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Beyond the balance sheet

Why Brexit (not Bremain) is the shrewd path in the UK EU referendum

Chris Thompson 18/5/2016 11 minute read

Chris Thompson analyses why Brexit, and not Bremain, is the right course for the UK in the upcoming referendum on EU membership.

In the second of our series on the UK EU referendum we look at the case for Brexit, why the UK's current arrangement in the European Union doesn’t work at all well for British interests. Much of the public discussion to date on this matter has focussed on specific items such as immigration, asylum, the UK’s future international standing and the potential for recession. Unfortunately this misses the point, the two fundamental issues that are core to the arguments for Brexit.

At the heart of this debate is the opinion that the EU in its current state is contrary to Britain’s constitution while it also borders on being undemocratic in its nature. All the other discussion points that seem to have taken up so much air time are simply a consequence of these rudimentary principles. Consider carefully the answers to these two critical questions:

Does the EU dissipate power away from Parliament?
Yes.

Will the EU continue this trend in the future?
Undoubtedly, given the way it is set up and operates.

This post doesn't reflect the position of Wellers as a firm or the opinions of our staff. It has been written to help inform and encourage thought around the Brexit v Bremain debate. Do let us know what you think in the comments section at the end of this post.

1. Sovereignty and democratic principles

 

The erosion of Parliamentary sovereignty

The UK constitution is set up on the principle of the sovereign power of Parliament. This means Parliament is the supreme legal authority in the UK with the ability to create or terminate any law. It’s the most important part of our constitution and it’s established in statute law.   

Given the above, the EU creates a huge constitutional dilemma. The reason being our relationship as a member is based on the 1972 European Communities Act. This means all rights, powers, obligations and restrictions established by EU treaties have to be recognised and available in the laws of member states. The UK must therefore obey and incorporate all EU laws. The problem is that’s inescapably counter to the idea of Parliamentary supremacy.

Consider the long, rich history of the United Kingdom, the civil and world wars that were fought on the principle of promoting or protecting democracy (and the sovereignty of Parliament). Alas, since we joined the EU political experiment, we’ve been surrendering to the Brussels bureaucrats what we sacrificed so much to protect in the past.

 

A case of colonisation by the EU

Such a constitutional dilemma would be less of an issue of course if the EU didn’t make many laws. Unfortunately that couldn’t be further from the case. As if we didn’t have enough of our own, since joining the European Economic Community in 1973 we’ve had to assimilate a torrent of regulations and directives. In that year alone some 2,900 regulations and 410 directives, or 43 volumes worth of EU legislation, were incorporated into UK law.

According to the website EUABC.com, by May 2015 there were 40,000 legal acts in the EU, with 15,000 court verdicts and 62,000 international standards. All of this has to be obeyed as compulsory by all EU citizens and organisations. It’s led leave campaigners to describe this as a process of “legal colonisation” meaning the UK is effectively no longer in charge of our own affairs.

 

EU supremacy: When laws clash, the EU wins

The European Court of Justice (ECJ) is in charge of deciding what happens when EU legislation clashes with national laws. What it has actually done is establish the pre-eminence of EU law.

A good example of laws clashing was around the UK’s patent box tax initiative. This is a British tax scheme allowing businesses to lower their corporation tax liability for all profits attributed to patents held in the UK and Europe. It was designed to encourage innovation and advancements in technology in Britain. Soon after it came into effect, the European Commission assessed that it contradicted European State Aid regulations.

The view of the EU (and in particular Germany) was that Patent Box constituted a harmful tax practice that could facilitate the shifting of profits between EU countries to artificially lower tax liabilities. Consequently, the UK Treasury compromised with a whole new regime designed to come into effect from June 2016.

In another case from the early 90’s, Spanish fishing boats were accused of “quota-hopping” in UK waters. Despite the charge being labelled at the Spanish, the ECJ ruled that elements of the Merchant Shipping Act were incompatible with EU law resulting in the UK’s shipping laws being revised.

 

A very indirect democratic process

A significant problem with the EU is the manner in which it's set up and operates meaning it delineates indirect representation. Take the Prime Minister’s negotiations back in February 2016, David Cameron had to effectively deal, negotiate and compromise with 27 other heads of state over items such as in-work benefits and financial regulation.

The compromise part of this political process is important. It means the heads of other states (outsiders to UK voters) in the European Council have a significant input into drafting proposals on items specific to people’s lives in Britain. The UK electorate doesn’t elect these officials and so we can’t hold them to account like we do our own politicians at the ballot box in the general election for example.

Consequently via the Prime Minister in the European Council or the relevant Members of the Cabinet in the Council of Ministers, we only have set partial representation and thus a limited influence. Then consider that such proposals are subject to review and recommendations by the EU Parliament, with implementation of any subsequent legislation being enacted by the European Commission. Furthermore the deal struck by David Cameron is subject to something called a “permanent review” whereby any other member state can always raise objections if they become unhappy with any particular items.

It’s clear, much of the democratic and legislative cogs that make up the EU machine are out of our hands. The argument thus goes that to have a far greater say in deciding our own future requires autonomy, meaning we must leave the EU in its current form.

2. Economics and businesses

 

Impact on the economy and trade  

Assessing what a potential Brexit could do to the economy appears almost impossible. There are a wide range of estimates on this and the reason why predictions are so difficult is because it all depends on the nature of any trade deal we strike with the EU, post exit.

To be clear, should the electorate vote to leave on 23 June then this activates Article 50. We would then have a two year period for both sides to negotiate on the terms of any exit, specifically think trade and tariffs.

