Prime Minister David Cameron’s government is committed to an “in-out” referendum on a British exit, or “Brexit,” from the European Union (EU) before the end of 2017. Proponents and opponents of Brexit are ramping up pro-and-con arguments for this historic vote that could come as early as May 2016. Let’s look briefly at a few of those views.
Leaving the EU: Brexit pros
In brief, the main arguments of the pro-Brexit camp are that the EU:
- Costs too much.
- Has grown too large.
- Has encroached too far into domestic policies, eroding national sovereignty.
- Stifles business through overregulation.
By some estimates, the total economic cost (both direct and indirect) of EU membership is as much as 11% of the UK’s annual gross domestic product (GDP), or close to £200 billion.1 Direct costs, such as the UK government’s contribution to the EU budget, totaled an estimated £20.5 billion in 2014.1 Indirect costs arising from red tape and regulations amount to billions more.
A particularly sensitive subject for Britain is financial regulation. Brexit proponents cite red tape, ill-informed tax initiatives, protectionist policies and high costs of the EU’s regulation of financial markets. The EU has also sought to regulate the compensation structure in finance by imposing caps on bonuses.
Such perceived interference has led to calls for leaving the EU so UK financial authorities and Parliament can formulate a more accommodating regulatory framework to meet London’s needs and ensure its continued financial dominance in Europe.
Brexit supporters also maintain that EU regulations hinder the nonfinancial sector of the UK’s economy. For example, regulations prohibiting dangerous substances and processes are considered extremely costly, forcing some suppliers to go out of business and others to introduce expensive changes to their business operations or products. These regulations have also raised prices for consumer goods. In addition, free market supporters are critical of protectionist trade policies, such as anti-dumping measures, which the EU imposes when it suspects that unfair subsidies are making imported goods considerably cheaper than their EU-made equivalents.
One of the most emotionally charged issues for Britain is immigration. Due to the EU’s founding principle of free movement of people across member countries, the UK has no control over immigration from other EU member states. Since the 2004 membership accession of eight Baltic and Eastern European states — the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia, known as the EUA8 — there has been a noticeable wave of migrants from these countries. By 2011, EUA8-born residents accounted for nearly 1.7% of total employment in the UK.1 Evidence suggests that these migrants, employed primarily in low-skilled sectors, have suppressed wage growth in those sectors and increased unemployment levels among the UK-born population.
“Benefit tourism,” or the migration to the UK for welfare and health care benefits, is another issue cited by Brexit proponents. There is concern about citizens of EU states with less adequate health services coming to the UK to take advantage of the free services available through the country’s National Health Service. Prime Minister Cameron has designated benefit tourism as a key issue in his negotiations with the EU.
Staying in the EU: Brexit cons
Brexit opponents emphasize the benefits that the EU has brought to UK business, crucially enabling London to provide financial and business services unfettered across Europe and thus become Europe’s dominant financial center. The consensus among business leaders appears to support continuing EU membership, with 85% in the manufacturing sector and 84% in the financial sector considering it best to remain within the EU.2
To counter pro-Brexit arguments on immigration, proponents of continued EU membership cite favorable statistics supportive of the free movement of people. For example, immigrants from the EU are better educated than UK nationals — 32% have a degree, compared with 21% of UK subjects —and are less likely to be in the lower education category.2
The Scottish question
If Britain does decide to leave the EU, what could the consequences be for the union between England and Scotland? With its decisive victory in the UK general election in May, the Scottish National Party, which is emphatically pro-Europe, appears likely to maintain its control of the Scottish Parliament in next year’s assembly elections. If Britain voted to leave the EU, there would doubtless be calls for another referendum on Scottish independence, and I believe the likelihood of a vote to leave the UK would increase dramatically.
Prime Minister Cameron’s objectives
The Cameron government is seeking changes to several areas of EU regulations and entitlements for EU citizens with the apparent objective of negotiating sufficient revisions in EU laws, regulations and practices to convince Britain that its continued participation is justified. Although the prime minister may secure only part of that objective, in my view there is little doubt that Britain would do best by maintaining free trade with and full access to the EU, while remaining outside the eurozone.
For more on the Brexit issue, see John Greenwood’s full commentary Brexit: The pros and cons here.
Read more expert views about the European Union here.
1 Source: Tim Congdon, “How Much Does the European Union Cost Britain?” September 2013
2 Source: The City UK, Analysing The Case for EU Membership, “How Does the Evidence Stack
Up?” April 2014
Important information
Many countries in the European Union are susceptible to high economic risks associated with high levels of debt, notably due to investments in sovereign debts of European countries such as Greece, Italy and Spain.
The performance of an investment concentrated in issuers Great Britain is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
