Monday, 7 December 2015

Single Market - UK trade with EU

In a series of posts, I'm aiming to discuss the "Single Market", one of the major topics of  the EU Referendum.  In this post, I will be looking at UK trade with the EU.

UK Exports as a proportion of UK economy

The Office for National Statistics (ONS) has analysed the importance of the UK's trade relationship with the EU , which shows for the year 2014:
- UK exports to EU = £227 billion (44.65% of total exports)
- UK exports to non-EU = £281 billion (55.35% of total exports)

However, the ONS figures overstate the real level of UK exports to the rest of the EU, due to 2 separate distortions:
- "Rotterdam-Antwerp Effect" where exports destined for non-EU countries are routed via the ports of Rotterdam or Antwerp and so are recorded as exports to Netherlands or Belgium,
- "Netherlands Distortion", where investments and subsequent income are channeled through  "brass-plate" holding companies for tax purposes by investors domiciled in other countries.

The ONS have not attempted to estimate these effects, but have made reference to these distortions in recent bulletins.  The think tank Global Britain have analysed the effect of these distortions and estimated that over 11% of the trade recorded as exports to the EU was in fact exports to the Rest of the World, which would suggest that the share of UK exports is more likely to be:
- UK exports to EU ~40%
- UK exports to non-EU ~60%

The ONS "Composition of Demand" statistics for 2013 show that UK exports contribute 23% to the UK economy.  Based on this, we can estimate that the contribution to the UK economy from UK exports to EU as 40% x 23% = 9.2%.

UK Trade Deficit with EU

The ONS figures for 2014 show a UK trade deficit with the EU of £61 billion, i.e. we bought more goods/services from EU states than EU states buy from us.  In fact, a trade deficit has been an enduring feature since the UK joined the then common market in 1973 (despite having been in trade surplus with Europe during the 1950's and 60's). The table below is based on ONS statistics and has been extracted from Business for Britains "Change or Go" document

This deficit has widened appreciably in recent years, due in part to the on-going Euro crisis, which is depressing demand from most Eurozone states and providing an artificial boost to German export competitiveness.

Although the UK has historically recorded a trade in goods deficit with the EU, its trade in services balance with the EU is much more favorable, running a surplus in each year since 2005, which reached £15.4 billion in 2014.  While the Single Market was theoretically implemented in 1992, there is unfortunately still no effective single market in services and little progress is being made to remove trade barriers in services - which is a particular disadvantage to the UK (ranked number 2 in services globally after the USA).

UK Trade with Rest of the World

By contrast, the UK's trade with the Rest of the World is typically in balance or surplus, as per the ONS seasonally adjusted chart for 2015 Q2 in the diagram at the top of this page.  UK exports have been re-orienting away from the EU and towards the Rest of the World since before the millennium, reflecting the fact that the EU is a declining market place in the world, down to 17% of Global GDP and forecast to fall further.  Global markets provide the best prospects for UK trade growth and trade balance.

Insider Advantage ?

It is an oft-repeated claim that membership of the EU gives the UK an essential trade advantage. However, a detailed analysis of UK export figures 1960 - 2012  (undertaken by Michael Burrage for the cross-party think tank Civitas) shows no positive impact on UK trade with other members. Britain's trade with other EU nations accounts for no more of its trade with all leading economies than it did on joining the European Economic Community in 1973; UK exports to non-EU nations Iceland, Norway and Switzerland have increased enormously over the same period.
".. evidence presented above contradicts again and again those who wish to claim that the UK has enjoyed an insider advantages in the Single Market. The growth of UK exports to other founder members was low when compared with UK exports prior to its launch, low when compared with the exports of goods of 27 non-members to the other founder members of the Single Market, and low when compared with the exports of services of 21 non-members to the other founder members. It was also low when compared with UK exports of goods and services to non-member countries. There was therefore no prima facie evidence that the UK enjoyed any insider advantage, and therefore no obvious place to look for it."
"It is similarly hard to accept the idea that there are disadvantages to non-membership, since the exports of goods and services to the EU of so many ‘voiceless’ and ‘powerless’ nations, both developed and less developed, who had never been ‘at the table’ or even ‘in the overflow room’, have grown faster than those of the UK."


It would be wrong to suggest that the UK's trade deficit is entirely due to membership of the EU. The UK has historically suffered from lower productivity, skills levels and investment compared with the likes of France, Germany, Netherlands etc. UK governments have shown themselves quite capable of pursuing damaging policies without assistance from Brussels.

Nor is trade with the EU the fount of all prosperity that it is often portrayed as.  UK exports to the EU contribute less than one tenth to UK GDP - as per calculations above and in line with a 1999 report from the National Institute of Economic and Social Research (NIESR) which looked at how many jobs were linked to trade with the EU.

