Brexonomics: The five most insidious anti-EU myths debunked

Opinion piece (City A.M.)
Simon Tilford
03 June 2016

Eurosceptics peddle a raft of myths about the economic costs of EU membership. These have little, if any, empirical basis, but Brexiteers cling to them doggedly however many times they are refuted by proper academic research. Let’s take a look at the five most insidious ones:

One: we keep being told that quitting the EU would be good for the UK public finances.

Between 2014 and 2020, Britain’s net contribution to the EU budget will be around 0.5 per cent of GDP per year.

But the UK could end up paying into the EU budget even if it leaves the EU. If it quit and joined the EEA and paid into the EU budget on the same basis as Norway, Britain’s contribution to the EU budget would not fall by much at all. In the unlikely event the UK was successful in negotiating an agreement similar to Switzerland’s, its contribution would fall by around half.

Moreover, under both the Swiss and Norwegian scenarios, the UK economy would suffer - more under the Swiss option than the Norwegian one - thereby hitting tax revenues. If Britain quit the EU’s orbit entirely, it would save the full 0.5 per cent of GDP. But it would not take a dramatic fall in trade and investment after Brexit to weaken Britain’s fiscal position by 0.5 per cent of GDP.

Two: EU regulation is apparently so onerous that it outweighs the modest benefits of Britain’s membership of the EU Single Market. But according to the OECD, Britain’s markets for goods and services are the second least regulated of its 30-odd member states. And the UK’s labour markets are far more “Anglo-Saxon” than “continental”.

Further, most EU regulation would need to be replaced by comparable UK regulation if Britain quit the EU. For example, no UK government would scrap statutory sick leave or vacation pay, or tear up environmental rules. There is no doubt that some EU regulation could be improved, such as the Working Time Directive. But Britain’s most serious supply-side problems are home-grown - an acute housing shortage, congested infrastructure and skills shortages.

Three: EU membership supposedly undermines Britain’s trade and investment with the rest of the world. Outside the EU, Britain would trade more with countries whose demand for British goods and services is strong (the UK has a trade surplus with non-EU markets) and trade less with the EU, where demand for British exports is weak and with which Britain is running a large trade deficit.

But there is little to suggest that Britain’s trade with the rest of the world is being held back by EU membership. Why should it constrain British exports to China, but not Germany’s? There is also little evidence that UK trade is being diverted from non-EU countries to EU ones, but plenty that EU membership has boosted Britain’s European trade. Very weak Eurozone domestic demand since the crisis has hit UK exports. But Eurozone problems will be an issue whether the UK is in the EU or not.

Four: Britain is home to more foreign investment than any other EU country and Eurosceptics claim Brexit would boost inward investment even more.

But for many foreign investors, especially in manufacturing and financial services, Britain’s access to the Single Market is crucial. For example, the EU’s drive to open up member states’ financial sectors to competition has increased investment in the UK, which has a strong comparative advantage in finance. This would not have been possible without common EU regulatory standards. And, in any case, even after a Brexit, Britain would have to agree to common regulatory standards in many areas in order to broker free trade agreements with the EU and US.

Five: UK immigration from the EU jumped in 2004 following the accession of the central and eastern European countries and has remained relatively high since. Many Britons blame this for stagnant wages and pressures on public services and their fears are keenly fanned by Brexiteers.

Yet EU immigrants are, on balance, a positive force for the UK economy. There is little evidence that they take jobs from Britons. And the limited evidence that they reduce the wages of low-skilled British workers suggests that any impact is small. Britain’s EU migrants are young and more likely to be in work than Britons, and thus pay more in tax than they receive in benefits and public services. Where there are negative effects for particular groups of Britons from EU immigration, these can be offset by public policy, for example by increasing the supply of public services in areas of high immigration or making changes to the tax and benefits system.

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