EU referendum is about economics as much as politics

A LOT OF THE PRESS said it was all about politics, keeping one wing of his party quiet, ‘dishing’ UKIP and wrong-footing Labour. Others said it was to deflect criticism of the government’s economic policies, which have seen growth dip again into negative territory and borrowing exceed the chancellor’s forecasts.

Yet the prime minister’s statement on the UK’s relationship with the EU raised some critical economic issues, which successive governments have been unwilling to address in public, and the timing of the speech dovetailed nicely with what is happening in Europe, rather than at home. Far from being a cheap attempt to shore up support for his sagging administration, David Cameron has been brave enough to light the touch paper to an issue that will cut across party lines and inflame passions on both sides of the debate.

The economic arguments are finely balanced. The other 26 members of the EU took 53% of UK exports in 2011, but we imported even more and ran a deficit of £43bn. Given that they sell more to us than we do to them, it seems unlikely that the UK would be denied access to the single market if we left the formal EU structure. In the first nine months of 2012, moreover, our exports to the EU fell (by 5%), while exports to the rest of the world rose (by 1.5%). Perhaps, given the growth outlook for the EU in the medium term, UK exporters would be better advised to focus on the emerging markets than on the traditional markets in the EU [see page 28].

There is also a genuine concern from the UK’s point of view that, while the single market operates reasonably effectively for trade in goods, a lot less progress has been made in liberalising trade in services and, given the debt-related priorities of the policymakers, this is unlikely to change in the foreseeable future.

Perhaps as significant as the numbers on cross-border business are the alternative arrangements that the UK could adopt, and there are probably four precedents.

The Norwegian option would free the UK from the agricultural and fisheries rules, EU-wide regional policy, and reduce the budget contribution. The UK would, however, still be subject to the regulations on employment and financial services (without the ability to shape them) and its goods would be subject to complex rules of origin.

The Swiss option involves a bi-lateral trade deal, without the fishing and agricultural rules, regional policy and a reduced financial contribution. This offers less EU regulation and more sovereignty but access to the single market might be limited, particularly in services.

The Turkey+ option would give the UK full access to the single market in goods but would be bound by external deals that the EU strikes in trade, without the ability to shape them. A separate deal on services would be needed but the UK would be free of social and employment regulations and the rules on agriculture, fisheries and regional policy.

For some, the clean-break WTO option has a lot of appeal. This would leave the UK free of all EU obligations and relying on World Trade Organisation membership for access to European markets. This would leave some exports facing relatively high tariffs and limited market access for services. All the options have drawbacks as far as trade is concerned but trade is only part of the equation since the price of membership is high, in terms of budget contribution, increased regulatory burden and the loss of sovereignty.

There is a lot to play for and Cameron is right to raise the issue now. He is right because the eurozone will have to re-write its rules, and we are not part of the bloc and may not like the rules. And he is right to be brave enough to ask his shareholders, the electorate, for their backing, something his UK predecessors and European peers have always been reluctant to do. ?

Dennis Turner is the former chief economist at HSBC