Of note, nothing changes in that timeframe and that’s what makes estimates on economic impact so difficult because who knows how those negotiations might play out or what course the economy might take in the meantime. At this stage it’s all hypothetical stuff.

So if you see headlines warning about how leaving could hurt house prices for example, it might be worth treating such predictions with a healthy degree of caution and scepticism. According to the Office for National Statistics (ONS), the EU today as a market accounts for 44% of our export trade. That’s contrary to the 49% Bremain campaigners claim. Furthermore the trend in our trade figures with the EU has been declining since 2008 when the figure was over 50%.

UK export figures to EU member states prior to the referendum

If we delve into the circumstances of our trade, then the scare mongering of some politicians appears unfounded. Admittedly, for all the EU’s rules and regulations, the private sector isn’t so weighed down in red tape that leaving would result in mass productivity growth. However, by the same token the evidence shows an exit wouldn’t be a disaster for our trade.

For this reason the conclusion by research consultancy Capital Economics, that Brexit could have either a modest negative or modest positive impact, appears well founded.

 

Negotiation of the terms of trade in our favour

Then consider the circumstances for any negotiations under Article 50 and the balance of trade might potentially point in our favour. You see if the UK wasn’t a member of the EU then based on today’s figures, it would be one of the Union’s largest single goods export markets.

The UK as part of the EU's export markets

That’s particularly significant. It means we’re one of the EU’s biggest customers and so the chances of negotiations ending in a trade war are quite unlikely. If the EU did pursue punitive trade measures against the UK that would simply reveal that we’re better off out. After all who wants to be in a club that fails to recognise good partners and potential economic opportunities? It would be contra to the free trade, global economic principles that have become such a prominent part of the internet age.

Furthermore the World Trade Organisation, of which the UK and EU states are members, forbids the use of punitive tariffs. Given that last point it means in the event of Brexit at worst, we’re likely to adhere to the same tariff as non-EU members, around 4.4%.

 

Why Brexit would be good for small businesses

According to the economist Bernard Connolly in an interview with MoneyWeek, Britain exports just under 30% of its GDP, as mentioned earlier 44% of exports that go to the EU. That then means 12% of GDP is reliant on the single market or, to look at it another way, 88% of our economy isn’t reliant on the EU.

The issue that Connolly reveals with all this however is the whole economy has to abide by EU regulations. To leave therefore frees up many SME businesses of regulatory restrictions that in the main may not be relevant to the markets in which they operate.

Many larger companies on the other hand have come out in favour of the EU. If one looks at how the EU works, with all its rules and regulations, it’s clear to see how this benefits corporates. Unlike SMEs they have the funds to be able to invest money in lobbying the EU in terms of its existing regulations and the law making process.

It’s this lobbying that can create oligopolies in industries as the more regulation there is the harder it can be for new, smaller operators to enter markets. The danger here is corporates then secure their position in terms of market share, thereby dominating, and this comes at the expense of innovation and entrepreneurialism. After all, how can you innovate if you have to spend so much time trying to adhere to the rules?

3. The EU construct

 

An unclear overall purpose

What exactly is the purpose or mission of the EU – why have this political and economic union of so many diverse and different nations? Go to the European Union website and you’ll read all sorts of things about advancing human rights, equality, mobility, growth and the single currency. But what is the overall mission statement?

Given the diversity of European countries can there even be one? It’s this very lack of coherent ambition that’s at the heart of everything that’s wrong with the EU. Every nation that goes to the European Council or the Council of Ministers, is there to get what they can out of it for their own national interests. They’re not there for the collective good of all members. They’re not there for the EU and that means a total lack of any real cohesion.

If you can’t define what the purpose or aim of an organisation is, then in politics as in business, you have a fundamental problem. You have no brand values, no common purpose and thus no clarity of direction.

 

A lack of identity

Germans and British people can quite easily identify their uniqueness and in many ways most do. It’s all well documented, being a big part of both their history and education. Could or would they do the same when it comes to the EU or being European? No, I’d suggest not, you identify with your country of birth or citizenship.

Few describe themselves as European. Why? There’s no real personal connection to it and thus no real belief in it. Sure, the continent is full of great destinations that are rich in history, culture and diversity but that really doesn’t make a single community. Instead the EU is an imagined political and economic construct. It’s a something of forged allegiance of countries, a political and economic behemoth lacking a sense of cohesion and identity.

This lack of identity means a lack of buy in among the people that make up EU member states. It might also explain why both the Union and the wider world are so concerned about Brexit. Perhaps they realise the fragility of the situation, that if one member leaves it opens the eyes of other states as to the arguments against the EU and the benefits of being out.

This isn’t just about Brexit; the future of the EU is at stake!

 

Economically and politically failing

Think to the poor handling of Greece that has created a continual economic crisis, lurching from one disastrous debt restructure to another. Consider the lack of cohesion over the refugee crisis from Syria which could rip up the Schengen Area agreement as countries establish border controls.

Look at the economic instability of Portugal, Italy, Greece and Spain and the risk this poses to the banks that are intrinsic to member’s commercial activities. At best these countries are stagnating. At worst they’re part of a failed economic experiment where they’re locked into monetary union. They’ve lost control of a key component of economic policy whereby decision making on interest rates and the money supply accounts for the situation across the Eurozone rather than being specific to their own national circumstances and interests.           

No other continent has copied the EU construct for a reason. It hasn’t worked and it's failing its members. Based on the current flawed arrangement, we’re better off out!

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The content of this post is up to date and relevant as at 18/05/2016.

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