Don't let England's poujadists kill London's golden goose

Don't let England's poujadists kill London's golden goose

Don't let England's poujadists kill London's golden goose

Written by Simon Tilford, 08 July 2013

One of the UK’s key economic advantages is its success at attracting skilled immigrants. In particular, the ability of London to generate the wealth that Britain depends on to finance its public services is inextricably linked to the city’s openness to ideas, capital and immigrants. But Britain’s immigration debate is now all about how to make it harder for newcomers rather than making the country more attractive to them. To a large extent, this is being driven by the concerns and fears of suburban and rural voters, especially older ones. The readiness of politicians from across the political spectrum to pander to these fears is damaging the economy, feeding euroscepticism and with it the possibility of the UK quitting the EU.

The government wants to reduce net immigration to less than 100,000 a year. To this end it has tightened up the regime for student visas and for skilled immigration into the UK from outside the EU (non-EU countries account for two-thirds of the net immigration: the EU the remainder). There is little the government can do about EU immigrants, which explains the increasingly hysterical campaign to reduce their access to benefits. The government argues that the scale of immigration is prejudicing the employment prospects of lower-skilled British workers (over the last year more than half of new jobs went to immigrants, and youth unemployment is at a record high, ergo they are taking British jobs); placing a further burden on an already overwhelmed National Health Service (NHS) and school system; and leading to abuse of the country’s welfare system.

These claims are either wrong or misleading. Net immigration into the UK is not particularly high. It certainly rose following the opening up of the UK labour market to the new eastern European members of the EU in 2004. Over the 8 years to 2011 net immigration averaged 214,000 a year, before falling to 165,000 in 2012. In the context of a country as populous as the UK, this is a relatively modest inflow – adding about 0.3 per cent to population each year. And it is not especially high in a European context: over the last ten years, net immigration in Britain has been higher than France and Germany, but lower than in Italy or Spain. Talk of ‘mass immigration’ is well wide of the mark.

The UK is also very good at attracting skilled immigrants: almost 40 per cent of first generation immigrants have a university degree; the comparable figures for France and Germany are half that, and even lower for Spain and Italy. Indeed, the south-east of England is home to the biggest concentration of foreign professionals anywhere on earth. The reasons for this success range from the English language to the greater readiness of UK employers to recognise foreign qualifications. Many other first generation immigrants have vocational qualifications in skills like construction, which are in short supply in the UK. Even those in unskilled work are probably not displacing many local workers: these jobs tend to pay at or near the minimum wage – if employers hire immigrants, whose English is sometimes patchy and who often move on quickly, it must be partly because the locals are unwilling to take these jobs.

First generation immigrants tend to live in the most economically dynamic parts of the UK. This is inevitable – immigrants are drawn to where the work and opportunities are. But these areas are also wealthy and dynamic because of their openness. Contrary to popular myth, the areas of greatest immigration are not the ones with the greatest hostility to migration. London, for example, is easily the most tolerant region of the UK. The areas where there is most hostility to immigrants tend to be those where there are fewest immigrants, or where cultural and religious differences are pronounced, as in some northern English towns.

Openness largely explains London’s long renaissance and emergence as the only world city in Europe. It is perhaps the UK’s most precious economic asset. Huge amounts of tax revenue are redistributed from London to the rest of the country. According to the Centre for Economics and Business Research, one in every five pounds earned in London goes to subsidise other regions of the UK. Without this redistribution (and a smaller but still very large one from the rest of south-east England), the bleak economic prospects of swaths of Britain would be even bleaker. Of course London should be supporting the rest of the UK; it is easily the wealthiest region of the country. But the British government needs to resist popular pressures for controls which would erode London’s ability to generate that wealth.

British politicians need to think about what policies are needed to help London and its environs exploit its unique position. First, they should reverse the cap on student visas. This ill-thought out step has already damaged British universities – one of the country’s most successful export-industries – by making it harder for people to study in the UK. The number of foreign students in Britain is a much envied source of soft power (many either stay or retain long-term links with the country) and export earnings. While other European countries urgently try and attract more foreign students, Britain fashions ways of deterring them.

Second, the government should lift or scrap the caps placed on non-EU skilled immigrants. Given the increasingly fierce global competition for such workers, it is self-defeating to limit the number allowed into the country.

Third, the government should stop stigmatising EU immigrants. There is no evidence of benefit tourism or health tourism. If anything, the reverse is the case; EU immigrants in the UK are on average much younger that UK ones living elsewhere in the EU, and more likely to be in work than the native population. If there is a country in the EU with legitimate cause to resent health tourism, it is Spain, which must cope with large numbers of elderly Britons.

