Many challenges face UK Prime Minister David Cameron if he wants to keep the UK in a substantially reformed European Union. Some EU-reforms under the labels ‘flexibility’, ‘competitiveness’ and ‘democratic accountability’ are negotiable and would benefit the EU as a whole. This would help to win the EU-referendum for the ‘in-camp’. But British voters would also look at the economic and political consequences of the UK leaving. These depend on what arrangement the UK would be able to negotiate with the EU after an ‘out’ referendum. There are more likely to be economic net-costs of Brexit and, politically, Brexit could trigger another referendum in Scotland on whether to leave the UK.
The big question British citizens have to answer at some date before the end of 2017 is ‘Should the United Kingdom remain a member of the European Union?’
There is no doubt whether an EU-In/Out referendum will be held following UK Prime Minister David Cameron’s Conservative party victory in the General Election on May 7, 2015. The only question is when. It could be as early as next year. If the referendum were held today and if – a big if as the election polls have shown – opinion polls have indicative value for the outcome, an unusually large majority of between 45 and 55 per cent would vote to stay in the EU. But many are still undecided.
The outcome would be influenced by three factors:
1. The ability of David Cameron and his special envoy, Chancellor George Osborne, to strike a ‘new deal’ with the EU in the form of fundamental EU-reform which would make UK-membership more attractive than it is now.
2. The course of the pre-referendum campaign which will be influenced by UK media, business groups, think-tanks and political parties. The debate will centre on emotional issues such as migration and national sovereignty, but also on economic costs and benefits of ‘Brexit’ – the UK leaving the EU
3. Costs and benefits of a life outside the EU in turn depend on what kind of post-Brexit arrangement a UK government would be able to negotiate with the EU, especially concerning access to the EU single market. Voters’ expectations We have to look at scenarios both at the pre-referendum stage of EU-reform and, in the case of an ‘out’-vote, at scenarios of the UK’s position after Brexit. The outcome of the referendum will depend on both – voters’ assessments of the changes of the status quo and voters’ expectations of the consequences of a Brexit.
David Cameron himself is ready to fight to remain in the EU, but only if there are comprehensive reforms. He is expected to deliver a first ‘wish-list’ for EU-reform at the EU-Council meeting in Brussels on June 25. His list is most likely to cover four broad areas:
1) Restrictions for migrants from EU-countries to claim non-contributory social welfare benefits in the UK during a qualification period of up to four years.
2) Safeguards for countries which do not use the euro, like Britain, to make sure they cannot be hurt by rules made to govern the eurozone, and to protect free trade in goods and financial services.
Yes – But
3) Opt-out for Britain from its treaty obligation to seek an ‘ever-closer union’, and perhaps the European Convention of Human Rights.
4) Empowering a group of national parliaments to effectively block new EU-legislation.
So, how will EU-leaders react? Most likely with a cautious ‘Yes – But’. Yes – we know the present treaty does not work well for an EU with 28 member-states with vastly different economic strengths and diverging political preferences and capabilities. Above all, the eurozone needs a new rule-book which should be strictly defined and firmly enshrined in the treaties – including the ‘fiscal compact’ which seems not to be taken seriously in many countries.
But – the leaders would also say, we know that substantial treaty-change will be almost impossible to negotiate and then ratify in all 28 states of the EU before 2017.
No one should expect a new EU convention to draft a ‘new’ EU treaty in time before the UK-EU referendum. At the same time, the old Lisbon treaty has been changed and re-interpreted quite dramatically in the wake of the eurocrisis. It overrides the no-bail-out-clause, extends the European Central Bank’s mandate and establishes a banking union. And, there is more than one way to skin a cat.
There are different ways the many reform ideas, could be achieved without full scale treaty change, from targeted amendments to protocols to amendments to specific pieces of legislation. Mr Cameron will also demand ‘more Europe’ in the best sense of boosting trade across the single market, for example in the areas of services, capital, digital or energy. This can be achieved without treaty change by coalitions of the willing and capable, according to the enhanced cooperation procedure in the EU-treaties.
