David Cameron’s re-election has stunned pollsters and put the issue of the United Kingdom leaving the European Union firmly on the table. Showing how far removed the UK’s voters are from the long term interests of their nation, they have re-elected a party which promises to impose more austerity, weaken social structures, and cut them off from one of their largest markets. Democracy is a funny thing. The ‘mediamacro’ type of analysis done by the British media shows us that the tradeoff was sold in terms of benefits to migrants and costs to the taxpayer of being in the EU--as a rich nation the UK contributes more than it receives from the Union in many cases.
Mr Cameron has pledged to hold a referendum on the UK remaining within the Union before the end of 2017. Unlike membership of the Euro, a sovereign state can actually leave the European Union. Article 50 of the Treaty of Lisbon provides that ‘any Member State may decide to withdraw from the Union’ on the basis of a negotiated ‘arrangement’. Greenland left the EU in 1985, but as they only exported fish, the effects weren’t that pronounced.
For the UK, the effects of leaving would be enormous. First, the timing would have to be negotiated. If in 2017 the British people said ‘yes, we’d like to leave’, the exit might be in 2019. Or 2018. Or 2020. A period of uncertainty around legal and economic structures would preceed and follow any exit. For example, upon an exit there would be a suspension of all regulations which have direct effects, including mundane things like gathering statistics but also vital things like food safety legislation. These legal issues could be fixed but equally, legal black holes could open up all over the place. There would be an end to the direct transit of goods and services across borders, as well as people. It would make an end to the principle of no state aid for companies. So you could see a situation where, say, Ryanair has to compete with a heavily subsidised British Airways for routes, and loses. It might change the business model for many sectors. For example, the UK’s universities might lose access to Horizon 2020 funding, worth 80 billion euros over 7 years, which is key to enhancing research. The universities might also find attracting students a harder proposition as the referendum will focus, unhealthily I suspect, on migrants.
For Irish people, all of a sudden, it would be harder to drive to Northern Ireland, harder to work in London, harder to invest in the UK and have UK investors invest in Ireland. These problems might be solved by adopting bilateral treaties or being granted most-favoured nation statuses, but it would not be as open and free a movement of capital and labour as before, and substantial problems in supply chain management, as well as hiring, will occur. The top four countries whose citizens go to the UK are, in order, India, Poland, Pakistan, and Ireland. Irish nationals made up more than 5% of all migrants to the UK from 1995 to 2013.
For British citizens living and working in the EU--and paying taxes--an exit would change their lives dramatically. More than 12% of the UK’s working population is foreign-born. What will happen to them?
In pure trade terms, for Ireland a shock exit would be a disaster. Right now Ireland exports about 14% of all our goods and services to the UK. Adding the value of all the exports we send to the UK, we find our relationship has been worth around 260 billion euros in today’s money. We also import a substantial amount from the UK. Again, adding up all the import values since 1995, we have a total country to country trade of around 305 billion euros. Huge, huge sums of money. We also have to remember that for as long as there have been people on the island of Ireland, they have been trading with the UK. A poorly managed exit could redefine the trade relationship the two countries have enjoyed since the 1950s, as the UK would experience a recession and, combined with a realignment of the terms of trade, take us down with them.
Then there’s the, literally, murky areas shadow banking and tax arbitrage. Will Ireland’s multinationals and financial intermediaries appreciate the effects an exit has on their abilities to move capital between the UK and Ireland to reduce their tax bills? Will the IFSC hoover up brass plates from the City of London, Europe’s largest financial centre? What about Irish agencies like the IDA poaching UK-bound investment opportunities at the UK’s loss? While extra foreign direct investment--of the productive kind--would always be welcome, diplomatic and economic repercussions would be soon to follow. A series of tax and banking treaties to ward off these destabilising effects would represent a Keynesian stimulus for lawyers, economists, regulators, and other productivity parasites, and simultaneously weaken politicians, who will publicly pass the bills, deepening the cynicism the public already feels towards their rulers.
The Centre for European Reform has done the best work in trying to understand the detailed disconnections leaving the EU would cause the UK. The UK’s poorer regions would suffer very large shocks, at the same time Chancellor Osborne is trying to create a resurgence in the North of Britain. Their models also estimate that leaving the EU would harm Ireland almost as much as it will harm the UK in terms of lost growth and higher unemployment.
Leaving the EU is a terrible, terrible idea for the UK. For Ireland there are opportunities, but the weaknesses of the idea far outweigh its strengths. We will have to hope for the rationality of the average UK voter to emerge in the process of the referendum campaign. Although Alexander Pope might have been right when he wrote “Blessed is he who expects nothing, for he shall never be disappointed.”
Published in the Sunday Business Post, 17 May 2015