Fourth, it needs to open the way for more construction. The crippling cost of property is now a serious threat to the prosperity of London and the south of England generally; unless action is taken firms will find it increasingly hard to entice people to work there. It will, in turn, be impossible to build these houses unless contractors can rely on imported labour. Britain has an acute shortage of skilled construction workers and there is little indication that the unemployed elsewhere in the country have any desire to do this kind of work in London. There is a reason why London’s building sites are full of Poles rather than Liverpudlians.

How should the government address the rising anti-immigrant feeling that threatens the UK’s economic vibrancy and even its membership of the EU? It can do little about ignorance, other than to stop legitimising it by playing up to it. Instead of scape-goating the migrants that Britain needs, the government should concentrate on addressing the underlying cause of the popular frustration: an acute shortage of affordable housing, even in many economically depressed parts of the country; a lack of vocational training for those that do not go to university, and over-burdened public services. If there is a shortage of primary school places in London, the answer is to build more primary schools. Most countries in Europe would do anything for this problem: with the populations ageing rapidly, European countries (including Britain) need all the young people they can get. If the NHS lacks capacity in London, expand that capacity. After all, immigrants pay tax. Indeed, the OECD calculates that in the UK they pay more into the pot than they take out.

Britons, especially those living outside London, will all be much the poorer if politicians fail to challenge the widespread belief that immigration is a burden rather than a boon.

Simon Tilford is deputy director of the Centre for European Reform.

Comments

Added on 12 Jul 2013 at 09:01 by WhatHouse.co.uk

The new policies are designed to make it harder for illegal immigrants to get benefits, housing, jobs etc. For those that are legally applying then opportunities will still be open to them. As a Brit living abroad I have to pay into the system where I live, cannot get a free house, free health care etc, have to show I can support myself and pay for a visa.

http://www.whathouse.co.uk" rel="nofollow">whathouse.co.uk

EU summit in Brussels wrestles with youth unemployment

Youth unemployment

EU summit in Brussels wrestles with youth unemployment

Written by John Springford, 26 June 2013

Link to press quote:
http://www.bbc.co.uk/news/world-europe-23062291

The CER commission on the UK and the single market

The CER commission on the UK and the single market

The CER commission on the UK and the single market

Written by John Springford, 07 June 2013

The case for British membership of the EU has always rested primarily on the country’s participation in the single market. The CER’s commission on the UK and the single market held its first meeting this week. It will examine whether participation in the EU helps or hinders Britain’s economy. If the referendum on EU membership takes place, the commission’s report will provide balanced evidence to help the UK make its decision.

Membership of the EU cannot be weighed solely in pounds and pence. But in a period of economic stagnation, any decision about membership will be shaped by the pecuniary costs and benefits. Unfortunately, the British debate has lacked objective analysis of these, with both eurosceptics and europhiles using evidence selectively to make their case. As the UK is not a member of the eurozone, and is unlikely to join, an appraisal of EU membership should centre on the single market.

Martin Wolf of the Financial Times, and Brian Bender, former permanent secretary at the UK business department, introduced the discussion at the inaugural meeting of the commission. There was broad agreement that Britain only has two choices: leave the EU and withdraw from formal participation in the single market, or stay in. Commissioners ruled out a third option: that of joining the European Economic Area. Theoretically, Britain could be in the single market, but not in the EU. The EEA provides Norway, Iceland and Liechtenstein with free access to the single market, but they have to sign up to its rules, and have no say over what the rules are. As one reason for dissatisfaction with EU membership is the loss of sovereignty over rule-making, it was felt that this would be worse than either staying in or leaving.

Few commissioners thought that leaving would be an economic disaster for Britain. There would be little significant impact on jobs, because the level of employment was largely determined by how well the British labour market matched the demand for and supply of workers, rather than the amount of trade that the UK conducts with Europe.

The impact of exit on national income was more contentious. Many estimates put the economic gains from membership of the single market at around 2 per cent of GDP. But some commissioners argued that the immediate impact of leaving would be closer to zero. Others argued that there would be a small negative impact on UK national income in the short term, but there would be a steady erosion of Britain’s attractiveness as a location for foreign investment.

Commissioners questioned whether leaving the EU would allow Britain to extricate itself completely from EU rules in any case. The EU would remain the UK’s largest trading partner, and companies exporting to the rest of Europe would have to conform to EU product standards.

The second option was stay in the EU on current or renegotiated terms. Some commissioners thought that cherry-picking the single market – repatriating social and employment rules, for example – was not really on the table because it would be unacceptable to the other member-states.

