Whether the UK remains in or leaves the EU will affect many issues in our national life. This page sets out my perspective on these issues from my Remain perspective, but I welcome contrary views from Leave supporters.
Posted 28 May 2016 Updated 29 May 2016.
The EU Referendum is the most important decision the British people have faced for a generation. Like many, I have become frustrated by the poor quality of the discussion of the issues involved in the EU referendum decision. Accordingly, I have created this page and will expand it issue by issue as I have time.
I am writing from a Remain perspective but welcome responses from Leave supporters using the Disqus comments facility at the bottom of the page. Please make it clear which issue you are responding to. Particularly cogent comments will be copied by me into the main body of the website page while making their origin clear.
Why are we having a referendum?
The EU and British sovereignty
The single market – what it is and why it matters
Turkey joining the EU
The point is often made that if Prime Minister David Cameron believes that leaving the EU would be as damaging to the United Kingdom as he claims, why is he holding a referendum in the first place.
I have not seen any real responses to that question. However, everybody who follows UK politics knows the answer.
The referendum was promised in a speech that David Cameron made at the London headquarters of Bloomberg on 23 January 2013. At that time Mr Cameron was facing enormous pressure from Conservative MPs hostile to the EU. Promising a referendum held the Conservative Party together by postponing the issue to some future date.
At that time, the government was a Conservative/Liberal Democrat coalition. Before any referendum could take place the Conservative Party would need to win the 2015 general election outright to be able to govern alone since none of the other UK political parties (apart from UKIP) was interested in having a referendum about the EU.
The promise of a referendum about Britain’s EU membership was included in the Conservative Party’s 2015 general election manifesto and may have helped it fend off voter losses to UKIP since it gave the Conservative Party a clear message: You can only get an EU referendum by voting for a majority Conservative government.
The Conservative Party did succeed in winning the 2015 general election outright. Given the manifesto commitment and the widespread hostility to the EU amongst large segments of the Conservative Party, it was impossible for David Cameron to not hold the referendum. That applies regardless of how damaging he might consider leaving the EU to be.
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During the EU referendum campaign so far, I have heard many Leave campaigners content that we need to leave the EU to save or to restore our sovereignty. However, apart from asserting the point, the case is rarely made in detail.
On 6 October 2015 on his website John Redwood wrote a piece “We might need to leave the EU to reassert our sovereignty.” I recommend reading it in full but have included a short quote below:
“Most of us wish to restore or reassert UK sovereignty. If the UK people and their Parliament want to change a law or control our borders, or decide how much to tax and spend we need to be free to do so. None of that is possible under the present Treaties.”
The Wikipedia article on sovereignty is worth reading. The modern concept of sovereignty comes from the Westphalia settlement which ended the 30 Years War. Very briefly, a state is an area of land with a border which has been agreed with its neighbours and which is governed by a sovereign. Within the state, the sovereign may do as he wishes. At that time, sovereigns were normally hereditary rulers.
The principle has been carried over to democratic governments so that the government of a state can do as it wishes within the state (subject to any internal constitutional constraints) but without any constraints from other states.
Accordingly, one now tends to refer to the people as being sovereign or the state as being sovereign rather than referring to the person in charge of the government as being sovereign.
To illustrate the point, the United Kingdom is a state whose government exercises the sovereign power of the state. Accordingly, if the UK government wished to transfer the territory of Kent to France, it has the power to do so irrespective of the wishes of the residents of Kent.
As another illustration, although Scotland is a country (within the technical definition of an area of land which has a uniform system of laws separate from other areas of land such as England) it is not a sovereign state. Accordingly, Scotland does not have the power of its own accord to leave the United Kingdom even if all residents of Scotland wanted it to do so.
The independence referendum that was held in 2014 was possible only because the sovereign government in London permitted it to take place and pledged to abide by the result. Indeed, even if the Scottish people had voted in the referendum to leave the UK, Parliament in London had the power to override that decision, reverse any laws on the statute book relating to the referendum and determine that Scotland could not leave the UK.
