The UK Referendum on EU Membership: Narrative, Economic Realities and Political Ambitions

As the the British Prime Minister is on the verge of announcing a referendum on continued UK membership of the EU, this post considers the narrative surrounding this issue and concludes that despite the arguments in favour or against, voter intention polls suggest this entire debate is a waste of time, in light of the likely incoming anti-referendum labour (led) government in 2014.

Narrative: Does EU Membership Matter for the UK?

There are a number of logics that are used for arguing in favour of leaving the EU. These are best summarised in an interview of Boris Johnson, Mayor of London and Leader in Waiting of the British Conservative Party (video). In it he makes the following points:

  1. The premise of the argument is that this is not a referendum on exit as much as a referendum on a renegotiation of the terms of membership. To me, this is epitomised by statements such as Mr Cameron’s claim that “if you are fundamentally changing the relationship between Britain and Europe, then you should be having a referendum.” Now this is a pretty, but fairly useless exercise in democracy.  Not because democracy is useless; of course it is not. But British democracy does not extend beyond its borders so that if it decides to renegotiate something, the counter-party has to agree to such a renegotiation, in order for the result of the referendum to be meaningful. While the UK may want to renegotiate the terms of its agreement, the other 26 EU member states may not. In that case, as long as a single EU member state refuses, the UK has no negotiating counter-party, in which case the referendum is void of any actual meaning. Of course, the British line is that the UK would then secede from the EU, which the other member states would be dreadfully afraid of. But would they?
  2. If the Switzerland and Norway are fine outside of the EU, so can the UK! – This is one of those transparent cases of a generalization from the particular fallacy, where the error is in assuming that if something is true of one unit (in this case Switzerland or Norway), it is true for all units separately (including the UK). As a form of selection bias, it tends to emphasise cases that support one’s claim. A similar argument would emphasise the fact that Portugal and Spain are struggling in the Euro-zone while omitting the fact that Germany and Austria have been doing very well. It also ignores the fact that in the past, the wealth of EU members was used to illustrate the benefits of membership. Indeed it was very much on the back of this narrative that the UK joined in the 1970s, arguing then that EFTA was not enough. Incidentally the argument was as wrong then as its opposite is now… The cause of UK stagnation was that it did not have to catch up as much as the rest of continental Europe and that it had a very rigid labour market.  In relation to this argument, it is sufficient to show that the UK is not similar to Norway or to Switzerland as far as its exports are concerned. Trade- UK, Nor and CH
  3. Then,  there’s the trade argument. This adds a certain imperial flavour to the previous fallacy, in stating that Europe is stagnant and that the UK must therefore diversify its trade partners. If you want to talk about trade I would seriously advise readers to make up their mind on their own, but to start by reading Krugman and Obsfelt’s manual on international economics, which surveys the field pretty well. Now, I know my economics, and while trade can be quite complicated there is an overarching fact upon which most variations are built: the gravity model of trade. Quickly put, this model states that in the absence of severe and unusual geopolitical conflict and barriers geographical neighbours will always trade more. This means that trade is naturally biased towards geographical proximity. As a result the UK is inextricably tied to its neighbouring continent, ailing though it may be. In the past, its extension to the rest of the world was built on an exploitative colonial relationship that the UK cannot presume to replicate and that therefore makes such nostalgia useless if not dangerous. Surely, the UK will come to trade more with emerging markets, but not enough to compensate for European commerce.UK CA Balance ONS 2012Q2 BoP Bulletin
  4. A fourth argument says that the UK, and in particular the City of London is the financial centre of Europe. This would give the UK some leverage over its partners who would be dependent on it for cash. But is there really a European dependence of London? A brief consideration will quickly uncover the ambitions of Frankfurt or Paris as alternative financial centres, not to mention Luxembourg or Stockholm. Furthermore, while the UK may appeal to foreign investors, foreign jurisdiction may pass legislation that will discriminate the UK, thus making the desired jurisdictional arbitrage impossible. Once outside of the EU, the UK would no longer be protected by single market rules, which coincidentally it is increasingly less of a fan. After all, such proposal already exist.The remaining EU countries could then repatriate their cash and leave the UK relatively empty of foreign assets…
    Consolidated Claims of British Banks… and Liabilities.
    Claims on British Banks by Selected Bank NationalityMoney has a way of moving and following power and the City seems aware of this… The interesting fact is that even if the EU allowed all of funds to remain in the UK, eventually, a financial crisis would take place. The British government would have become too dependent on the industry which would inevitably capture it. Bad regulation would eventually allow overleveraging that would eventually create some asset bubble, which upon popping would require some bailing out, in not too different a manner that things progressed in Iceland or Ireland. As the EU member states would rush to the rescue, they would impose some pretty hefty conditions which would not take much  consideration for the welfare or economic interest of the UK. Of course you may argue that the UK weathered the last crisis quite well, but I wouldn’t
  5. Finally,there’s the rhetoric of proud isolationism that underlies all of the previous arguments. This disturbs me. Possibly it is because I am Portuguese and remember the “Proudly Alone” stance of my country’s old dictator about Portugal’s  colonial war. May be it is that I am aware of the advantages and pitfalls of small open economies. May be it is because I am wary of the prisoner’s dillemma dynamics that have dominated Europe during the majority of its history. May be it is because I think there is strength in numbers and that the UK will suddenly find itself a pygmy in a world of giants. You could even claim that I am biased because as a foreigner in this country I am at risk of having to apply for a visa or ultimately being shown the door. However, proud isolationism always strikes me as a form of denial of some sort. Denial of the benefits of stronger interaction with others. Denial about our lost significance. Denial about the existence of others and as such an alienation of them and ourselves. Either way it is troubling to me. Denial does not work. Problems do not go away because we dig our heads underground, no matter how entertaining Boris Johnson may be (he really is! :D). The UK is devoid of supporters for its renegotiating cause. Neither the USA, Ireland, Sweden or Germany support, and it can at best hope for Dutch silence when Cameron is due to make his referendum announcement. The Nordics are not particularly supportive either, be it the Swedes or the Finns. The fascinating thing about this nationalistic fervour is that it is a fabulous source of powerful denial that allows people like Luke Johnson, former Channel 4 chairman, to say this sort of things