The myth of "one-in-ten / 3 million jobs at risk" derives from the 1999 NIESR report.  As reported in the Telegraph, Britain in Europe (campaigners for UK to join the Euro) used this report in 2000 to claim that these jobs "depend on the EU".  Dr Martin Weale, the director of the NIESR, was so outraged by this misuse of his study that he called it “pure Goebbels”, and said “In many years of academic research I cannot recall such a wilful distortion of the facts.”  His report had in fact concluded that almost all of these jobs would exist whether Britain were a member of the EU or not.

The political reality is that it will be in everyone's interest to ensure continuity of trade.  If 3m jobs are at risk in the UK, then 5m jobs are at risk in the EU (given the UK's trade deficit with the EU). Furthermore, trade is now incredibly inter-dependent.  For example, the UK manufactures and exports car engines which are often incorporated into German cars subsequently imported to the UK. Complex international supply chains are at the heart of modern commerce.  An abrupt halt to trade between EU and UK would risk a "cardiac arrest" for international trade.

The key question is does trade with the EU have to entail integration in the political structures of the EU ? There are many trade blocks around the world (e.g. NAFTA, ASEAN etc), but only the EU requires political union of its members and removes the right of veto.  Fortunately, membership of the European Union and participation in the Single Market are not one and the same, as we will explore in a subsequent post.

Wednesday, 18 November 2015

Foundation of the EU - Supra-national not Inter-national

In this post,  I will try to briefly highlight the foundation of the EU and in particular the tension between the "Supra- national" EU and British preference for "Inter-national" co-operation (i.e. an "Intergovernmental" approach).  Once again, I have gleaned this primarily from “The Great Deception” written by Christopher Booker and Dr Richard North –  available to download as a PDF here.

An "intergovernmental" organisation is based on self-governing nation states co-operating willingly - the participating nations states remain independent and autonomous.   By contrast, a "supranational" organisation sits above nation-states - powers and decision making are transferred from participating state to the "supranational" organisation.

Post-war International Co-operation

In the aftermath of World War Two, Britain was at the forefront of international co-operation that led to the founding of many "inter-governmental" institutions, including: 
  • United Nations - the successor to the League of Nations, but this time with participation of the USA;
  • World Bank & International Monetary Fund (IMF) - to avoid another financial crash that led to the Depression; 
  • General Agreement on Tariffs and Trade (GATT) - to lower tariffs world-wide and avoid the protectionism that prolonged the Depression and also to promote free trade.  GATT was superseded in 1995 by the World Trade Organisation (WTO), another "intergovernmental" organisation to promote free trade around the globe. 

Britain's Intergovernmental Approach to Europe

Contrary to views commonly held today, Britain also played a leading role in the European arena in the post-war world, pursuing an “Intergovernmental” co-operation and “Free Trade” agenda:
  • The “Council of Europe”, an intergovernmental organisation proposed by Churchill (1946) and brought into existence by the 1949 Treaty of London.  This organisation was by-passed by Monnet in setting-up the European Coal and Steel Community in 1951.  Nevertheless, Britain signed an agreement of ‘association’ with the European Coal and Steel Community in 1954, with a commitment to friendly co-operation.
  • Britain led the creation of the Western European Union (WEU) an "Intergovernmental" organisation and military alliance to provide mutual defence.
  • The Organisation of European Economic Co-operation (OEEC) was formed in 1948 to administer the distribution of Marshall Aid.  At the insistence of Britain, Sweden and Switzerland  this was a strictly ‘Intergovernmental’ organisation, controlled by a ‘Council of Ministers’ making decisions on the basis of unanimity. 
  • Britain & Ludwig Erhard (German Minister of Economics and "Father of the German economic miracle") proposed using the OEEC as the infrastructure for a Free Trade Area Common Market 
  • When this proposal for a Free Trade Area Common Market was rejected, Britain led the creation of the "Intergovernmental" European Free Trade Area (EFTA) – established by the Stockholm Convention in Jan 1960 it comprised 7 countries: Britain, Norway, Sweden, Denmark, Switzerland, Austria & Portugal.
  • Britain promoted intergovernmental co-operation in a wide range of fields.  For example, in civil aviation (where it was a world leader) : Eurocontrol was agreed in 1960 and provided a Europe-wide system of air navigation safety; the Supersonic Transport Aircraft Committee was established which eventually led to the building of Concorde.

Monnet's Supranational Europe

Britain's "Intergovernmental" approach to Europe was an anathema to Monnet, characterised by his verdict on the OEEC "the OEEC’s nothing: it’s only a watered-down British approach to Europe – talk, consultation, action only by unanimity".  At the end of the 1940’s Jean Monnet renewed efforts to establish a “Supranational” United States of Europe based on the model described by Salter - in diametric opposition to Britain's approach.