Treaties are agreements entered into between sovereign states. They may be bilateral (such as the UK/USA double taxation convention) or multilateral (such as the Nuclear Non-Proliferation Treaty).
No external power can compel the UK to enter into a treaty since the UK is a sovereign state. There is a long list of the UK’s treaties on Wikipedia and the UK government also has a page about the UK’s treaties which leads to the full text of most of them.
In his 2015 Palliser lecture, former attorney general the Right Honourable Dominic Grieve QC MP included some fascinating information regarding the sheer number of treaties to which the UK is a party.
“During the four years that I was Attorney General, I became conscious of just how much of my workload concerned international obligations and the legal frameworks surrounding them. I asked the Foreign Office to tell me how many Treaties were currently in force concerning the United Kingdom. While unwilling to go back beyond 1834, they were able to state that since that date they have records of the United Kingdom signing up to some 13,200 treaties. Many thousands are still binding and range in importance from the UN Charter and the Treaty of Accession to the EU to bilateral agreements over fishing rights and maritime access. Over 700 contain references to mechanisms for binding dispute resolution in the event of disagreements over interpretation.”
Dominic Grieve's Palliser lecture is well worth reading in full.
Every treaty limits in some way how the UK can exercise its sovereign powers. For example, the UK/USA double taxation treaty sets a maximum rate of tax that the UK can charge on interest paid from the UK to USA. In exchange for limiting its sovereign freedom, under the treaty limitations are also placed on the other party’s exercise of their sovereign powers.
After signing a new treaty, the UK is no less sovereign than it was before. Instead, it has agreed to place limits on how it will exercise its sovereign powers because there are some countervailing benefits thereby received, in particular a limitation in how the other party to the treaty will exercise their sovereign powers.
I am not aware of any treaties to which the UK is a party from which the UK cannot withdraw by giving the appropriate notice.
The UK joined the European Economic Community (now the European Union) on 1 January 1973 because the government of the time considered that to be in the UK’s national interest. In particular, it was expected to deliver economic benefits for the UK. (I believe that significant economic benefits have been received but strictly that is not relevant to this discussion of sovereignty.)
At any time after 1 January 1973 the UK government could have left the EU. However, no UK government, whether formed by the Conservative Party or the Labour Party has considered leaving the UK to be desirable. Any government that wished to leave could do so at any time in the past, and can do so at any time in the future, since the UK is a sovereign state. The EU treaty has a clearly defined mechanism in article 50 regarding how a state leaves the EU.
I believe that what Leave campaigners find most irksome is the direct applicability and direct effect of some EU law in the UK.
For the purposes of this sovereignty discussion, it is not necessary to cover in detail how EU law is made and the respective roles of the European Commission, the European Parliament and the EU Council of Ministers. However, the process eventually culminates in the issue of new EU law in the form of a Directive or similar instrument.
UK and other EU citizens can rely upon such EU law against the UK government. However, the only reason they can do so is that Parliament has so legislated in the European Communities Act 1972, section 2(1):
“All such rights, powers, liabilities, obligations and restrictions from time to time created or arising by or under the Treaties, and all such remedies and procedures from time to time provided for by or under the Treaties, as in accordance with the Treaties are without further enactment to be given legal effect or used in the United Kingdom shall be recognised and available in law, and be enforced, allowed and followed accordingly; and the expression and similar expressions shall be read as referring to one to which this subsection applies.”
Parliament has the sovereign power to repeal ECA 1972 section 2(1) but to do so would be a breach of the UK’s obligations under the EU treaty.
The reason why EU law needs to have direct effect is quite simple. Otherwise individual member states, of whom there are now 28, could put massive obstacles in the way of citizens exercising their freedoms under the EU treaty (such as free movement of capital and free movement of labour) by failing to implement new EU legislation in domestic law.
Frankly, I believe the entire Leave argument on sovereignty is without merit.