“We require a wholesale renegotiation of the terms on which we do business with Europe. They need us more than we need them”

Ultimately, this strikes me as a issue whose relevance is limited to a few sectarian voters, who fail to see the irrelevance that British voters appear to identify, although not in no uncertain terms:

Otside the EU, things would be (YouGov)

On a positive concluding note, opinions on EU membership are divided, and it would appear that as people debate it more, they become more conscious of the costs and thus less receptive to exit. The poll below is a compilation of YouGov polls compiled by the daily mail.

In-out question: For the first time since David Cameron became PM more people would vote to stay in the EU than leave, according to a series of opinion polls by YouGov

So what is this all about? – Internal Politics and Pre-Election Posturing

Clearly there’s a matter of internal party politics here. Following its best performance ever, the UKIP has become a leveraging tool for those tory MPs who are virulently anti-EU. They point it out as a potential post-defection destination that threatens the survival of the Conservative party.

To this argument, these MPs would add that the popularity of this policy (referendum and/or exit) makes it an easy political victory for the party at the next elections. However, 75% may be an exaggeration and even if 51% is large enough to carry the day other informed estimates put the result of the referendum in favour of EU membership, according to YouGov. Moreover, there’s an issue of relevance. As YouGov President, Peter Kellner, puts it

Many people dislike the EU and rather like the idea of leaving the club. But for most people it’s not central to their lives. They are far more concerned about jobs and prices and crime and schools and hospitals.

So what is it all really about? I think that it is all about politics and hoping to win the next election. At the moment, Labour, at 25% of voter intentions, has a 7% lead over the conservatives. Losing votes to UKIP won’t help the tories, while winning their present 4% might. Meanwhile, up to 21% of the electorate is undecided (as of Dec 2012), which leaves the race wide open.

Voter intentions are in constant flux and the weak leadership at the helm of labour continues to create hope of a Conservative victory in 2015 Fear of a defeat on polling day will keep the conservatives from letting go of Eurosceptic votes. However, this may prove unhelpful.  As Keller puts it in the same article,

“William Hague led the Tories into the 2001 general election with populist policies on Europe and asylum seekers. His strategy did him more harm than good. He may have shored up the Tories’ right-wing base, but he alienated many in the middle ground who, without actually liking either the EU or the asylum seekers crossing the Channel, regarded the prominence of these promises in Hague’s campaign as a sign that he was veering too far to the Right.”

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