Christopher Howarth is a senior Political Analyst at the think tank Open Europe. Before working for Open Europe he worked as a Conservative Foreign Affairs Adviser and senior researcher to a Shadow Europe Minister.
Similar flaws dog the CBI’s claim that the EU adds 4-5 per cent of GDP and UKIP’s claim it costs us 10 per cent: both show the pitfalls of EU cost / benefit analysis.
On Monday, the CBI published a serious report on Britain’s place in Europe. Given its history of supporting EU integration (Euro, Lisbon Treaty etc.) it is interesting that the business group is now arguing that:
“The EU has moved too far from ‘adding value’ to ‘adding functions’, resulting in ‘mission creep’ in several areas. The recent Dutch declaration that ‘the time of an ‘ever closer union’ in every possible policy area is behind us’ offers a positive indication that other member states are also looking at how to refocus the EU.”
This is a welcome change. However, an otherwise thought-provoking report was somewhat spoilt by throwing in a (widely critiqued) claim that the EU is worth 4-5 per cent of UK GDP and for “each year, membership is worth £3,000 to every household in this country.” This calculation isn’t particularly sound. It is based on five out of date studies, conducted over different time periods, relating to an EU with fewer members – and which actually concluded that the benefit was between 2-3 per cent.
The CBI then decided to up that to 4-5 per cent, but without a clear justification as to why it settled on those numbers. Next, and more importantly, the CBI provides no counter-factual. Its 4-5 per cent of GDP may or may not be correct, but the key is that, to make that call, we need to have an informed discussion about how many of the benefits the UK currently derives from the EU would be preserved in a UK/EU free trade deal.
To some extent, the CBI has fallen into a trap that also befalls UKIP and Better Off Outers. Some organisations tend to seek to accentuate the benefits of the EU, play down the costs and discount the possibility that an alternative arrangement might preserve trade benefits. Others, such as a sometimes cited study by Professor Tim Congdon seek to accentuate the costs (10 per cent of GDP, apparently) while arguing all the benefits will remain in a new deal – and that somehow, magically, Whitehall officials could be trusted to remove all the regulatory costs currently associated with the EU. Both sides need to up their game.
This is worth dealing with now, since a referendum on the EU, at some point, is probably inevitable. Both polarised wings of the debate will throw statistics at each other and rogue statistics cited by organisations will proliferate with abandon.
So how do we do a real cost / benefit analysis?
First, we need a counter-factual. If the UK left the EU, trade would continue. The question is on what terms. Therefore, any study that seeks to quantify the benefits of EU trade and attribute all of it to the existence of the EU is flawed. What counter-factual to use is the nub of the argument: on other words, what deal would it be possible to get, given that some sectors (i.e. services) would be affected in different ways to others.
We need then to quantify the costs that could be reduced by leaving. This also needs a counter-factual. Would the UK repeal all costly EU regulations and would it be allowed to? For instance, if the UK left and joined Norway in the EEA, we could perhaps escape wasteful agricultural subsidies, but Norway accepts all EU employment, health & safety, environmental, financial and competition rules, for example.
We need also to look at external trade. Some argue that if the UK left the EU we could increase our trade with the rest of the world. This, again, needs a counterfactual. If the UK left the EU it would need to agree trade deals with all states that the EU currently has deals with, just to replicate its existing preferential trade network. This would not be impossible, but it is unclear whether these new UK deals would be significantly different than the current ones. So if you are basing your exit case on this, you need to set out how these will be different.
Many of the elements of the existing and counter-factual relationships are impossible to quantify. For example, the biggest potential downside to the Norwegian EEA option is the inability to vote and formally influence legislation that you are obliged to accept.
This is not to say that statistics and data are have no value in the debate about the UK’s EU membership, but the reason why this debate is so emotionally charged is that it is impossible to put a price on ‘sovereignty’ or ‘influence’. UKIP talks about ‘sovereignty’ and the CBI about ‘influence’ but both are unquantifiable.
The reality is that the age of globalisation often requires a trade-off between the two – the real question is one of balance, and this is likely to differ depending on the policy area, be it economic, trade, or crime and justice policy and what relationship with the EU is most appropriate for each one. The question for now is whether we can re-balance these trade-offs within a reformed EU.