Every state which is recognised as a state by its neighbours has sovereignty. That sovereignty is not impaired by the state choosing to enter into treaties, as long as it retains the power to withdraw from those treaties.
The UK can withdraw from the EU treaty at any time by giving notice of departure. As long as that legal right exists, membership of the EU does not reduce the UK’s sovereignty.
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The size of a market is critically important.
In his masterpiece “The Wealth of Nations” Adam Smith explains how everyone becomes richer when people are able to specialise, known as the "division of labour". In Chapter 1 he compares the different difference in productivity if people tried making pins doing everything by themselves as compared with breaking the task down into smaller parts with individual specialists responsible for each partial task.
To take an example, therefore, from a very trifling manufacture, but one in which the division of labour has been very often taken notice of, the trade of a pin-maker: a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.
But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades.
One man draws out the wire; another straights it; a third cuts it; a fourth points it; a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business; to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.
I have seen a small manufactory of this kind, where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day.
Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth, part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.
The larger the market, the greater the scope for specialisation and the division of labour. Imagine a world comprising a farming village of only 1,000 people. This market might be large enough for a blacksmith to make a living but there would never be scope for operating a car factory!
Fundamentally, the home market consists of the country of the producer. In this market, there is a uniform system of law with the same courts deciding commercial disputes. There is a uniform regime of direct taxation and also of indirect taxation. There are no tariffs when goods move between different parts of the country, no customs duty barriers, requirements for special forms to move goods from one city to another, uniform technical standards etc.
After the American War of Independence when the 13 colonies united under the American constitution, one of the key measures implemented was to make interstate commerce the exclusive legal competence of the federal government. This meant that the 13 former colonies now became a single market since they were unable to impose restrictions on the movement of goods from other states, even though the 13 states retained the power to impose income taxes and sales taxes within the state. That fledgling single market has grown as America has grown to 50 states and the USA is now a massive domestic market of well over 300 million people.
In comparison, even though the countries of Western Europe went through the industrial revolution at about the same time as the USA, the home markets of each of them was much smaller than the home market of the USA. Even the largest European economy, Germany, was much smaller than the USA.
That is why US companies grew to a far greater scale than European companies and dominated global commerce in the middle part of the 20th century. This domination was also aided by the destruction Europe suffered in the First and Second World Wars, but even before that, for example in 1913, the sheer scale of US companies was becoming overwhelming.
Today, in India, we see what happens when a country does not manage to have even a single domestic market within its own borders. The federal states of India have very significant control over the movement of goods between states, with their own customs barriers, such that the country of India does not function as a single market. The Economist newspaper has recommended the creation of an internal single market as a key strategic economic priority for the Indian government.
This is a process that the countries of the European Economic Community (now the European Union) have been engaged on ever since the EEC was founded in 1957.
Abolishing tariffs between member states was of course the simplest and easiest step to take. However, by itself that is not sufficient to produce a single market.
One of the ways that domestic producers regularly attempt to keep foreign competitors out of their home market is to persuade their government to set technical standards for products which are more difficult for foreign producers to comply with. Individual country governments are always vulnerable to such domestic lobbying, particularly when “jobs are at stake.”
Accordingly, a key measure to help promote the single market is for product technical standards within the EU to be set at a pan-European level, with individual countries having no ability to prevent the sale of products that meet EU technical standards. If a toaster is made in Italy, complying with EU technical requirements, the UK government has no power to prevent it being sold to UK customers.
Decision making on such matters is always complicated, especially when the product is more sensitive than a toaster, for example pharmaceuticals. Accordingly, as the membership of the EEC increased, it was recognised that requiring unanimity on technical standards for the single market was simply not viable. Instead, qualified majority voting was introduced which allows decisions to be taken if a sufficiently large number of EU states is in favour. The current rules on qualified majority voting are set out below:
When Digital Versatile Discs (DVDs) were first invented, the owners of content (the major American film studios) were keen on segmenting the global market for DVDs into separate smaller markets. The reason was to maximise their monopoly pricing power as explained in the section on “Exhaustion of trademark rights.”
