The claimfactFiction32 FactCheck: What happens to the economy if we pull out of the EU?

“There are 3 million of our fellow countrymen and women in this country whose jobs rely directly on our participation and role and place in what is after all the largest borderless single market.”
Nick Clegg, October 31 2011

The background

The Deputy Prime Minister has put himself on collision course with the increasingly vocal eurosceptic wing of the Tory party this week.

As a Daily Mail poll showed that 77 per cent of Conservative Party members believe there should be a referendum on Britain’s continuing membership of the EU, Mr Clegg launched a defence of the economic benefits of staying in Europe.

The Lib Dem leader said 3 million British jobs depend on our continued presence in the European single market – and both jobs and growth would be at risk if we attempted to pull out.

The analysis

That figure of three million UK jobs being dependent on the EU is one that has been bandied about by politicians for more than a decade.

It appears to originate from an influential piece of academic research carried out in 2000.

Economists at South Bank University found that about 2.5 million people owed their jobs directly to exports of goods and services to EU countries and a further 900,000 jobs had been created indirectly by trade with the continent.

One of the authors, Professor Iain Begg, now of the London School of Economics, told FactCheck that number would undoubtedly be different today, but not by a huge amount.

So far, so good. But should Mr Clegg be careful about suggesting that those jobs could be at risk if Britain pulled out of Europe?

While Prof Begg stands by his research, he takes great exception to headlines that suggest that millions of Britons would be thrown on the dole if Britain left the single market.

The simple reason for that is that Britain would still be able to trade with countries in Europe, even if it wasn’t a member of the EU club.

More than 20 countries including two of Europe’s richest nations, Switzerland and Norway, have negotiatied free trade agreements with the bloc without signing up.

Eurosceptics say it is inconceivable that Britain could not do a reciprocal deal to avoid trade tariffs, particularly since we import more from the EU as a whole than we export.

Another key study by the National Institute of Economic and Social Research (NIESR) found that “there is no reason to suppose that unemployment would rise significantly if the UK were to withdraw from the EU. Withdrawal could cause disruption to the economy, but it is most unlikely that export sales to EU markets would cease completely”.

So does that mean Mr Clegg’s completely wrong? What about the bigger question of whether Britain loses or gains economically by staying in the EU?

Surprisingly, the British government has never commissioned a cost-benefit analysis of our continued membership, and there are relatively few politically independent studies around.

The NIESR report suggested that staying in the EU has created a small net gain, and the UK’s output  would be permanently just over 2 per cent lower if we left.

One of the very few other independent audits – carried out by the Institute of Directors in 2000 - came to the opposite conclusion, estimating that there is a net cost to the UK from staying in the EU of around 1.75 per cent of GDP a year — about £15 billion at the time.

Of course the numbers underlying these calculations have changed so much since the turn of the millennium that these conclusions are of questionable use now.

What they and earlier studies all tend to show is a relatively small net economic cost or benefit, with a minor change in modelling able to tilt the balance the other way.

Professor Begg told FactCheck: “If anyone tried to do it completely objectively, you would probably find that the economic plus or minus is very small.”

He doubts whether it would be possible for the government to come up with a truly objective analysis, given the theoretical complexity of how much we gain from our close ties with the continent.

How, for example, do you quantify the economic gain from tourists being able to travel more freely within the EU? Does Britain’s involvement in the Europe help make the continent a more peaceful place, reducing the need for defence spending?

These are difficult questions for economists to grapple with, and Prof Begg also points out that it may be naive to try to talk about the purely economic benefits of pulling out of Europe, when there would inevitably be some political fallout.

He said: “If Mr Cameron said to the EU: ‘I’m taking my ball home, I’m not playing with you any more’, there would be some kind of revenge. That is what we would do if it were the other way round.”

The verdict

A cloud of uncertainty hangs over the whole question of whether Britain loses or gains economically by its continued membership of the EU.

Some of the world’s top economists disagree about the numbers, and it’s impossible to say what the ultimate political costs of pulling out could be.

On paper, Britain ought still to be able to trade freely with Europe, but would there be a backlash from Brussels designed to damage Britain’s interests if we turned our back on the single market?

What is fairly clear though, is that while Clegg’s right about the number of jobs dependent on trade with Europe, he should be very wary about suggesting that those jobs are automatically at risk if Britain’s relationship with the EU changes.

According to the people who did the research, talk of mass redundancies if Mr Cameron goes for a European exit strategy is just scaremongering.

By Patrick Worrall

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Category: Europe, Fact, Fiction, Nick Clegg, UKIP
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