EU - UK flag

Look up, is that a pig, or is it a fact? Sometimes I think that people are more likely to think they have seen a pig fly by than pay attention to an incoming fact, especially if it appears to disprove a long held opinion.

Last year, I was told that in the court of public opinion, people vote and decide on the most important issues of our time based on emotion, they ignore evidence that contradicts their pre-conceived ideas, and only consider evidence that, after a little bit of mental tweaking, seems to confirm what they think they already knew. Little things like facts are irrelevant.

That may seem like a horrible theory, but throughout the EU campaign, I believe I have seen evidence of this over and over again. The most thoughtful piece of analysis is dismissed out of hand without any serious consideration of the detail.

Even so, idealism lurks within me. An idealism that people’s view can be changed by hard evidence. And this is my attempt to provide that hard evidence and objective analysis to the most important question facing the UK this year. Should we stay or leave the EU?

Let me confess at the start, I lean towards Remain. Even so, I am going to look at arguments on both sides. Please join the debate, and help spread the core arguments, whatever your own leaning.

There are four key issues: the short and medium economic ramifications of a Brexit vote. Longer term considerations. The issue of immigration. The issue of the EU constitution and how this is affecting UK democracy, and linked to that, the unhappy topic of EU bureaucracy. I will warn you at the off, no one side wins all arguments. It is a case of looking at the pros and cons of each argument and seeing if the list on one side outweighs the list on the other.

Let’s begin with the economy in the short term and medium term.

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Let us not mince our words. This is the area where the Remain Camp have the advantage. I can think of no objective analysis that reveals a different conclusion. I have heard many on the Leave side concede this point. The key question is not so much will the UK be worse off in the short term if it votes to leave? Rather it is how much worse off will it be, and will the benefits proclaimed by the VoteLeave campaign be worth this price?

I’ll come clean, I am worried about this. I think there is a danger that the short term economic costs are being downplayed. Some economists have warned of possible recession if the UK votes to leave. That in itself is no big deal. The UK economy grew at just 0.2 per cent in the first quarter of this year. It does not need to see much of a deterioration for it to experience recession. And frankly this may happen even if the UK sides with VoteRemain. What worries me is the potential severity of this possible recession, and the lasting legacy that may result. Let me explain why.

For many years, the UK has posted a deficit in its trade in goods and services, but a net surplus on net investment income from abroad. Many economists looked at the detail in the net income figures, and felt alarmed. The danger related to the fact that the value of UK based assets held by foreigners is greater than assets held abroad but owned by UK investors. So that is odd. The UK was posting a net surplus on investment income, even though it effectively had a deficit in the net value of the capital from which this income was derived. And many economists fretted that this couldn’t last, and worried about the implications if net income fell into deficit. They feared that this may spark off very sharp falls in the pound.

A couple of years ago, the UK did indeed post a deficit in net income from abroad. But I don’t know about you, I certainly don’t recall any great economic earthquake when this dreaded occurrence took place. So given a weak trade deficit and negative net investment income from abroad, how did the UK manage to avoid crisis, and indeed grow faster than most other developed economies in the world?

The answer is that foreigners flooded the UK with money. The UK’s current account was awful, but capital flows made up for it. Frankly, you only need to look at the bulldozers scattered across London to see the evidence of this. Even so, I was staggered when I found out the extent of this investment. According to a report from the UK government, the stock of foreign direct investment, or FDI, into the UK was worth more than one trillion pounds at the end of 2014. In 2014, the UK was also the single biggest recipient of FDI within the EU. People who are critical of the UK economy talk about its levels of debts. But these debts are affordable for as long as investors plough money into the UK and the value of its assets are so great.

The UK’s major economic coup of the last decade or longer has related to its appeal among foreign investors.

Earlier this year, the UK posted its largest current account deficit relative to GDP ever recorded. Unfortunately, its net income from abroad also saw its biggest deficit ever recorded. This means that the UK economy, and the pound in particular, is reliant on foreign investors parking their money in the UK. The dire balance of payment figures led Bank of England governor, Mark Carney, to say that the UK was reliant on “the kindness of strangers.” Recently, the Brexit camp have been questioning Mark Carney’s credibility. I am sorry, but such suggestions are simply wrong. Even before he took over at the Bank of England, he was revered as one of the world’s leading central bankers. To say he is not independent is to show a total failure to grasp one of the core aspects of the Bank of England. You can disagree with Mr Carney, but don’t question his credibility, and keep your critique to facts not a blind faith that he must be wrong as he says something you don’t want to hear. Economic forecasts are often inaccurate, but for trying to examine the economic consequences of certain actions, they are the best tool we have. The Bank of England’s predictions have proven to be wrong by a few fractions of percentage points, but not many people do better, and I doubt whether anyone makes more accurate predictions over the longer term. But in one respect Mark Carney was indeed wrong. Although I doubt he expected to be taken literally. The UK is not reliant on the kindness of strangers, rather it is dependent on ruthless foreign investors who make their decisions based on hard economics and fundamentals, not some kind of love of Britain.

