UK’s Potential Exit from the EU
Effects of the Exit
Introduction
EU membership affects the UK economy in several ways. The major aspect stems from the Single Market that’s the network of the economic integration that has a huge impact in its internal economic matters. The EU has the ability to negotiate comprehensive investments and trade protocols and agreement with many countries outside the European union it’s basically a custom union that enhances a common tariff on all imported goods. EU membership affects and influences UK’s trade relations with other non-members of the EU. UK’s exit from the EU will affect its trade relations with members and non-member countries of the union.
The price of consumer products in the UK will also be affected as the Common Agricultural Policy and the common EU external tariff on all imported goods will cease to apply to all exports to the UK. Investors will also be influenced by the decision to withdraw from the EU.
The EU will also be affected by the exit of the UK from its membership as its monetary and fiscal contribution to the union’s budget will be affected.
Domestic politicts
In the year 1961, the government of the UK that was being led by Harold Macmillan of the conservative party finally came to a conclusion to join the EEC. This was after a series of economic successes of the earlier six founding members of the European Coal and Steel community (ECSC) the union that led to the EEC, the predecessor of the EU. Clement Attlee, the head of the labour government that was in power in the UK had declined an invitation to join the launching of the union in the early years of the 1950s. This decision allowed the founding members to set favorable terms for their countries which allowed their economies to grow at the expense of such non-member countries like the UK. The founding nations shaped the ECC to their advantage. The British application was rejected due to its strong links to the American government. (Pickard, 2005) Harold Wilson in the year 1967, made another application to join the EEC but it was also not successful. It was only in 1973, that the veto French vote was removed that Britain, under Edward Heath, the prime minister and head of the conservative party was allowed to join the EEC. (George, 1998)
After the introduction of the European Communities Act of the year 1972 in which only a small majority supported the bill, it was obvious that it would encounter some sovereignty challenges that would make its existence rough and difficult in the UK.
One of the ECC provisions, the communities Act provides that the European law under the communities Act has supremacy over all existing domestic laws of all the individual member states. But the UK has some unwritten laws whose principles recognize only the UK constitution as the Sovereign source of law in Britain and which respect the sovereignty of parliament. This has led to conflicts on the fundamental supremacy of its membership to the community.
However, the economic decline of the UK economy during the 1950s and the 1960s due to its stand on the EEC issues and the relative economic prosperity of the six nations that founded the EEC, most British politicians changed their minds and they began to forge working relationships with their counterparts in Europe. It was purely economic motivation that drew Britain to the EEC. The UK is reluctant to integrate its political sovereignty with the union and instead it has opted to cooperate as an intergovernmental entity. Though the UK accepted the community Act as the primary legal basis for its cooperation and membership it continues to define its position as simply intergovernmental and not political integration.
Trade
The exit of UK from the EU would lead to its independence over the EU policy that would allow it to join other trade areas like the NAFTA and forge new bilateral trade ties that would be tailored to British specific needs and in particular circumstances a condition that was not possible under the EU terms. This freedom to join other free trade areas would give the UK government a chance to refocus its trade policies on economies that have better and brighter prospects and also grant it an opportunity to correct its persistent deficits on trade. Britain arguably has a great potential and capacity to export its goods and services to the international markets and especially to the emerging markets which the UK strongly believes that it’s being held back by the policies of the EU and its membership. Trade between the UK on one side and China together with India on the other side has over the last five years doubled while the UK’s export has declined from a high of 54% in the year 2006 to 46% in the year 2012. UK has noted that the EU has less interest in seeking trade concessions with commonwealth countries. EU has failed to secure trade ties with China, India and Brazil. It’s still unknown whether UK’s influence and ties with the rest of the world will be stronger outside the EU than if it’s inside.
The other area that Britain feels that it’s not adequately represented is the
Financial and Monetary policy
In 1999, when the single currency was introduced among the fifteen member of the EU member states who joined the European Monetary Union. The UK is among the largest economies in the EU community declined to join the EMU. The decision to opt out of the EMU caused a lot of arguments and fierce contests in the UK government and in business circles. The conservatives who were in the opposition at the time and other right wing media groups were strongly opposed to the UK joining the group while the government and other business people and companies were in favor of joining the EMU.
