Business for New Europe

BNE Chairman in the Economist Debates: The UK and the EU

12 January 2012

Economist Debates: The UK and the EU

With the problems facing the common currency, it is easy for us in Britain to forget that the success of the euro zone—and for that matter the European Union—is essential for our recovery and future prosperity. The figures speak for themselves. According to the Foreign and Commonwealth Office, approximately 3-3.5m jobs in Britain are directly or indirectly a result of our EU membership. Totalling £351 billion a year, over 50% of foreign direct investment (FDI) to Britain comes from EU member states. Britain attracts so much global FDI precisely because it is a gateway to the single market. Also, according to the prime minister's pamphlet entitled "Let's Choose Growth", Europe's single market—largely a British initiative pushed by Margaret Thatcher—adds €600 billion a year to our economy.

The benefits of our EU membership go far beyond the figures above. We see that the EU is a force multiplier for British trade with the benefits being twofold. First, EU membership puts Britain in the strongest position to push for a liberal trade agenda at the global level. Second, the EU will support Britain if external trade partners contravene World Trade Organisation (WTO) rules. As part of the EU, Britain is in a much stronger position to secure free-trade agreements (FTAs). For example, the recent FTA signed with South Korea eliminates 99.4% of duties on EU goods.

A further demonstration of the EU having a much stronger voice on the global stage than that of its individual member states also can be seen in energy policy. With 36% of the EU's total gas imports originating from Russia, the EU is the best vehicle to develop new energy sources. Early last year, the EU negotiated the installation of the Nabucco Pipeline, which gives the EU access to Azerbaijan's oilfields, bypassing Russia and diversifying the energy supply for all EU member states. Beyond trade and energy policy, EU membership also benefits Britain by pooling resources and expertise and reducing pressure on Britain's budget in areas such as foreign policy, defence, humanitarian aid, crisis prevention and crisis resolution, among others.

As we start 2012, two challenges face us: the possibility of a break-up of the euro zone and Britain becoming further sidelined and marginalised in the EU, leading to diminished influence. Neither must be allowed to happen.

A break-up of the euro zone would of course be disastrous for the EU as a whole, with predictions of social unrest, the raising of economic barriers, a breakdown of the single market and trade within the EU contracting by 30% or more. However, with British banks' and companies' exposure of £191.8 billion to peripheral member state debt, according to the Bank of England, and 40% of British exports going to the euro zone, the consequences of a break-up would be just as devastating for Britain.

As we are not members of the euro zone, it is natural that we are not as involved as those within it, but we should be supportive where we can. With over half its trade with the rest of the EU, Britain should be wary of absenting itself from the table during discussions about Europe's economic future, especially on issues relating to the single market. There is a risk that with Britain outside the room, certain member states may push for protectionist and, ultimately, uncompetitive practices.

There are at present 40 pieces of legislation within the European Parliament that would have a direct effect on the City of London. Most notably, the proposal for a European financial transaction tax (FTT) within the EU and not at a global level poses a major threat to Britain. With 80-85% of the tax gains coming from the City, London would be disproportionately affected. Britain is entirely correct to fight this proposal along with others which, unlike the FTT, simply require qualified majority voting (QMV) within the European Council. We must, however, be at the table to do so.

Some now argue that an alternative to our membership of the EU would be to join the European Economic Area (EEA) or the European Free Trade Area (EFTA). When you analyse these options, however, they simply do not present acceptable alternatives for Britain. EEA and EFTA members must accept all the rules of the single market but have no input or vote on their formation. Moreover, members are obliged to contribute to the EU's budget for this access. For example, Norway pays about €349m a year, and estimates are that Britain would have to contribute €2 billion a year. A country the size of Britain, with such a diversified and large economy, would never accept such a large transfer of funds without a voice on how they would be spent.

So as we face the obstacles awaiting us this year, the EU can no longer plod along as the markets, and for that matter the whole of the global economy, increasingly lose patience. The economic and social consequences of a break-up of the euro zone are too dire to imagine. European leaders must put into place and progress the recently agreed fiscal compact in addition to ultimately agreeing to the European Central Bank's involvement in the sovereign debt crisis and, in the long run, some sort of mutualisation of debt. At the same time, Britain must not relegate itself to the second division in Europe but lead on issues such as the further deepening and ultimate completion of the single market. There will also be opportunities over the coming months to allow the euro zone to fold the new agreement, to which we are not signatories, into the EU treaties as long as there are safeguards on the single market.

With Britain playing a positive and active role in the EU, we have the opportunity in 2012 to bring an end to the euro crisis while safeguarding and further deepening the single market for all the EU's members, including Britain. Both would eliminate the biggest threat to the global economy while strengthening Britain's most important trade relationship. If Britain and Europe play their cards right, at the end of the year we will be able to look back at 2012 as the year Europe left its crisis behind and Britain returned to growth.

 

Roland Rudd

Chairman

Business for New Europe