According to the Ernst and Young 2015 UK attractiveness survey, the UK was ranked the fourth most attractive FDI destination in the world, behind China, the US and India. The same survey showed that 72 per cent of foreign investors cited ‘access to European market’ as important to the UK’s attractiveness as a destination for investment, alongside other factors like the quality of life. See: A new case for Brexit, is it right?

Linked to this is the idea that foreign investors see the UK as a safe haven, and so they buy UK government bonds, which are currently paying a yield which is hovering around an all-time low.

And it is the combination of awful balance of payments, and massive inflows of money into the UK from abroad, that worries me. If foreign investors feel that a Brexit vote significantly reduced the attractiveness of the UK, or had an impact on its status as a safe haven, then I worry about what that would entail for sterling. Now some falls in the pound are to expected and maybe a good thing. My fear relates to the danger of sterling falling precipitously, to the lows seen at the end of 2008 and in 2009, for example. Back in 2010, one of the world’s most celebrated investors, Bill Gross, said that the UK sits on “a bed of nitroglycerin.” Or at least he said that UK government bonds did. He was proven wrong, but there was logical reasoning behind his fears, and the rationale that underpinned his famous comment has not gone away. My big dread is that Brexit may provide the spark to light that unfortunate bed.


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If the potential damage to the UK of a Brexit vote is worrisome and potentially catastrophic, the longer term case is not so clear cut.

It all boils down to trade agreements.

On the one hand, the Brexiteers argue that the UK is a vital customer for the rest of the EU, that French farmers and German car makers will put their respective government under such pressure to accommodate UK wishes, that the EU will cave in and offer the UK favourable trade terms.

There is an even bigger point that the Brexit camp make. They say that the EU is a region in decline. That the UK needs to look towards the rest of the word, and that a nimble UK can agree trade agreements much more quickly than the EU.

There are three key problems with the first argument. There are both pros and cons for the second.

Firstly, UK’s exports to the rest of the EU account for 44 per cent of its total exports. Exports from the rest of the EU to the UK, account for just 8 per cent of the region’s exports. So actually, the EU is in the much stronger bargaining position.

Secondly, it is in the interests of the EU to ensure that the UK does not benefit form EU exit, as it wants to discourage other countries from following suit. So actually the EU has an incentive not to rush into agreeing new trade deals with the UK.

Finally, the UK may need French agricultural products just as much as French famers need UK consumers. If the UK were to, as part of its bargaining position, slap tariffs on French food products, then the cost of food in UK supermarkets would rise, and that wouldn’t go down well in the UK.

It is well known that other European countries outside of the EU, but that trade within the EU, have had to agree to the very conditions that the Brexit camp so hate, such as freedom of movement of labour and a contribution to the EU budget. But those arguments have been made many times elsewhere, there is no need to go into them here.

The question on how the UK may fare in agreeing trade deals outside of the EU is more contentious.

It is true that much smaller economies than the UK have had some success in agreeing such trade deals.

One such deal that is often cited is between Switzerland and China. It may be worth noting, however, that the benefits from this deal are far from symmetrical. China has pretty much been granted unlimited access to the Swiss market, in return, Switzerland will have access to the Chinese market in 15 years’ time.

And while it is the case that trade negotiations between the EU and other countries can take some time, the UK can often be the reason for the hold-up. For example, this has been the case in negotiations between the EU and US over TTIP. As it happens, the rationale behind the UK’s objections have been sound. But that is not the point. What is the point is that the UK does have significant influence when the EU enters into trade discussions.

Some supporters of Brexit make a quite different case. They argue in favour of the UK unilaterally becoming a free trade zone. So the UK does not impose tariffs on foreign products without a reciprocal arrangement. This is the idea put forward by professor Patrick Minford. The prof is eminent and highly regarded. He makes a coherent case. It is important to bear in mind, however, that there are many equally eminent economic professors who strongly disagree with him. See: “How Economists for Brexit manage to defy the laws of gravity” as an example.