Several issues and reasons were raised for and against the EMU. The groups that supported the EMU position argued that the single currency will be a step further towards the integration of the European single market. This would create a competitive UK economy and also maintain a successful and sustainable high growth and prosperity. The initial objective of the UK joining the EU was to lead the UK government out of isolation and right into the heart of EU economic prosperity.
The opponents of EMU and the single currency EU initiative argue that the introduction of the Euro would greatly undermine the identity of the British nation which is closely identified with the pound. The strongest sentiments were expressed against the loss of British sovereignty in relation to the integration of the monetary policy among the EU states. Joining the EMU would mean surrendering the independent exchange rate that exists in the UK and instead embrace the functions of the European Central Bank. These would mean a loss of economic power over its national economic policies and agenda. Most of the decisions affecting the EU are made in Brussels. The Bank of England became independent in 1999, as a sign of positive signal after declining the EMU membership and as outlined in the Maastricht Treaty for joining the Euro zone. (BIS, 2011)
Foreign investment
In the year 2011, the UK received $1.2 trillion in FDI making it the second from the US. The EU recognizes it as the most attractive business location for investment in the EU community in the year 2013. (Ernst and Young, 2013) About 48% of the total FDI stock is directly from the EU. This figure was 53% in the year 2009. In the year 2011, Investments from foreign companies amounted to £31.9 Billion which was a slight decrease from the previous year. (ONS FDI, 2011)
Being a member of the EU, the UK is more attractive to FDI’s as firms in Britain will also access the attractive EU market which guarantees entry to the single market. The existence of such benefits makes the final decision to withdraw from the EU very hard and challenging. However the decision to invest in the UK is also influenced by other reasons not only the EU factor alone as the availability of the requisite skills and services in Britain and also its robust legal system makes its more attractive.
Immigration
Economic Migration refers to the movement of people by choice to improve their standard of living by gaining a good job that’s better and more paying than the current one. When the Poland and other countries from the eastern part of Europe joined the economic union in the year 2004, the UK received more than half a million migrants in their country. The wages in Britain were more than five times what they were currently receiving back at home.
The World Bank estimates that UK receives major remittances across the world as well send the same equally. In the year 2011, UK received remittances valued at £5,040 million while the out flows were £2,031. In the fiscal year ending 2012-2013, UK remitted 7% of the total remittances to the UK (£626 million) while Pakistan received 14% (£1228). The cost of remitting the money from the UK varies with transfer method and the country of destination. Western union and Money Gram charge 6 to 11% of the total value of money remitted. World Bank (2012) revealed that India, Nigeria, Poland, France and Pakistan receive the largest share of the remittances from the UK. (Clark and Drinkwater, 2007)
If UK exits the EU or tries to control the EU immigration it will result in reduction of UK economic growth and also reduce its public finances. Tighter control on immigration will mean losing 2% of the GDP by the end of the year 2050 or £60 billion. The migrants also assist in offsetting the UK ageing population off which without them its financial expenditure will increase as expatriates or specialize staff will have be hired to fill some sectors in the labour market.
The EU directive of 2004/38/EC, all EU nationals are exempted from all visa requirement when entering member state and no time limitation may be subjected to their stay. All EEA members who are non-EU nationals and Swiss citizens also enjoy similar rights like the EU members
The UK political debate on the EU migration is gaining momentum but its insufficiently evidence based. Most Briton seems to believe that the jobs taken by the immigrants will be up for grabs by British nationals once the UK withdraws from the EU. This is a pre-conceived notion that immigration leads to shortage of jobs for the locals and immigration offers very little benefits in terms of economic value of the migrants on the UK economy. However it’s very clear that British economists have discovered very little evidence that immigration mostly from the European countries endanger any prospects for any Briton employment opportunity in Britain. The evidence is clear in one area that the impact of the skills of immigrants will be felt if UK pulls out of the EU. The immigrant groups contribute significantly to the public finances of the UK government. The EU immigration however has contributed to the rising costs of the housing costs and demand for public schools. Favorable factors prevailing in a country draws a lot of advantages tend to attract more
- a) The benefits of migration are strongest when there is an expectation of increased earnings and the cost of relocating is reasonable.
- b) Also where the host countries are offering different wages and salaries on equivalent jobs on offer.
- c) Accessible welfare benefits system of the hosting countries and their government education, health care and housing.
- d) Job opportunities especially for young workers vary between countries.
