EU referendum: The cost of the European Union has always outweighed its benefits – but fear could still kill Brexit

 
Graeme Leach
We need to make sensible assumptions about what the EU would do “the morning after” (Source: Getty)
This may surprise you. Right at the outset of our entry into the then Common Market, the economic assessment of UK membership was negative. Flash-forward to the present, and the academic evidence shows that the gains from the Single Market aren’t really sufficient to outweigh all the costs of EU membership.
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, the think tank 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 rising. Second, there was little or no counter-attack from proponents of EU membership, other than 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 accounting for the fact that Single Market gains impact exporters alone, while the costs apply to every business across the UK.
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, there has been limited academic support for the case for continued membership. US economist Barry Eichengreen published research in 1998 suggesting that 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. Around half the effect was “assumed” and it was a less than comprehensive assessment of all the costs of membership. In short, the CBI report was pretty amateurish.
If economics is to play a central role in the coming EU referendum, three things need to happen. First, there needs to be a truly comprehensive and independent assessment of the effects of membership, with all possible costs and benefits included.
Second, we need to make sensible assumptions about what the UK would do “the morning after Brexit”. 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 its big trading surplus with us, and retain open markets, or shoot itself in the protectionist foot?
The fear factor on this latter point is crucial. The most stark example is car producers in the UK, who would not want to face a tariff wall into the EU. They should be fine, but we can’t be sure, and here the campaign for Brexit has a problem.

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