The question of the U.K.'s – or perhaps just England's – position in Europe is now live. This follows the crisis-driven evolution of the euro zone, the decision of Prime Minister David Cameron to hold a referendum on EU membership in the next parliamentary term, the success of the U.K. Independence party and now pressure from erstwhile Conservative heavyweights such as Lord Lawson. A country that has long been semi-detached, particularly since it decided not to participate in the euro, may soon become detached.
Nothing here is certain. The chances of a referendum are not 100 per cent, since Mr.Cameron may well not be Prime Minister after 2015. But the pressures on the opposition Labour party to make the same offer are strong. The chances that Mr. Cameron's renegotiation will yield anything substantial are, as Lord Lawson stated this week in The Times, small. Given this, the likelihood that the British will vote for exit is large, in view of the increasing integration of the euro zone and near certainty that the U.K. will refuse to join the single currency for the foreseeable future.
In November I argued that: "The U.K. is a bystander at the euro zone drama. Its sensible policy is to keep its options open until the outcome is far clearer." But: "The question is whether domestic politics will allow it to be so sensible." It now appears that it will not. Given this, it now seems to me better to make a decision, rather than let many years of uncertainty over the U.K.'s future place in Europe blight the country.
Yet what should that place be? Lord Lawson insists it should be outside the EU. The U.K., he argues, does not share the rest of Europe's ambitions. He adds that the EU's net economic impact is negative: the U.K.'s net annual contribution of £8-billion ($12.4-billion) and the regulatory burden, particularly on finance, outweigh gains from the single market. It would be better for the U.K. to embrace global openness, he says.
On the politics, Lord Lawson is right. The U.K. has seen membership more as a matter of interests than of identity or destiny. Some argue that, outside the EU, the U.K. would have no global influence. This is not a compelling point. The U.S. has far more influence than Canada. But this does not mean Canadians want to become Americans for the sake of greater influence. The British may also reasonably choose to sacrifice the influence of being part of a bigger whole because they simply do not feel European. Furthermore, the indifference to democracy in the emerging euro zone is worrying: it looks far more like a machine for imposing the will of strong countries than a democratic federation.
On the economics, Lord Lawson is right to insist that the plausible alternative is to be outside the EU and the European Economic Area. Being only part of the latter is the worst of almost all worlds: it would mean accepting the rules of the single market without having a voice in determining them.
Yet his assumption that the World Trade Organization offers adequate safeguards is unconvincing. The WTO does not offer free trade and does not cover services as fully as the single market of the EU. Above all, its survival cannot be assumed to be secure. Since the U.K. still sends 46 per cent of its exports of goods and services to the EU, exit would surely put a large proportion of its trade at risk. People focus on what they view as costly immigration. But membership also allows British people to travel, live and work in the EU, freely. That is a huge asset.
Would foreign investors still be as interested in the U.K. if they knew it could not offer access to the European market on the same terms as other European countries and had given up all influence on future European regulations? I doubt it.
Today, London is Europe's New York. But would the ambitions of European policy makers and the self-interest of large financial companies let it remain so? London can be an offshore centre. But could it remain Europe's financial capital if the U.K. had decided to leave the EU? Lord Lawson suggests it could. I doubt it.
Yes, the U.K. would save about half a per cent of gross domestic product in fees. But that is not very much. As for burdensome EU regulations, these have not prevented Germany from being a successful global exporter. The U.K. ranks seventh in the World Bank's Doing Business survey. This hardly suggests that membership imposes prohibitive regulatory costs. The principal determinants of a country's prosperity are its policies and resources. But the idea that exiting the EU would secure substantial net economic gains is implausible.
The case for exit is not close to proven. This being so, the option of departure should remain unexercised. It would have been better to have avoided a referendum. But that is no longer possible. The time has come to make a decision. Let the debate begin. But the wise outcome would be to remain semi-attached. It is not a bold choice, but it is the sane one.