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We have a large number of clients ranging from large multinationals to SME’s and even micro businesses who are exporting to Europe and with the debate currently raging over whether the UK should stay in the EU, we thought it might be helpful to get away from discussions over migration and legal jurisdiction and instead explore some of the underlying economic arguments from both sides of the debate.

Having entered the European Union as a result of a referendum which carried a mandate for a single economic market, the intervening years have brought with them an ever closer union and a gradual loss of sovereignty as more of Britain’s laws are now decided in the European courts in Brussels.  It is not surprising that the issue of regulatory sovereignty is at the heart of the current debate, but in this article I have intentionally avoided discussion of legal sovereignty and tried instead to examine just the economic impact of a possible exit on the wider UK economy.

One of the key points made in the economic arguments over Europe relates to the net contribution made by the UK to the EU’s budget, which the Treasury estimates will be 0.5 per cent of GDP per year between 2014 and 2020.  The total EU budget added up to almost €150 billion in 2013, of which €8.7 billion is spent on administration.  Overall, Britain’s contribution to the EU pot amounted to €17 billion in 2013, notably less than the contributions made by Germany, France, and Italy.  Also it should be remembered that we did get some of that funding back in EU investment in British businesses and vital infrastructure, so the NET figure is estimated to be around €10 billion or £8.6 billion sterling.

Now, I’m not about to argue that £8.6 billion wouldn’t go a long way towards boosting the British economy, but it still only amounts to 5% of our total GDP and we get more back that just EU grants.

How do those exporting to Europe benefit from the single market?

The key benefit to British membership of the EU is that British companies exporting to Europe benefit from a single market.  The underlying economic case for British membership of the EU has always rested on our participation in the single market, so an analysis of the economic case to stay or to go must take account of the benefit or otherwise for those exporting to Europe of being part of the EU single market.

The single market has at its heart three basic principles – namely;

  • Elimination of tariffs on goods.
  • Establishing the right of businesses to sell their goods services or labour or to invest in other member-states – the so-called ‘four freedoms’.
  • Finally, and perhaps least quantifiable, it reduces the cost of exporting to Europe since companies are not having to potentially comply with 28 different rule books.

 

Those who argue that we should leave the EU often argue that the single market actually does little to open markets on the continent and that leaving the EU would have little impact on Britain’s European trade.  This is a matter of some debate, but it is fair to say that Britain’s trade with the fast-growing emerging BRICK economies, especially China, has been increasing far more rapidly than with the EU.  Since the 2008 economic crisis many of the EU member states have seen their economies shrink significantly with a resulting decline in the UK’s exports to those countries.

A report on the likely economic consequences of leaving the EU was published in June 2014 based on research carried out by the Centre for European Reform, a body which claims to be pro-European but not un-critical.

According to CER figures, Britain’s EU membership has boosted its trade in goods with other member states by as much as 55 per cent. In 2013, Britain’s goods trade with the EU was £364 billion, so this ‘EU effect’ is estimated to have amounted to around £130 billion.  This compares with trade of £43 billion in bilateral trade with China in the same period, so Chinese trade might be fast growing but it’s got a long way to go before it catches up with our trade with Europe.

It is fair to say that those businesses who benefit most from our membership of the EU tend to be the larger FTSE 250 size companies and that the net benefit for smaller businesses is much less in general, although of course there are notable exceptions.  It should never be forgotten however that many of the UK’s SME businesses rely directly or indirectly on larger entities for their business, even though they themselves aren’t involved in exporting to Europe.  For example Toyota in Derby manufacture vehicles destined for export across the EU, and their supply chain includes a vast number of support businesses including road haulage, packaging, HR services and even translation of course!

Can we leave the European Union and retain the benefits of the Single Market?

Those arguing for an exit from the European Union often argue that EU rules tie up UK SME businesses in red tape and bureaucracy regardless of whether or not they are exporting to Europe and a British exit would boost output by reducing the burden of regulation on business while leaving us free to sign more free trade agreements with countries outside Europe.  Certainly there is evidence that the EU bureaucracy places a disproportionate burden on smaller SME businesses while favouring larger multi-national giants.  For example recent changes to EU law on VAT designed to capture taxation from giants such as Google and Starbucks have actually created a further administrative and tax cost to SME’s and even micro businesses for whom exporting to Europe might only consist of a minimal number of orders delivered direct to consumers via EBay.  Even these micro businesses now might find themselves having to collect VAT on their sales on behalf of the government of the member state in which their consumer lives, a burden which is sufficient to make many smaller exporters simply refuse to sell overseas at all.

There are examples of countries outside the Union who enjoy a free trade relationship with the countries of the EU, most notably Switzerland.  However, it must be noted that leaving the Union but retaining the single market would mean having to sign a free trade agreement with the EU, itself necessitating that those exporting to Europe must comply with EU product standards.  It is likely that following an exit UK companies wanting to continue exporting to Europe would still have to comply with EU regulation to a great extent, including accepting many of the rules of the single market.

What about the City of London and the importance of the financial services industry?

It is accepted that the City of London is without doubt the Eurozone’s largest wholesale financial centre, and indeed only this week there has been talk of a merger between the London and German stock exchanges.  Those speaking against an exit fear that many of the hedge funds, equity investment houses and even banks might leave the UK in favour of France or Germany in the event of an exit.  Although the overall contribution to value added jobs for UK PLC of these institutions is a matter of some debate especially given the lack of corporation tax paid on their profits here in the UK as opposed profit moved to offshore tax shelters.

Overall it seems that the total net economic benefit to British membership outweighs the annual cost, and if we can look beyond the loss of some sovereign powers to Brussels and accept that there will be winners and losers, taken as a whole, we are financially better off in than out, of course that’s a big “if”.