A hallmark of Monnet's approach was to use a "beneficial crisis" and then advance his ideas via a public advocate.  In spring 1950, French demands regarding West Germany's coal & steel industries were the "beneficial crisis" and Robert Schuman, the French Minister of Foreign Affairs was his advocate.  On 9 May 1950, Schuman made a declaration (prepared by Jean Monnet) proposing integration of the French and German coal and steel industries: 
"Through the consolidation of basic production and the institution of a new High Authority, whose decisions will bind France, Germany and the other countries that join, this proposal represents the first concrete step towards a European federation ...."
The European Coal & Steel Community (ECSC) was founded by the Treaty of Paris in 1951 when The Six members states (France, West Germany, Italy and the 3 Benelux states) handed over control of their steel and coal industries to this new “supranational” organisation.   “Qualified Majority Voting” was used in the Council of Ministers.  Jean Monnet became the first President of the “High Authority”.

Monnet then proposed a ‘Supranational’ European Defence Community (EDC), with a European Army run by a European minister of Defence and Council of Ministers, a common budget and common arms procurement policy.  Rene Pleven (French Prime Minister) was the public advocate, but the initiative met with sustained opposition and eventually failed.  Consequently, Britain led in the creation of the "Intergovernmental" WEU to provide mutual defence.  It is worth noting that from 2000, the WEU’s capabilities were transferred to the EU and the WEU was wound up in 2011 - there have since been fresh moves within the EU to create a Single European Army.

In response to the rejection of the EDC, there was a change of tactics: the language was changed with phrases such as “European Government” and “Federal” being avoided; as exemplified by the Francois Duchene quote at the start of this blog.  Political integration was to now proceed under the guise of economic integration.

Monnet resigned as President of the High Authority and began work on "economic" integration. Paul-Henri Spaak (Belgian Foreign Minister) composed The “Benelux Memorandum” (based on a draft by Monnet) which called for a Common Market including integration of transport, energy, nuclear energy and social legislation.  Tellingly, the phrase “United States of Europe” in the original draft was removed to give more emphasis to the idea of an “economic community”.

Spaak rejected Britain & Ludwig Erhard's suggestion of a Free Trade Area using the existing OEEC governance, as it  ‘offered no prospect of a European political union’.  Instead, the Common Market was implemented as a Customs Union with a common external tariff wall erected against non-members – i.e. focussing on integration within the European Economic Community rather than an expansion of free trade. 

The Common Market treaty was signed in 1957 in Rome.  Although commonly believed to be a purely economic agreement, the Treaty pre-amble includes the declaration to ‘lay the foundations of an ever-closer union among the peoples of Europe’

Subsequent treaties have continued the transfer of powers from the member states to the “Supranational” EU.  Executive power is held by the European Commission, the equivalent to Salter’s “Secretariat”, a body of civil servants who owe loyalty to the EU, not member states.  Most decisions are via Qualified Majority Voting, i.e. national vetoes have been mostly eliminated.   Just as Salter & Monnet envisaged. 


There is a historic difference between the "Supra-national" nature of the EU and Britain's preference for "Inter-national" co-operation, which helps explain why the UK has never felt comfortable inside the EU and why the UK is often seen as the “awkward” member. 

It should also be understood that the EU is something of an anomaly as the only recognised Supranational Union in the world.  By contrast,  the "intergovernmental" organisations created after WW2 are still the dominant global institutions, i.e. UN, NATO (which has been the cornerstone of Europe's defence & security for almost 70 years), IMF & World Bank (which still underpin the world's financial systems) and GATT / WTO, which has been the major force enabling Global trade.  Crucially, the WTO along with a plethora of other "intergovernmental" institutions (e.g. UNECE, ILO, Codex Alimentarus etc) is driving the emerging Global Single Market which has effectively made the EU redundant as a law-maker for the Single Market.

Fundamentally, the choice for Britain in the Referendum is the same as it has been for the last 65 years: 

  • Should Britain "Trade and Co-operate" with nations across the Globe  as a self-governing nation-state ? (i.e. an "Inter-governmental" approach)
  • Should Britain commit to a "Supra-national" EU, where the EU sits above the member states (as a form of Government of Europe) and where the EU represents the member states around the world ?

Sunday, 15 November 2015

Origins of the EU - An Old Idea

In this post,  I will try to briefly highlight the origins of the EU.  I cannot take any credit for the information, I have gleaned this primarily from “The Great Deception” written by Christopher Booker and Dr Richard North – a meticulously researched and detailed account of the European project.  I regard this book as essential reading for anyone who wishes make an informed decision at the EU referendum.  This book is available to download as a PDF here.