But there is wider point made by the Brexit camp related to the long term economic costs of staying in the EU. The argument in a nut shell is that the Eurozone is an economic basket case, and that it can only be viable long term if it sees greater political union. Either way, the UK is a loser. It may be forced to pick up the bill, as the Eurozone falls into crisis, or it will be left in a kind of slow stream in a two speed EU, one that is moving to closer union.

I do think that people exaggerate the extent of the euro area’s problems. Yes, it has weaknesses, but it has strengths too. Some very strong economies sit within the region. And we may exaggerate the woes of the French economy too. Anglo Saxon economists have been the biggest critics of the French economy since there was such a thing as economists. And likewise, but in reverse, when French economists talk about the UK. Yet, over the long term, the two economies seem to have seen similar performances. Sure, France has high unemployment, and a very rigid labour market. But the UK has awful productivity, and much higher debts. Indeed, the UK’s debts, including household debt, maybe a bigger problem than debts pertaining to nearly all Eurozone economies.

And just as importantly, some very strong economies are in the EU but not in the euro area, Sweden for example.

But what is unique about the UK is its opt-out, something that David Cameron puts a great deal of emphasis on. According to his narrative, the UK will not be forced to contribute towards the bailout of Greece or Italy, other than as a member of the IMF, and no one is suggesting that the UK should leave that organisation.

In economics, like so much else in life, there is always uncertainty.

Mr Cameron says it can’t happen, and the UK is legally protected, but many fear that the UK will be forced to in some way bail out Europe, or become relegated to unimportant status, if it stays in the EU.

Maybe, but bear in mind, that by the mid-2030s, it is predicated that the UK will be the biggest economy in Europe, hardly compatible with the view it will have little influence.

The UK can hold another referendum to leave. It seems improbable it can ever re-join after a Brexit vote.

Let me finish with one more observation. It is often stated when the UK joined the EU it was the fifth largest economy in the world, and today it is the fifth largest economy in the world. But consider that since then it has been overtaken by China. Something that was going to happen regardless of being in or out of Europe. So actually, setting aside the inexorable rise of China, the UK has moved up a place. Also, in the early 1970s the UK seemed like a country in terminal decline. This is not the case today, economists predict that based on the business as normal case, at some point in the next two or so decades it will overtake both Germany and Japan, although it will in turn be overtaken by India – something that will happen regardless of Brexit or Remain.


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In the debate over the EU, nothing has been more contentious then the issue of immigration. Many people feel incredibly strongly about this subject. Unfortunately, there are untruths and myths lurking in the background.

I also think that people forget about my dream.

Now I am not suggesting that my dream should sway your view on how you vote in the referendum, but you may want to consider if you share my dream, or if maybe your children might do so one day.

My dream is to live somewhere else in Europe for a couple of years. I don’t want to retire there, but providing I have decent internet access, I could work abroad and EasyJet into the UK once or twice a month. I won’t realise my dream for a few years, I might never do so, but it is a dream. And if you want to dream with me, my only personal preference is Lake Como.

But many other people want to do something similar. Some want to retire, in say Spain. It is not just warmer weather that appeals, it is cheaper property too. I know someone who is moving for that very reason. He is selling his £450,000 home, with its £200,000 mortgage and buying a lovely £150,000 home in Spain, but is to carry on working for UK clients.

The thing about free movement of labour is that it is a two-way benefit.

Right now, more people come from other parts of the EU into the UK than the other way round. But how do we know it will always be like this? Might your children want to move at some point?

According to Boston Consulting, by 2030 Germany will face a shortfall in the size of its working population of between 8.4 and ten million people. It also forecasts a labour shortage in Italy and Poland, and even a small shortfall in France. By contrast it forecasts too much labour supply in the UK. Does this not suggest a reversal in immigration flows within the EU is quite likely?

What we can say is that migrant workers’ pay more in tax than they take out in benefits, or in use of education or the health service. And for as long as this in the case, they provide a net gain. From time to time, an influx of immigrants may or may not create short-term logistical problems for the NHS or schools, but over the time the benefit is clearly positive.

But in two respects the anti-immigration lobby have a point. There is some evidence that an immediate and short-term impact of a rise in immigration may be to force down wages of unskilled workers. But this is a very simplified argument. For one thing, let me emphasise that I am talking short-term. Also, bear in mind that workers in the UK get benefits beyond their wages. They may get tax credits, topping up their income, they certainly get access to the NHS, and their kids going to school. If immigrants pay more in taxes than they take-out, then even lower paid workers may actually see a benefit overall.