The USA and Canada were defined as Region 1 while the EU was defined as Region 2. DVD players were only allowed to be manufactured able to play DVDs for a single fixed region, thereby segmenting the market to increase the film studios pricing power. (Modification of DVD players to play DVDs from other regions involved extra cost and also voided the player’s warranty.)
The film studios actually wanted to be able to segment the European market into separate smaller markets so that they could charge higher prices in wealthy countries such as the UK and Germany while charging lower prices in poorer countries such as Greece. However, the EU acting collectively had sufficient negotiating power to insist that the entire EU would be a single region for DVD technical standards rather than being divided into multiple regions.
The benefit to consumers was lower prices as a result of having a single pan-European market.
The owner of a trademark has a significant level of control over how goods bearing that trademark are resold. For example, the maker of a branded perfume may sell that perfume in Nigeria to local Nigerian dealers at a relatively low price taking into account income levels in Nigeria. At the same time, the manufacturer may sell the identical perfume with the identical packaging to dealers in the UK at a higher price.
It would be attractive for a UK dealer to buy the perfume from a Nigerian dealer at a relatively low price rather than buying the perfume from the manufacturer at a higher price. However, trademark law allows the manufacturer to prohibit this since the UK dealer would be infringing the manufacturers trademark by importing the perfume from Nigeria and selling it in the UK.
This principle allows the manufacturer to achieve higher sales prices in the UK than it could achieve if UK dealers could bring in such “parallel imports” from Nigeria.
If the 28 member states of the EU were completely autonomous for trading purposes, the same principles would apply to parallel imports from one EU member state to another. However, as part of the creation of the single market, there is a concept of EU law known as the exhaustion of rights. The principle is that once goods have been sold by the trademark owner into any EU member state, they are regarded as having been put into circulation within the single market. The trademark owner then has no legal power to prevent parallel imports.
The overall effect is that prices of such trademarked goods in the EU as a whole are lower than they otherwise would be because customers benefit from lower overall price levels in poorer EU countries such as Greece, Bulgaria and Romania.
The economics is well explained in sections of economics textbooks that explain how monopolists set prices. The goal of a monopolist is to segment the market into smaller markets, and in each such fragmented market “charge what the market will bear.” Instead, the exhaustion of rights principle forces the monopolist manufacturer of the trademark goods to treat the entire EU as one single market where the manufacturer “charges what the market will bear” but overall customers end up paying a lower price than the would if they were customers in 28 separately segmented markets.
Another method for domestic producers to seek to exclude foreign competitors is to lobby their governments to “buy domestic” rather than buying from foreign suppliers. Again, when “jobs are at stake” governments are always vulnerable to such domestic lobbying.
Accordingly, the EU has collectively set rules which prohibit discrimination by governments in public procurement in favour of domestic suppliers. Every time such rules result in a British local authority purchasing from a non-UK supplier, some people complain. However, it is those same rules which prevent Italian local authorities favouring Italian suppliers rather than purchasing from the best supplier who may be non-Italian.
Historically, it was more complicated for a UK business based in London to sell to a customer in Paris than to a customer in Birmingham. To send goods to Birmingham, the company simply shipped the goods and they arrived at the Birmingham customer.
However, sending goods to Paris required them to stop at the French border where they would be inspected to ensure that they were not prohibited goods. Even though there were no customs duties between the UK and France (since tariffs within the EU were abolished long ago) there was paperwork required for VAT purposes since the sale was a zero rated export by the UK company and a taxable import by the French company.
In 1992 all such fiscal frontiers within the EU were swept away. While security checks are still possible (for example French lorries coming to the UK may be checked to ensure there are no illegal migrants within them) there is no VAT paperwork at the border and goods flow freely.
The single market applies to goods but not yet to all services.
