Should Britain leave the EU? Why the economics are still far from settled on Brexit question

Graeme Leach
The case for continued EU membership has been limited (Source: Getty)
From an Empire where the sun never set, to an EU where the economic sun doesn’t shine; that’s Britain’s geopolitical journey over the past century. So which way now? Can we re-discover the entrepreneurial vision that took a small island to global pre-eminence, or will we remain tied down by a collective loss of confidence? Whatever the result of the General Election today, much will turn on the economic evidence.

Right from the outset of entry to the then Common Market, the economic assessment of membership for the UK was negative. In the early 1970s, two government White Papers and three academic studies made the simple point that, given the costs of the Common Agricultural Policy and transfer payments to Brussels, membership was almost certain to be negative.

By the late 1980s, the cost-benefit appraisal was becoming more complex, with the introduction of the Single Market and EU regulatory model. An Institute of Economic Affairs study in the early 1990s suggested that the overall cost benefit analysis was marginally negative.

A study by me, at the turn of the century, estimated the net annual cost of membership at 1.75 per cent of GDP. At around the same time, Civitas produced a figure purporting a net annual cost of about 4 per cent of GDP.

Two developments were occurring simultaneously. First, estimates of the size of the net cost of membership were increasing. Secondly, there was little or no counter attack, other than for opponents of exit to point to the benefits of the Single Market and of foreign investment for UK business.

There are costs and benefits from the Single Market, but the academic evidence does not suggest a strong positive effect, especially when one accounts for the fact that Single Market gains impact exporters alone, while the costs apply to the entire business population.

In 2005, the economist Patrick Minford shifted the terms of the debate by pointing towards the misallocation of resources from EU prices exceeding global prices. And more recently, Tim Congdon has produced a yearly report for Ukip showing the annual net cost of EU membership to be around 10-11 per cent of GDP.

In contrast, the case for continued membership has been limited. US economist Barry Eichengreen published research in 1998 suggesting the level of EU (not UK) output was 5 per cent higher due to EU institutions. Subsequently, in 2012, the CBI assessed the net benefit of EU membership for the UK to be around 5 per cent of GDP, but this was somewhat controversial, with around half the effect “assumed” and a less than comprehensive assessment of all the costs of membership.

If economics is to play a central role in the debate as to the costs and benefits of EU membership, three things need to happen. First, there needs to be a truly comprehensive assessment of the effects of membership, with all possible costs and benefits included. Secondly, we need to make sensible assumptions about what the UK would do “the morning after”. How much employment law would we impose voluntarily, for example? Finally, we need to make sensible assumptions about what the EU would do “the morning after”. Would it recognise our trading deficit and retain open markets, or shoot itself in the protectionist foot?

Visit our General Election poll tracker to see how the polls changed in the build-up to election day. 

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