A lot that has been said about the recent elections to the
European Parliament. (Full disclosure: I
am an EU national living in the UK.) For
me, part of the debate in the UK represents a useful reminder of the challenge
of cost-benefit analysis. Not
surprisingly, there isn’t an accepted view about the balance between costs and
benefits of EU membership. Here is an
illustration of the range of estimates (as of 2013) from a research paper of the UK Parliament:
I reviewed some of what has been written and have also read
with interest Hugo Dixon's recent book - 'The in / out question'. I thought that rather than develop another
cost-benefit analysis, I would set out the main considerations to take into
account if you choose to read one of them to form your own views.
It seems uncontroversial – I think – that the economic benefit
from EU membership is the access to supply products and services to a
market of 510 million consumers and an economy the size of the US. Hugh Dixon quotes an estimated benefit of the
order of 4% to 5% of UK GDP. If you accept this, then the key
questions are whether:
- the costs to the UK of achieving that benefit offset it; and
- the benefit can be achieved through an alternative arrangement.
Firstly, UK manufacturers exporting to the EU will need to
comply with EU product regulations. They
are likely to end up manufacturing to UK and EU product regulation
standards so (at best) cost savings would be limited.
Secondly, the distinction between goods and services in the
table is the reality of “free trade”, which does not usually apply to services,
such as financial, business and legal services.
They represent 78% of the UK GDP.
The table suggests that being outside the EU could be
cheaper on a ‘cash’ basis. However, none
of the options would appear to replicate the benefits of a single market. Norway replicates many of the benefits at a
reduced cost. However, note that they
are bound to follow EU legislation without having a saying on it – an
interesting view about sovereignty!
Overall, I struggle to see how the UK would be able to
replicate the economic benefit of the single market in products and services
outside the EU.
However, the real value of cost-benefit analysis is the impetus
to focus on increasing benefits and reducing costs. This means considering how to reform the EU
and get the best from a single market of 510 millions of consumers and a GDP
that is as large as the US. Dixon suggestions
include cutting red-tape, negotiating trade deals with US, Japan and
China. For me, one of the more interesting
suggestions is the potential gains from banking disintermediation and providing
long-term finance to industry through capital markets. As he puts it, the crisis was a banking crisis
not a financial crisis. Something for another
post …
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If you found this post interesting, you can subscribe to future posts at http://crescendo-erm.blogspot.co.uk and receive them by email; you will need to provide an email address and then confirm the subscription; your email address will not be shared. Alternatively, if we share a group in “LinkedIn” you can choose "follow" Isaac Alfon.
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