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What does Her Majesty’s Government actually know about the impact of the EU on the UK economy?

Successive governments have failed to inform the public of the impact of the EU, but they have also failed to inform themselves


There is a natural inclination to assume that when a PM says that the EU is good for jobs, trade and investment in the UK that his remark must be based on a thorough analysis of the evidence. No one thinks he did it himself of course, though one imagines his civil service advisers will have collected and studied all the available research, perhaps even commissioned some, so that when he speaks out on the EU’s impact, he, and we, can be sure that he knows what he is talking about.

Is this assumption correct? Have the Treasury or other government departments commissioned, conducted or reviewed research which would entitle the PM to speak confidently about the beneficial impact of the Single Market on jobs, trade and investment in the UK?

One thing is for sure: they have not published their evidence on such topics. It may be that somewhere in Whitehall, there is a hidden cache of insightful and convincing comparative analyses of research data which, for some reason, they alone have been lucky enough to see.

What does the Treasury know?

In 2010, in response to a Freedom of Information request by an unknown person, HM Treasury released five brief internal analyses of ‘third party assessments of the cost-benefits of EU membership’.[1] Could this be, one wondered, the hidden cache, or part of it?

If so, it is not much of one. These papers did not disclose any previously unknown data, and only one of them includes any original research. Most seem to have been written to construct and promote a particular line of policy, and to brief ministers. One is a storyboard, perhaps to help a minister who is not quite on song, or had difficulty following the agreed script. Four are undated, as if they might be recycled after a change of government. I wrote to HMT and asked for some guidance on their purpose and provenance, but did not receive a reply.

  1. EU Membership and FDI (2005 ca)[2]

According to the report, certain stylised facts support the claim that membership of the EU is a key factor in attracting investment to the UK. Unfortunately, the stylised facts were not explained, and no reason was given why they should be preferred to the unstylised facts regularly reported in UNCTAD or OECD databases. It then embarks on a rushed explanation of the benefits of FDI to host economies, and of the gains in FDI inflows to the UK that will follow ‘further integration’ of the EU and ’the liberalisation of services industries’.

In particular, it features a 2004 article by Pain and Young who used the NIESR[3] model to estimate that ‘withdrawal from the EU would cost the UK 2¼% of GDP over time, largely from lost FDI flows.’[4]  It neglected to mention one of the other forecasts in this article: ‘there is no reason to suppose that unemployment would rise significantly if the UK were to withdraw from the EU.’[5]

  1. The Economic Effects of UK membership for the UK: revised storyboard (August 23rd, 2005)

This begins with a review of several critical analyses of the costs of EU membership, but decides that these can be quickly dismissed because they are ‘based on pessimistic assumptions’. It only assesses static direct costs and benefits and ignores second order dynamic ones. Most of the paper is therefore able to portray sunnier prospects consisting largely of forecasts of future gains of trade, FDI and even productivity, there being ‘some evidence of catch-up in recent years’ though these gains might be held back by EU regulation. Immigration is seen as having little impact though it acknowledges ‘patterns may change with the latest accessions.’

The perils of non-membership are portrayed in one page devoted to Norway and Switzerland’s dismal plight. No data is given on the growth of their exports to the EU which might have raised awkward questions.[6] Pain and Young’s estimate is repeated for the same purpose, though now as an established fact, that ‘GDP would decline by 2.25% permanently after withdrawal primarily because of lower FDI leading in turn to lower technical progress.’

  1. EU Membership and the Drivers of Productivity and Growth (2006 ca)

This report identifies five drivers of productivity: competition, investment, entrepreneurship, innovation, and skills. It argues that the EU can strengthen the first four of these drivers, but not the fifth, since the EU has little direct input into vocational education and training.

Citing diverse published sources, it gives a generally positive account of the ways the EU could, should or has affected competition, investment and innovation, though barriers and obstacles remain. The exception is entrepreneurship on which it decides that ‘the overall effect of EU membership is mixed and probably negative.’