In the longer term, the main factor holding down wages in the UK is lousy productivity growth. The solution to this lies in in the UK attracting more investment, wealth creation such as via entrepreneurs, and more skilled labour. This surely means that long-term the net benefits of immigration to the UK, for all but a few, is positive.

This article in the New Scientist goes into far more detail, and explains the points well. See: The truth about migration: How it will reshape our world

But some people who sit in the Brexit camp, make a subtle and quite compelling argument. They say that they are pro-immigration, but that it will be politically more acceptable in the UK if, instead of being part of free movement of labour across the EU, we introduce a points system and make the UK more open to immigrants from outside of the EU, less open to immigrants from inside.

The arguments in favour of immigration are strong, but if immigration can be more appropriate outside of the EU than in, does that not make it an open and shut case for Brexit?

The arguments are not simple. My first doubt relates to the real motivation of Brexit. If the UK does leave the EU, there will be a popular expectation of much less immigration. Regardless of the merits of a points system or otherwise, would the UK electorate post Brexit, tolerate any system that does not entail a huge fall in immigration?

My second doubt relates to the bilateral nature of free movement of labour in the EU. This can very much work to the benefits of Brits. Not just when they are working or have retired abroad, but even when they are on holiday, for example via the bilateral arrangements over health cover. And don’t forget the longer term factor of European demographics.


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The Brexit camp is at its strongest when looking at the issues of sovereignty, democracy and bureaucracy.

Let me deal with the one open and shut case. While the UK press grossly exaggerate the number of bureaucrats working in Brussels, there is one area where the EU has a big weakness. It is lousy at changing its mind.

We make mistakes, we all do. But providing we recognise our errors and take appropriate action we can usually get away with it. George Osborne has done this many times, for example in reversing some welfare reforms announced in a recent budget. But it is much harder for the EU to do this, because to change its mind it usually has to secure agreement among all member governments, and that is devilishly difficult.

But there is some irony here. While the Brexit camp often say that the UK is losing control over its own affairs through the way its affords authority to the EU, in the one area where the EU clearly has a weakness it is down to efforts to protect the autonomy of each government. This may simply be an inevitable disadvantage of any large union, of any sort.

There is an issue over democracy too, however, and this is more complex.

They often say of the UK and US, two countries separated by a common language. In the case of the UK and the rest of the EU, you could say two regions separated by a different view of democracy.

The Open University covered this point well. I quote: “[There is a] fundamentally different understanding of sovereignty in the UK and other Member States. Those nations that do have a civil law system, where no common law applies and most law is codified, the law is sovereign, rather than the law maker. From their perspective and following their constitutional traditions, a parliament is not meant to be sovereign and although not many would argue that the EU’s application of democratic principles is perfect, most Member States do not understand the UK’s fear for a loss of sovereignty.” The OU explains that “Compared to other constitutions in the world, the UK’s constitution is one of the very few, if not the only one, viewing parliament as the sovereign of its constitutional core."

So the UK and EU are disagreeing when frankly no one in the debate has really defined the terms of the disagreement.

There is another way of looking it. According to this BBC show by Jeremy Paxman, in recent years no less than 59 per cent of UK laws were set by the EU. That may seem worryingly high, but drill down further and it turns out that many of these laws applied to areas that do not affect the UK, such as olive oil production or growing of tobacco. As Mr Paxman said, the 59 per cent figure “may be a gross exaggeration.”

But there is another point. The area where the EU sets rules relate to either the effective workings of the single market, or where international borders are not appropriate, such as pollution.

In free trade areas, or indeed in free trade agreements, there has to be complex rules defining products and what you can and cannot do, or else countries, companies or people will find ways around the intention and spirit of agreements. That is the nature of the beast.

And the UK has to accede loss of sovereignty in many other ways such as within the UN or WTO. That is the nature of the globalised world we live in.

For more on the issue of sovereignty see: Brexit: Facts Not Fear, where Toby Young of the New Statesman makes an impassioned case for Brexit, and Dishonesty on an industrial scale” EU law expert analyses referendum debate, where Professor Michael Dougan from the Liverpool Law School, makes an equally impassioned case for Remain

And if you still feel there is insufficient information out there to help you make up your mind, see these two objective reports: The UK's EU Referendum - In or Out? And if, you really want some detailed reading matter see Sir Tom Hunter joins EU debate with free detailed book aiming to clear up the facts on the UK’s future and download his 126 page, but extremely objective report.
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By Michael Baxter, economics blogger