Significant progress has however been made. For example, in financial services there are many common standards and “passporting” applies. This means that a regulated bank established in one EU state is able to set up branch operations and serve customers in other EU states without requiring the permission of the country in which the operations are established.
Similarly, once a collective investment scheme has met the requirements of the relevant EU directive it can be sold to investors throughout the EU without requiring the approval of financial services regulators in 28 individual European states.
Furthermore, the existence of domestic courts in all 28 states makes commercial disputes that are cross-border more difficult than domestic commercial disputes. However this problem is often avoided in practice by arbitration clauses in contracts, or clauses specifying the applicable law and the forum for the settlement of disputes.
It is possible for the UK to continue as a full member of the single market. That is the status of Norway. However, such status is unacceptable to most advocates of Brexit:
If we leave the single market, it is still possible to have zero tariffs if the UK and the EU agreed to have zero tariffs. However, the requirement for VAT paperwork and customs inspections on goods crossing from the UK to the EU would almost certainly reappear since the UK would no longer be in the EU system.
Most importantly, the EU would continue to set technical standards which would apply throughout the remaining 27 member states but the UK would have no voice in setting those standards. We would simply have to accept whatever standards the EU set for all goods shipped from the UK to the EU. If UK technical standards were different from those within the EU, that would be a major cause of inefficiency for UK manufacturers since they would have to produce goods for two different sets of standards. Conversely if the UK automatically applied all EU technical standards, those who had been vocal about leaving the EU would complain.
Most importantly, once the UK was no longer in the EU, financial services passporting would no longer apply. This would cause a drain of highly paid financial services jobs from the UK to EU member states.
In particular, countries within the Eurozone have occasionally contended that all clearing of euro denominated securities should take place within the Eurozone. As a member of the EU the UK has been able to ensure that such restrictions cannot be imposed. Once we were no longer in the EU it would be impossible to resist such lobbying. The transfer of all clearing of euro denominated securities to the Eurozone would be seriously damaging for the financial services industry in the UK.
The more successful a company is, the more people it can employ and the higher the wages it can pay.
The creation of the single market has increased business within the EU for exactly the same reasons as the US domestic single market increased business within the USA; because it created a larger market within which competition takes place. Accordingly, if the UK is no longer in the single market, that will damage UK businesses, thereby reducing UK employment and wages.
In their paper “The Costs and Benefits of Leaving the EU” in May 2014 four economists at the London School of Economics attempted to estimate the impact. Theirs was a serious and sober attempt at estimation rather than a politically motivated document. I recommend reading it to satisfy yourself on its objectivity and attempt to be unbiased. I have copied their conclusion below:
Withdrawing from the EU is a dangerous move for the UK. Using the Costinot and Rodriguez Clare (2013) methodology, we generate counterfactual scenarios and show that UK future losses due to this move can sum up to 1.23% of the GDP in real terms in our optimistic scenario, and to a drop of 3.09% in our pessimistic one.
When we factor in more realistic dynamic losses from lower productivity growth, a conservative estimate would double losses to 2.2% of GDP even in the most optimistic case. In the pessimistic case, there would be income falls of 6.3% to 9.5% of GDP, a loss of a similar size to that resulting from the global financial crisis of 2008/09. These numbers show that leaving the EU appears to be a risky gamble.
In any case, we should have in mind that these numbers are likely to be larger in reality, since many other welfare improving channels associated with EU trade such as immigration, increases in productivity, increases in R&D intensity, vertical production chains, to cite just a few, are not considered in our analysis.”
Even the smallest reduction in GDP of 1.23% mentioned in the above conclusion is more than twice what the UK pays into the EU budget (which is roughly 0.5% of GDP allowing for the UK's rebate and what the EU sends back to the UK for agricultural support, regional funds etc.) and that is their most optimistic scenario. Their more realistic scenarios, particularly taking into account secondary (dynamic) factors, are much worse.
These figures translate directly into lower incomes for UK citizens. That is why remaining within the EU is vital for UK prosperity.
