have the initiative; the pro-Europeans have the moral high ground. As long as eurosceptics get away with telling the public that EU windmills are dangerous giants, the debate about Europe will be skewed.

One of the most frequently repeated arguments in the British EU debate is that “the Commission in Brussels dictates 75 per cent of our laws” (this is a quote from UKIP’s website but I have heard the number repeated in public debates and in the national media).  The European Commission does not dictate laws; it is allowed to propose laws. But it is the ministers from the (elected) EU governments that negotiate and agree them, together with the (elected) European Parliament.

The 75 per cent figure comes from a statement that Hans-Gerhard Pöttering, then president of the European Parliament, made in 2009:  "Today approximately 75 per cent of the European Union legislation is decided by the European Parliament together with the Council of Ministers and has a direct impact in our daily lives.” Note: Pöttering was talking about the share of EU legislation that is influenced by the European Parliament. He did not refer to national legislation.

So what is the true share of UK legislation linked to EU directives? There is no easy answer. First, EU laws and national laws cannot be compared like for like. EU regulations apply directly in the member-states. EU directives are implemented through national laws and regulations. Sometimes one national law implements four EU directives, sometimes four national laws implement one EU directive.

A lot of British business regulation is likely to be related in some way or another to the single market and hence to the EU. But the EU does not get much involved in setting British rules governing tax (other than VAT and excise duties), social security, pensions, education, policing (except cross-border operations), spatial planning or the health service. The House of Commons Library has tried to calculate the percentage of secondary legislation in the UK that results from EU requirements and concluded that "[t]his figure has fluctuated between 8 and 10 per cent in the last decade". OpenEurope, a eurosceptic think-tank, has spent a couple of years looking at the question of how much British law can be traced back to the EU. The researchers concluded that it was not possible to determine the share with any kind of accuracy.

Nor is it a straightforward question how much EU regulation costs the UK. The anti-EU Bruges Group claims that EU regulation costs the UK £28 billion a year, but it is not clear where this figure comes from. Some eurosceptics have also claimed that EU regulation cost the UK over £100 billion over the last decade. This figure is probably based on research that OpenEurope did in 2010. It should be used with great caution.

OpenEurope looked at the impact assessments attached to 2,000 UK business regulations since 1998. (Many national governments, as well as the EU, try to estimate the potential positive and negative impacts of planned pieces of legislation before they enact them.) OpenEurope’s researchers then added up the estimated costs of the proposed regulations as well as the estimated benefits. They found that the 2,000 pieces of regulation could have cost the economy a total of £176 billion since 1998, and that £124 billion of this could have come from regulation that was in some way related to EU policies. I say “could have” because the £176 billion and £124 billion figures are made up of ministerial estimates of potential costs, not actual costs.

The researchers also added up the estimated benefits of the regulations and found that they are significantly bigger (by 60 per cent) than the estimated costs. In other words, although regulations can be burdensome, their net effect on the economy is thought to be positive because they usually help business to trade with one another as well as making workers more productive and products safer. OpenEurope says that the positive net effect is smaller for EU-related regulations than for national regulations. But it admits that it is particularly hard to quantify the benefits of EU regulation since impact assessments do not usually take into account wider benefits, such as access to the single market or the price decreases resulting from stronger international competition.

The costs of EU regulation also depend on how it is implemented in the individual EU countries. Some governments go beyond what is required by the EU. A 2006 review found no evidence that the UK was doing more ‘gold plating’ than other EU countries. But any meaningful estimate of the burden of EU regulation would have to consider the share of costs added at the national level.

These costs would then have to be set against the benefits of being a member of the single market and the world’s largest trading bloc. These benefits are every bit as hard to calculate as the costs of EU membership. Therefore, when pro-Europeans use figures such as the 3.3 million jobs that directly depend on exports to the EU or the £3,300 that every British household gains from being inside the EU each year, they should also be taken with more than a pinch of salt.

Eurosceptics claim that access to the European market is no longer worth much since Britain now “mostly” trades with non-EU countries. It is true that the share of British exports that go to the other EU countries has fallen to just below 50 per cent and that sales to emerging markets are growing faster  –  that is exactly what you would expect, given that the eurozone is in recession while many emerging markets are still growing briskly.

But British exports to emerging economies are starting from a surprisingly low base: in 2007, 3.3 per cent of UK exports went to the BRIC countries; by 2012, that share had risen to 5.6 per cent. Britain still sells more to Germany than to Brazil, Russia, India, China and South Africa, Australia, New Zealand and Canada – combined. Another key export market for Britain is the US – with which the EU is currently negotiating a free trade and investment agreement.

Eurosceptics often imply that if Britain severed its ties with the EU, it would trade more with emerging markets. In a purely arithmetical sense this might well be true: if British business found it more difficult to access markets in France, Spain and Poland they might try harder to sell things in India and Indonesia. But the idea that the EU is holding Britain back is spurious. Germany sells six times as many goods and services to China as the UK does. If it is the EU holding Britain back, why is it not holding back Germany?