It is commonly believed that the concept of the European Union developed following World War II.  In fact, the essential ideas of the European Union emerged as a response to the horrors of the Great War, for example: 
·     Federal Europe or “United States of Europe”  based on the Amercian model, e.g.:.Giovanni Agnelli published ‘European Federation or League of Nations’ in 1918, the Pan Europa movement founded in 1922, Aristide Briand (French Prime minister) published ‘Memorandum on a European Federal Union’ in 1930.
·     Coal & Steel Union to transfer industries crucial to waging war from nations to a “higher authority” and as a first step to establishing a “United States of Europe”, e.g.: Louis Loucheur (French Armaments minister 1917/8, Minister of Finance 1925/6); Pan Europa; “International Steel Agreement” brokered in 1925.
·     Customs Union or Common Market as a means to achieving economic integration leading to Federation e.g.: Sir Max Waechter (1924); French economist Charles Gide, supported by Pan Europa (1924); Louis Loucheur (1927).
·     Franco-German Collaboration Aristide Briand & Gustav Stresemann (German Foreign minister) shared the 1926 Nobel Peace prize for their work on the Treaty of Locarno (which guaranteed mutual security for France and German) and championed Franco-German economic collaboration and a “United States of Europe”.

However, it was two close friends & senior officials in the League of Nations, the Frenchman Jean Monnet and his British colleague Arthur Salter, who did most to provide a blueprint for the future European Union:
  • During his term as the League of Nations deputy-secretary general (1920-23), Monnet became frustrated by member states power of veto and became committed to the idea of an entirely new ‘supra-national’ form of government, beyond the control of national governments, politicians or electorates.
  • In 1931, Salter published ‘The United States of Europe’ proposing that the method used to unify Germany in the 19th century should be used to create a United Europe, i.e. by establishing a Zollverein or  ‘common market’, funded by a common tariff on all goods imported from outside with “a political instrument to determine how the distribution [of those funds] should be made”.
  • Salter also proposed an institutional structure based on the League of Nations, with a “Secretariat” as the central source of authority – a permanent body of international civil servantsloyal to the new organisation  (not to the member countries) – essentially government by “Supranational” bureaucracy.
At the heart of these initiatives was an attempt to bind Europe together politically and economically, particularly France & Germany, to avoid another war.  As Churchill put it :
“…the aim of ending the thousand-year strife between France and Germany seemed a supreme object. If only we could weave Gaul and Teuton so closely together economically, socially and morally as to prevent the occasion of new quarrels and make old antagonisms die in the realisation of mutual prosperity and interdependence, Europe would rise again.”
Ultimately, these initiatives failed to prevent World War 2. Nationalist resentment in Germany at the terms imposed by France at Versailles combined with the Wall Street Crash and ensuing Depression provided the platform for Hitler’s rise to power. The world that emerged after World War 2 was a very different one:
  • Britain was at the forefront of international co-operation that led to the founding of many institutions: the United Nations; the World Bank & International Monetary Fund (to avoid another Depression); General Agreement on Tariffs and Trade (GATT) (to the avoid the protectionism that prolonged the Depression).
  • Germany underwent dramatic changes.  Prussian militarism was extinguished by the humiliation of Allied occupation and shame as the Nazi's deeds were fully exposed.  The “Wirtschaftswunder” or "economic miracle" ensured a successful social democracy was established in West Germany.
  • The Cold War dramatically altered the political landscape.  Germany was split in two (East & West); Western European nations were bound together by the common threat of the Soviet Union and NATO was formed; the Soviet Union became a nuclear power in 1949, ushering in the threat of nuclear Armageddon and “Mutually Assured Destruction”.

In the late 1940’s,  Jean Monnet renewed efforts to establish a “Supranational” United States of Europe, establishing the European Coal & Steel Community (ECSC) in 1951, culminating in the European Economic Community (EEC) established by the Treaty of Rome in 1957, based on the blueprint provided by Salter in 1931.  

However, given the changed reality of the post-war world, was this idea still relevant ? If the ECSC and EEC had not been created in the 1950’s, is it really possible to believe that a new European war would have erupted ? Was the EEC any guarantee of peace in the Cold War between the two super-powers (USA & USSR), which reached a near-disastrous climax during the Cuban Missile crisis ? If NATO had not been formed and the USA had returned to its inter-war "isolationism" would peace have been sustained in Europe and the Soviet threat countered simply because of the formation of the ECSC and EEC ?  If the answer to these questions is no, then it begs the ultimate question :  why do we need a "Supranational" United  States of Europe, a government of unelected bureaucrats with power over nation states ?