I find it particularly discouraging that those who wish to leave the EU are unable to say what kind of economic scenario after leaving they have in mind. Some are ultra-liberals who wish to slash regulation, employment protection and operate like a larger scale version of Hong Kong while others are more interested in reducing immigration to almost zero and putting up barriers against the outside world, regardless of the economic consequences.
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The Vote Leave campaign have been running a poster campaign about Turkey joining the European Union. I have copied one of the posters.
Many issues in the EU Referendum are difficult to assess because they require judgement about uncertain future circumstances. For example, will the UK be richer per person if it remains in the EU or if it leaves? While the overwhelming weight of expert economic forecasting is that we will be worse off if the UK leaves the EU, it is obviously impossible to guarantee such forecasts.
However, on the question of Turkish accession to the EU, there are clear, incontestable facts. The only area open to dispute is the interpretation of those facts.
Turkey has applied to join the EU.
The process is governed by Article 49 of the EU treaty, reproduced below.
"Any European State which respects the values referred to in Article 2 and is committed to promoting them may apply to become a member of the Union. The European Parliament and national Parliaments shall be notified of this application. The applicant State shall address its application to the Council, which shall act unanimously after consulting the Commission and after receiving the consent of the European Parliament, which shall act by a majority of its component members. The conditions of eligibility agreed upon by the European Council shall be taken into account.
The conditions of admission and the adjustments to the Treaties on which the Union is founded, which such admission entails, shall be the subject of an agreement between the Member States and the applicant State. This agreement shall be submitted for ratification by all the contracting States in accordance with their respective constitutional requirements."
When any country applies to the EU, negotiations take place. Broadly speaking, the applicant state has to demonstrate to the satisfaction of the EU’s administrators, the European Commission, that the applicant country satisfies the requirements in terms of democracy, freedom, implementation of European law etc.
Once the European Commission is satisfied, there are then two stages of approval required:
Readers should already be aware that the European Council consists of the 28 member states, each represented by their government.
Every one of the 28 member states has a veto on every new applicant.
For the avoidance of doubt, this means that the UK has a veto on Turkey joining the EU.
Turkey applied to join the EU many years ago but the negotiations have gone very slowly. The Turkish government itself has varied in its enthusiasm but it is clear that the Turkish people, and the Turkish government, would like Turkey to join the EU.
Many European countries have made hostile remarks about Turkish accession to the EU. In particular, France has been negative. Obviously, the most negative country is Cyprus which has part of its territory occupied by Turkey and Cyprus will clearly veto Turkish accession if the division of Cyprus is not resolved first.
The UK government has been supportive of Turkish membership of the EU, and continues to be supportive. However, the UK government is clear that Turkish accession will only take place when the time is right. My position is the same as the UK government's; I would like to see Turkey in the EU when the time is right.
The obvious factors the UK government will take into account will include:
Turkey will not be joining the EU any time soon.
Domestically freedom in Turkey is being restricted rather than increased and internal terrorism problems are also increasing. Furthermore, many existing EU member states are currently adamantly opposed to Turkish membership.
The UK government would not vote to admit Turkey until it was satisfied that there was no risk of major Turkish immigration.
The Vote Leave poster implies that Turkey is joining the EU in the near future. That appears to ignore the realities about Turkish internal problems and the views of other governments mentioned above.
Vote Leave also appear to believe that the UK government will not exercise its veto even if Turkish accession would be damaging to the British national interest by flooding the UK with, apparently, 76 million Turkish immigrants.
Vote Leave clearly do not trust the UK government to act in the UK’s national interest.
My only response is that anyone who does not believe that the UK government will at all times act in the UK’s national interest is delusional or is accusing our government of treason.
All governments are capable of making mistaken decisions. However as nobody I know is arguing that Turkish accession to the EU in the near future would be good for the UK, one needs to accept that the UK government (whether Conservative or Labour) can also see that.
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