Another figure that the eurosceptics like to use is £50 million: that is supposed to be the daily British contribution to the EU budget. This number has some validity, although it is outdated. In 2011 the gross UK contribution to the EU budget was £13.83 billion, or £37 million a day. Is this a lot or a little? It depends how you look at it. As a share of GDP, the UK’s gross contribution is the lowest of any EU country, lower than those of poorer countries such as Poland or Bulgaria. And of course, Britain also gets money back from the EU for its farmers, universities and poorer regions. Once these revenues are factored in, Britain’s net contribution amounts to roughly 1 per cent of total government spending.

Even 1 per cent is a lot if, as many eurosceptics claim, the money is wasted. UKIP calls the European Union a “bureaucratic monster” and sometimes implies that most EU spending goes to meddlesome bureaucrats. In reality, around 5 per cent of the EU budget is spent on administration, and half of that on the European Commission. The European Commission has 23,000 employees, less than Birmingham City Council. It is true that EU officials are “unelected”, as are the 32,000 officials in the British Home Office and those of any other state administration around the world. No doubt, the EU’s bureaucracy could be streamlined and made more effective but the real potential for savings – as many British politicians have pointed out for years – is in the common agricultural policy and funds for poorer regions.

The latest figure that has crept into the European debate is £150 billion – that is supposed to be the sum that the UK could lose through the euro crisis, according to the Bruges Group. Among the heroic assumptions underlying this calculation is that all other 26 EU countries would go bankrupt simultaneously so that Britain would be lumbered with the entire £60 billion costs of a lending facility called the European Financial Stabilisation Mechanism; that the European Investment Bank (an AAA-rated infrastructure lender) would fold; and that Britain would be called upon to bail out the European Central Bank if the euro broke up.

The fundamental truth is that the European Union is an extremely complex undertaking that cannot easily be reduced to simple numbers – either on the positive or on the negative side. But perhaps by feeding random numbers, half-truth and fiction into the debate, the hard-core eurosceptics will force other politicians and journalists to do a better job of explaining what is really at stake in Britain’s EU membership.

Katinka Barysch is deputy director of the Centre for European Reform.


Anonymous said...

Excellent article. The in/out debate about UK and the EU needs more informed exchange of views in order for a rational rather than an emotional outcome for all concerned. As someone who is not well informed on this subject, I look forward to following these types of articles in order to better equip myself to understand both sides of the argument. Well done and keep up the good work,

Anonymous said...

"Pro-Europeans have the moral high ground". That's not true either, as those same people who claimed Britain would loose out by being out of the Euro are now saying that Britain will loose the same number of jobs by being out of the EU. The simple matter is that neither side knows the Pro's and Cons of Trade. Britain would gain some advantages (such as reclaiming its WTO post that was taken by the EU) and it would be able to sign bilateral agreements and loose others such as being able to take other European nations to court when they flagrantly violate the Common Market - e.g. France and British Beef and would be reliant on the slow justice of the WTO.

You claim the advantage of having the numbers on your side then repeat the oft quoted lie that 50% of British Products are sold into Europe. Scrub out the Rotterdam effect and that's nearer 35% of the UK's products that are sold into Europe. Important yes, but not the only game in town. You also assume that this is one way traffic, with Britain being lucky to receive UK goods whilst Europe doing the UK a favour buying their goods which is rubbish, if the goods are worth buying people will buy them regardless of which Club they happen to be in. I drink Budweiser Beer, doesn't mean I have to be in NAFTA to do so. Furthermore I think Audi, BMW and Mercedes might have something to say to Frau Merkel were the EU suddenly to slap punitive charges on British Goods into the EU, bearing in mind that Britain is Germany's largest Market in Europe. You also neglect to Mention the fact that the Common Market is in Good;, services are not anywhere near as free as anybody trying to buy a French Utility company would find out. Britain gains less from the EU than Germany because Britain sells more services - not goods.

You quote the fact that if Britain left the EU then the Free Trade deal between the EU and the US will exclude the UK. You assume that firstly the US Congress would ratify the treaty at all without Free Trade Atlanticist Britain involved in the legislation backing such an agreement. You also assume that the Democrats (and an Anti-British President at that) will be in the White House in perpetuity.

Europhiles oft quote the City of London being excluded from Euro Denominated Trades. Again it is assumed that Firstly there will be a market at all with the FTT making capital very unwelcome in Europe. Europhiles also assume that the main market will be physically settled rather than in cash settled Futures and other OTC products. As the OMX Sweden exchange proved, capital flies at a rate of knots from Transaction Taxes. If I had a £5 every time I heard that London would loose out to Frankfurt I'd be a rich man.

Both sides are guilty of mendacities in this debate when discussing the Economics. The Eurosceptics are responding to Europhile Half Truths or outright lies with half truths and lies of their own. This is because the debate hasn't got onto what actually matters, does the UK want an 8% say in EU law, or 100% of UK law? The debate is ultimately about national sovereignty. Right now the pro EU argument is fighting on its own turf, when the EU is fighting on why this was allowed to happen without scant Democratic Mandate then the Europhiles and Europhobes will have to debate without this insipid Economic hyperbole.