The line that David Cameron and George Osborne should use most obstinately when visiting Berlin or Brussels to secure support should be that which Mr Cameron used in his famous Bloomberg speech in 2013. He said then, ‘My strong preference is to enact these changes for the entire EU, not just for Britain’.
The most damaging suspicion in Germany, and other EU-member countries, is that the British are ‘cherry-picking’ – asking for privileges and trying to secure benefits while renouncing the duties of EU-membership.
Another red line which Mr Cameron and Mr Osborne will hear again and again in Berlin, Brussels and elsewhere is, ‘No: fundamental EU rules like the right to free movement cannot be negotiated away’.
If the UK sees the single market as the heart of Europe, this includes the basic freedoms – all four of them for goods, services, capital and labour. But, there is legal room for manoeuvre when it comes to national rules for access to national welfare systems.
Secretly, many in Germany hope Mr Cameron’s plan to postpone access to benefits for EU-migrants will be accepted by the European Court of Justice (ECJ). Germany may well like to enact similar restrictions.
British voters will know what the costs and benefits of remaining in the EU will be after the negotiations on EU-reform. But they will not know the consequences of leaving the EU.
Emotions are expected to run high during the referendum campaign and issues of national pride and entrenched euroscepticism will take their course. But one can also expect UK voters – like when the Scots voted on independence in 2014 – will weigh the economic risks and opportunities of alternatives to EU-membership cautiously.
Think-tank Open Europe in London worked out four different post-Brexit scenarios.
The decisive factors will be:
(a) The amount of access the UK can negotiate to the EU’s internal market
(b) The way a regained national sovereignty will be used.
In the best case – full access to the EU internal market and far-reaching market opening and deregulation on the UK’s part – Brexit could increase British GDP by 1.6 per cent by 2030.
In the worst case – economic isolation for the UK – it would shrink the economy by 2.2 per cent.
More realistic scenarios with arrangements similar to the former European Free Trade Association (ETFA), now the European Economic Area (EEA), allowing non-EU-members Norway, Iceland and Liechtenstein access to the internal market, suggest a narrower range of 0.8 per cent shrinkage to 0.6 per cent growth depending on what is negotiated.
An exit from the EU would be fraught with huge problems and uncertainties, but in purely economic terms it would not be the end of the world if reasonable post-Brexit arrangements can be found.
The main difficulties would be for British service industries and financial services in particular, since the UK has a trade surplus with the rest of the EU; whereas the EU should be more open to allow free bilateral trade in goods where the UK has a deficit with most of its EU partners. Barriers to enter European markets could be increased by new EU regulations after Brexit – especially in financial services – and the UK would no longer have any say.
The British government would have to adopt a radically liberal policy to prosper outside the EU. A decrease in economic growth could only be avoided with completely open free trade, even less regulation and a very liberal immigration policy for workers. But this is exactly what many Conservative-nationalist supporters of a Brexit would reject. These supporters come mostly from England. The UK Independence Party (UKIP) has its strongest voter-base in middle-class southern England. UKIP won only one seat in the House of Commons, but the 2014 EU-elections saw it in front of all other parties due to the proportional voting system and an election focussing on migration and EU-regulations – a scenario more in line with the forthcoming EU-referendum. Another calamity could easily occur if the UK tabloid media, together with UKIP and some eurosceptic Tories, turn the vote towards Brexit.
Scottish voters are much more europhile than those in England and very likely to vote for staying in the EU. The Scottish National Party (SNP) has already announced it will table an amendment to the referendum bill to ensure every constituent nation has to vote in favour of Brexit for that to actually happen.
This line will not enjoy majority support in the House of Commons but it will give the SNP an occasion to make a case for a second independence referendum if there were to be an ‘out’-majority in the UK but an ‘in’-majority in Scotland.
The UK risks not only being isolated from the EU but also being reduced to ‘little England’ – arguably the worst case scenario which most voters would like to avoid.
The best case scenario would be for the UK to remain as one nation and a member of a seriously reformed EU. This would develop as a competitive economic area, remove regulatory handicaps, push forward the internal market for services, digital networks and energy, and open itself to global free trade.
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