One British interest was deepening the single market. A second was making the EU regulate less. Some participants questioned whether these two interests were compatible. The UK liked the single market, but did not like the transfer of rule-making power to Brussels that further integration would entail. So it faced an uncomfortable choice: it may have to cede more sovereignty in order to get more out of its economic relationship with the rest of Europe. And if it decides to promote integration, it may in any case be difficult to get other member-states to sign up to a deeper single market. Countries like France were cooler on the single market than Britain, and their priority was addressing the eurozone’s problems, rather than furthering trade integration. But a focus of the CER’s commission should be the policies needed to open markets in industries in which the UK has a  comparative advantage.

Commissioners were divided on whether Britain should seek to reform the EU to make it a less active regulator. Participants from the business world said that the European Commission and Parliament had become hyper-active and too keen to regulate, which was costly for Britain. Others disagreed, and said that EU regulation hardly tied up Britain’s economy in red tape: by OECD measures, Britain had among the least regulated labour and product markets in the developed world. The EU’s institutions had failings, they said, but also benefits for the UK: the EU acted as a counterweight to national protectionism; and a common external trade negotiator had more bargaining power than Britain would wield on its own.

The commission meetings that follow will take evidence from experts in particular areas of the single market: the free movement of labour, of goods and services, and of capital, to assess whether the single market works for Britain in these areas. The report, which will be published in the spring of 2014, will provide a cool-headed appraisal of the UK’s two options.  If commissioners find that staying in would be best for Britain, the report will propose reforms to deepen Britain’s trade integration with Europe.

John Springford is secretary to the commission and a CER research fellow. More details about the commission can be found here.

Launch of the CER's commission on the UK and the single market

Launch of the CER's commission on the UK and the single market

Launch of the CER's commission on the UK and the single market

05 June 2013

Speakers include: Sir Brian Bender, former permanent secretary, UK business department and Martin Wolf, chief economics commentator, Financial Times

Location info

London

Event information download: final_singlemkt_proposal_7june13.pdf

Event Gallery

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External Author(s)
Katinka Barysch

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The EU battle Cameron could win

The EU battle Cameron could win spotlight image

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20 March 2013
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Denmark is the easiest place in the EU to do business

Denmark is the easiest place in the EU to do business spotlight image

Denmark is the easiest place in the EU to do business

Written by Simon Tilford, 28 February 2013

Link to press quote:
http://www.information.dk/comment/677993

The 'lost generation' that never was

The 'lost generation' that never was

The 'lost generation' that never was

21 January 2013

Link to press quote:
http://www.presseurop.eu/en/content/article/3272591-lost-generation-never-was

Europe places too much faith in supply-side policies

Europe places too much faith in supply-side policies

Europe places too much faith in supply-side policies

Written by Simon Tilford, 18 January 2013

Supply-side thinking now dominates European economic policy. Most governments, and the European Commission, argue that attempts to boost demand would be counterproductive, achieving little but a delay to the necessary consolidation of public finances. With close to unanimity, they believe that structural reforms offer the only hope for depressed European economies: these reforms will improve competitiveness and confidence, leading to stronger growth, a rebalancing of trade between European countries and sustainable public finances. But are policy-makers and the Commission putting excessive faith in the power of structural reforms? Is there a risk that a strategy weighted so heavily towards supply-side measures could actually end up further eroding Europe’s growth potential? And is it right to argue that structural reforms will help bring about sustainable rebalancing?

Few doubt the need for structural reforms in Europe. The region needs faster productivity growth and this requires, among other things, more flexible and competitive markets: labour and capital must be freer to move from slow growing sectors to faster-growing ones. But structural reforms alone will not achieve this. Indeed, in the short to medium term such reforms will further depress demand. Only in the long-term could they have the desired effect and only then if businesses invest in new organisational structures and new products, and if workers (especially young ones) have the right skills and experience. But business investment is at historic lows in Europe as firms worry about the lack of demand.

 
And unemployment is back to levels last seen in the early eighties and set to remain chronically high for years. In short, the damage done to Europe’s supply-side by very low investment and mass unemployment is likely to offset the potential benefits of the reforms. For example, all the academic evidence shows that persistently high unemployment does lasting damage to economies’ human capital and hence growth potential.

A further problem is the nature of the structural reforms underway in Europe. Supply-side reforms in the context of the eurozone largely mean labour market reforms, or more particularly, labour market reforms that erode the bargaining power of labour. By contrast, there is much less emphasis on opening up markets for goods and services to greater competition, which is arguably more important from the perspective of economic growth. This is perhaps unsurprising. Germany’s Hartz IV reforms, which are the inspiration for much of what the eurozone is doing, led to a weakening of workers’ bargaining power, but did little to promote reform of Germany’s domestic economy. Indeed, according to the OECD, Spain’s product markets are considerably more competitive than Germany’s. This helps explain the persistent weakness of German domestic demand: it fell in 2012, with all of the economy’s 0.9 per cent growth down to net exports.