Migration which raises very vital economic, political and social issues has become a very significant feature of the globalizing world. Three percent which is about 200 million people in the world’s population do not live in their birth countries. For instance, in the United Kingdom a number of international migrants grew by 10% in 2010.
The UK must make a decision if the economic benefits it derives from the EU are enough to make it stay in the EU community.
Migrants create new jobs thus creating a multiplier effect. Increased labor supply and reduce the shortage of skilled labor: Migration helps in relieving labor shortages and help in wage inflation control. Skilled labor recruitment outside the European Union makes positive contribution to the UK’s GDP.
International relations
Each country has its own defined role in the world which particularly shapes its general perception of global issues and its identity in relation to other countries. The historical British Empire had significant influence on global issues. The British Commonwealth was created out of Britain’s former colonies as an intergovernmental association. When the UK joined the EU, most member nations felt that, the commonwealth was a positive way of reaching out to the rest of the world and also a way of improving its global communication. However, the UK felt constrained by the tough EU rules and institutions which had curtailed its global dominance and influence and which had literally narrowed most of its opportunities. When Britain failed to take part in the formation of the first EU community it lost an opportunity to assert its initial number influence on the EU membership states. UK relationship with some countries like France was initially strained. In 1961, when UK applied to be a member of the EU, France used its Veto power to lock out The UK. Its second attempt was also rejected. It was only after the veto powers of the member nations were reviewed that Britain had an opportunity to be a member of the EU. The major reason why the UK joined the EU was to rejuvenate its ailing economy and also to be able to access the EU single market economy. (Rodrik, 2008)
However, should UK finally decide to withdraw from the EU it could seek other alternative relations with non-members of the EU whose membership to unions like the European Economic Area (EEA) have also adopted most of the EU laws that guarantee access to the Single Market and some other benefits enjoyed by the EU members.
British former prime minister, Tony Blair believes that UK major interest is best protected when it’s aligned with the Americans not the European Union. His view is that the UK should encourage more cooperation with the west that’s the Americans than the EU community. (Seldon, 2007)
Conclusion
It’s reasonable to assume that the UK membership to the single market is a major determinant of FDI but should the UK decide to abandon the EU, it would be able to create its own regulatory framework that will attract overseas investors and provide favorable terms to offset the loss of the EU influence on FDI. To be more precise, Britain will regain control to negotiate international trade agreements on FDI’s with other countries especially the third world countries. As a member of EU, the UK is restricted in negotiating international trade terms by the EU Lisbon treaty of the year 2009. (UNCTAD, 2009)
But whether the UK will benefit or not from its withdrawal or exit from the EU, it will certainly affect significantly some sectors in the UK economy. Farming in the UK receives some subsidies from the EU’s Common Agricultural Policy and in other areas like in the West Wales; EU has pledged a lot of funding from its budget. Should the UK withdraw from the EU, it will have to source for alternative funding to finance these projects.
The effects of migrants can result either in positive or negative economic growth depending on the host countries polices on migrant’s status and treatment. Where the migrants are assisted and integrated in the society with clear policies that countercheck human mistreatment and abuse, then the contribution of migrants in terms of services and taxes can improve the performance of the economy. But situations where they are locked up and treated like criminals then the country have to provide maintenance and other services to the migrants who incur expenses that are paid by the host country. This becomes a burden on the taxpayers as well as it affects the performance of the economy negatively. For the UK to remain in the EU is a decision which the citizens have to make. The benefits of remaining in the EU community are enormous but if it can negotiate new terms with foreign countries and also using its position and also as the head of the commonwealth community to negotiate favourable trading agreements.
Reference
BIS (2011) Economic consequences for the UK and the EU of completing the Single Market Clark, K. and S. Drinkwater (2007) An Investigation of Household Remittance Behavior: Evidence from the United Kingdom
Ernst and Young (2013) European Attractiveness Survey
European Commission (2013) EU trade relations world wide
George, S. (1998)An awkward Partner: Britain in the European Community.
Oxford: Oxford University Press.
ONS Foreign Direct Investment (2011) (MA4)
Rodrik, D. (2008) One economics, many recipes: globalization, institutions and economic growth
Seldon, A. (2007) ’’How will history judge Blair’’. BBC News. 10 May 2007
http://news.bbc.co.uk/2/hi/uk_news/politics/6636091.stm
UNCTAD (2009) World investment prospects survey 2009-2011
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