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Politics & Law Series: EU Referendum

City Perspectives: Does Britain need to be part of a declining EU?

In the second of our City Perspectives videos looking at Britain's future in the EU, Dr Javier Ortega argues that Britain's membership helps prevent our politicians from enacting potentially damaging legislation.
by Ben Sawtell

nullBy Dr Javier Ortega, Senior Lecturer in Economics

The European Union has been in the search for new institutions since the beginning of the 1990s, following the monetary union and the enlargement to Central and Eastern European countries. The context in which this search is taking place is that of a continuous decline of the political influence of individual European countries in the international sphere, a sharp fall of the contribution of Europe's economies to the world GDP and a process of globalisation. More recently, the great recession initiated in 2008 as a financial crisis has mutated into a debt crisis in the euro periphery and has evidenced the problems with the current design of the monetary union.

As the size of markets becomes bigger following globalisation, the ability of European Nation-States to use macroeconomic policy to influence macroeconomic variables such as output or unemployment is progressively limited. This is partly hidden behind constitutions that still proclaim the sovereignty of the inhabitants of nations and history books that tell us that European Nations have existed for a very long time and will survive broadly for ever.

If one believes that markets have to be corrected sometimes (or often) by governments, the only coherent alternatives are to close down borders -which would be very inefficient economically- or to create elements of democratic decision making at the European level.

In this context, the British Prime Minister has announced that the UK would hold an in-out of EU referendum after the next general election and after a renegotiation of the UK's participation to the EU. The Conservatives would favour a 'yes' in the referendum only if the outcome of the renegotiation is satisfactory to the party. The move of the David Cameron seems to be aimed at raising the bargaining power of the UK in a future negotiation with other European countries and to keep the Conservative Party and its electorate united in order to raise the chances of winning the next general election.

However, it is not clear that this move will contribute to the victory of the Conservatives. Indeed, while some opinion polls indicated that the British may favour the exit from the EU, other polls also show that EU membership is not so far one of the main issues the electorate is interested in. By bringing the issue to the forefront of the debate, the Conservatives risk actually to campaign in an unintended way for the party that has enthusiastically defended for now some time the exit from the EU, i.e. the UKIP. It might also to favour to some extent the slim chances of Scottish independence. 

UK membership to the EU is not important because of free-trade or the future of the City. Free-trade is becoming a common standard also out of the EU, and it is difficult to imagine EU countries not finding some free-trade arrangement with the UK after the UK leaves the EU. As for the City, its European competitors are far behind, and the competition is likely to be with financial places out of the UK independently of EU membership.

EU membership is important to the UK mainly -I believe- because it plays the role of a "commitment device" to certain time-inconsistent policies that British governments would be tempted to follow -and the British electorate would be tempted to support- in the absence of rules such as the EU treaties. This is particularly the case for immigration policy. In the absence of UK membership to the EU, governments as the current one may choose to implement restrictive immigration policies as the present policy also to EU countries.

Stricter border control may probably pay in electoral terms (immigrants are not allowed to vote!) and have no important short-run negative effects, but would be damaging for British growth in the long run: there are other countries where the international language is spoken and that could attract EU emigrants. British membership to the EU in this sense ties the hands of politicians against this kind of temptations.

Finally, what will be the attitude of other European countries during the British renegotiation process? There is of course a lot of uncertainty, because the evolution of the Eurozone and other EU institutions is unclear. If EU institutions do not change, the UK might be able to get some powers transferred back from Brussels or Luxembourg to London. However, if further integration takes place, this is likely to be through a "two-speed" Europe given that a series of countries (such as Sweden, Denmark or the Czech Republic) will oppose it. In that case, EU countries choosing further integration may have an interest in marginalising the UK (pushing it out of the EU or creating a new union) if British governments try to get privileges by using their right to veto their integration within the EU framework, as attempted by the current government during the negotiation of the "Fiscal Compact".

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