The European Commission argues that the structural reforms underway in the peripheral eurozone economies are boosting their trade competitiveness, and points to the narrowing of their current account deficits in 2012 as evidence of this. But this improvement is mainly the result of unprecedentedly weak domestic demand (and hence declining imports) in these economies, rather than rising exports. Faced with stagnation at home, some firms have successfully scrambled to boost exports. However, a sustained rise in exports requires investment in new capacity and products and stronger export demand. Neither is happening: investment in manufacturing is at all-time lows across Europe, but it is especially weak in the periphery. Demand across the European economy, meanwhile, is chronically weak.

Three years ago, the Commission argued that rebalancing within the eurozone needed to be symmetric if it was to be consistent with economic growth. It followed that the onus needed to be on the economies with big trade surpluses to rebalance their trade as much as the deficit ones. In reality, very little emphasis has been placed on rebalancing the surplus economies. And in a report published in December 2012, the Commission downplayed the role that stronger demand in the region’s surplus economies would have on the exports of countries such as Spain, Greece and Portugal. The Commission illustrated this by showing the limited impact a 1 per cent increase in German domestic demand would have on the exports of the country’s eurozone trade partners: the peripheral ones do less trade with Germany than the country’s immediate neighbours, and would hence benefit less from stronger German demand for imports. The Commission acknowledges that there would be second and third round effects – for example, stronger demand in Germany would boost the French economy, which in turn would boost the Spainish one – but almost certainly underestimates the significance of these.

However, the bigger problems with the Commission’s analysis are the narrowness of its focus and its use of such a modest increase in German domestic demand to illustrate its point. There is no doubt that a 1 per cent increase would have only limited impact on peripheral countries’ exports. But if domestic demand in Germany (and in other surplus economies such as the Netherlands and Austria) expanded by 4 per cent per year over a five year period, the impact on their trade partners would be significant, even on the assumptions employed by the Commission. Moreover, if their demand were to increase by this amount, the surplus economies’ ‘marginal propensity to import’ (that is, the proportion of any increase in demand spent on imports) would rise: their domestic industries would lack the domestic capacity to service the increased demand and a rising share of it would be met by imports. Firms would be likely to step-up investment in the domestically orientated-sectors of these economies, reducing their trade surpluses, and with it the drag they impose on the rest of the eurozone economy. The flip-side would be stronger investment in the export-orientated sectors of the peripheral countries.

On their own, the structural reforms underway across Europe will bring neither economic recovery nor rebalancing. The current reforms focus strongly on labour markets, and risk leading to similar results across Europe to those seen in Germany: very weak consumption and investment. Europe needs to do much more to strengthen demand, which requires symmetric structural reforms and stimulus. While there is no doubt that Spain needs to reform its labour market, Germany would also benefit from reforms of its product markets. Those governments that have the scope to provide stimulus need to do so: Germany actually posted a budget surplus in 2012. Stronger demand in the countries running trade surpluses will not suffice to rebalance the eurozone economy and return it to growth, but it is an indispensable element of what is needed. The European Central Bank, meanwhile, could redouble its efforts to boost credit growth. As it stands, demand is likely to remain very weak across Europe for a prolonged period of time, further eroding growth potential and the sustainability of public finances.  

The Commission’s readiness to place so much faith in structural reforms as a solution to Europe’s economic ills is a product of the region’s political realities. The surplus countries have successfully resisted pressure to take steps to rebalance their economies and there is little appetite among eurozone governments for simultaneous reflation involving fiscal stimulus and quantitative easing by the ECB. The current strategy is not without political risk: the more European policy-makers talk about growth, the less growth there is. Whereas unpopular national governments can be voted out and replaced with ones that do not shoulder responsibility for unsuccessful policies, this is not the case with the Commission, whose standing could suffer long-lasting damage.

Simon Tilford is chief economist at the Centre for European Reform.

Comments

Added on 21 Jan 2013 at 06:20 by Heri

A leadership must have a policy, but that policy must be useful or that can bring good at something.

Added on 18 Jan 2013 at 17:05 by K Bledowski

Greater competition in products markets, lower cost and higher supply of labor and other measures would surely support growth. Yet import-, consumption- and overall spending elasticities vary widely across the continent. The impact of either supply- or demand-side measures is uneven. The ideal vehicle to help rebalance trade and demand is through floating exchange rates. What a pity that those are fixed across much of the continent …

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