Breaking up may not be so hard to do for the UK

George Magnus

British voters have been promised a referendum by 2017 on whether or not to stay in the EU. This will follow a mandate in the Conservative government’s 2015 election manifesto to negotiate a new settlement, which will seek to influence the future direction of the EU generally, and UK-EU relations specifically. These events are of the utmost significance to Britain’s economic and political future, to the EU and to countries, including in the Commonwealth, that have strong ties to Britain.

UK membership of the EU is coming to a head because the Eurozone sovereign debt crisis is forcing Europe to graft a political union onto the existing economic and monetary union. Euro member countries are already adopting supra-national fiscal rules, and may have to supplement these with a regional sovereign debt restructuring mechanism, and common sovereign debt issuance instruments. In the end, the Euro system will only survive if Europe develops a unified system of bank supervision and regulation that covers funding, liquidity, capital adequacy, deposit insurance and resolution authority. Along the way, Europeans will have to adopt new economic integration initiatives covering labour markets, social security systems and financial stability mechanisms, some of which will be unveiled at the EU Summit in May.

Britain has historically resisted political integration in Europe. The stakes are much higher than they were when the UK government sought an opt-out from the euro 20 years ago, partly because Europe has to integrate (or fail), and partly because of sombre economic circumstances unleashed by the financial crisis.

EU protagonists warn that if Britain voted to quit the EU, it would lose the political leverage and trade benefits that accrue from the EU’s relations with the rest of the world. The City of London’s status would be undermined, as integrating European institutions, including the European Central Bank, insist on financial and regulatory policies that favour Frankfurt and Paris. The structural shift in UK trade and foreign direct investment (FDI) towards Europe over the last half century could become a millstone. For non-EU companies, the advantages of being in the UK, as the gateway to the European market, could dissipate quickly. These arguments cut little ice with the antagonists, for whom the more limited acceptability of EU membership – free trade – is now being overwhelmed by the political integration they regard as unacceptable. Less colloquially, they have given up on trying to reconcile deeper economic integration with democratic politics and national sovereignty.

And yet, the antagonists may have a point. Despite the economic benefits of UK integration with the EU, there is a fundamental incompatibility between the current need for Eurozone integration, and entrenched UK resistance to joining the euro. If the latter is cast in stone, what is the point of a large economy staying in the EU?

The European economy will remain fragile for many years, and annual trend growth in rapidly ageing Europe may now be below one percent. The UK should, in any case, seek out better trade, investment and financial services opportunities in faster growing, younger emerging countries. Meanwhile, the US is recovering its economic sea-legs, and is newly serious about a transatlantic free trade agreement with the EU, covering half of global output, and which would hardly exclude the UK.

The feared shock to the City of London may also be balanced by the very reasons that the world’s financial institutions, including 160 from the EU, choose to be in London. The City trades twice as many euros as all other member states combined.

Commonwealth member countries have particular reasons for considering the UK’s political and economic outlook, and there is no question that lingering uncertainty will be unhelpful and sometimes uncomfortable.

However, by 2017-2020, if the UK leaves a floundering Europe, it will have made the right decision. If it leaves an integrating Europe, it will doubtless incur economic and political costs, but perhaps also the chance to exploit commercially a changing global system, in which the EU’s economic significance may shine less brightly.

About the author:

George Magnus is an economist and advisor to UBS and other investment banks


Post a comment

Leave a comment

You must be logged in to post a comment.

Amnesty International