  1. EU Membership and Trade (2005)

This piece of original research tries to identify ‘the observable impact of EU membership on trade flows’. It uses a standard gravity model with controls for GDP, population and real exchange rates. It finds that EU membership boosted trade of member states by 38 per cent, but the trade of the UK by only 7 per cent. However, ‘after this initial boost from accession, straightforward comparisons of UK trade with the EU 15 and the rest of the world from 1970 to date do not immediately highlight the significant boost in trade amongst the EEC members that one might have expected, particularly over the period of implementation of the Single Market.’ The Single Market was seen to have ‘boosted intra-EU trade by a further 9% (although this may be an under-estimate)’. There is no figure for UK. While the storyboard above says there was a 7% improvement in UK trade, it did not distinguish between imports and exports.

  1. Literature review – economic costs and benefits of EU membership 2011

This is a limited bibliography of just seven items, with a commentary that focuses mainly on the European Commission report of 2007, published four years earlier. It manages to avoid mentioning any of the problems identified in that report.

HM Treasury’s limited knowledge base about the EU and the Single Market

There is one main conclusion to be drawn from these papers: as of 2011, no significant research effort or intellectual resources have been devoted inside HMT either to document or to analyse the economic impact of the EU or the Single Market on the UK economy.

As a result, the government appears to have been about as informed as the rest of us about how EU membership and the Single Market might be affecting the UK economy. It was relying heavily on European Commission reports about the EU as a whole, and scaling them down to discover what was happening to the UK. These five reports were, it is true, ‘third party assessments’ but they were all written within HMT, originally for the benefit of its staff and ministers. If HMT possessed any telling sources or analyses of their own, they would have little reason not to refer to them to confirm or contest the conclusions of other publications.

They convey a sense of minds made up, and a remarkable lack of curiosity. The repetition of Pain & Young’s article is symptomatic. It seems that no attempt was made by HMT, or any other department, to critically analyse this conclusion, examine other research that contradicted it, conduct research of their own, or to ask the authors to re-run, update or corroborate their conclusions.

This comes as something of a surprise. Just a few years earlier, HMT had organized a remarkable trawl of expertise from around the world to discover the likely impact on the UK economy of the adoption of the euro to answer the five tests set by the Chancellor. That exhaustive and comprehensive process had set conflicting evidence and opinions alongside one another. Because HMT was able to compare and evaluate conflicting evidence, it came to a stronger and more balanced decision.

Why the euro decision was different, and the same procedure could not have been adopted with respect to EU membership or the Single Market is not clear.

Is the Department for Business, Innovation and Skills (BIS) better informed?

In 2011 a BIS minister told the House of Lords Select Committee on the European Union in 2011 ‘that the Single Market has delivered substantial economic benefits’. He went on to say that ‘EU countries trade twice as much with each other as they would do in the absence of the Single Market programme’. Astonished by these claims, in 2013 I submitted a FOI request for the evidence to support his claim.

I was given two references:

  • Fontagne, L., T. Mayer and S. Zignago, 2005, Trade in the Triad: How Easy is the Access to Large Markets? Canadian Journal of Economics, 38(4): 1401-1430.

Unfortunately, neither of them supported his claim.[7] One from the European Commission itself, some three years earlier, included a rather candid assessment of a number of the Single Market’s conspicuous failures, none of which had ever been heard in the UK debate. This contradicted many of the claims that had been made about the success of the Single Market, including those of the minister. It is included in Chapter 25.

The second, some five years earlier, was a test by three French professors of their model on border effects. It made no attempt to measure the impact of the Single Market, though incidentally it found that Japan ‘would seem almost as open to US exports as German consumers are to French exporters’. This might, on another occasion, have raised questions about the distinctiveness, or indeed necessity, of the Single Market.

Although these studies had little to say about the minister’s claim, they were informative for another reason.[8] They showed the limited knowledge available to a Minister giving evidence to Parliament. He had been given no departmental or UK government sources, and instead had to rely on what were by then rather dated evidence from French academics and the European Commission. This reinforced the impression conveyed by the five HMT papers, and led to the unpalatable conclusion that two government departments, with significant responsibilities in the formation and conduct of UK government policy towards the EU, were incapable of forming an evidence-based judgement of the Single Market’s merits. The opinions given by this minister and others, including the Prime Minister, must be no more than hunches or hopes, with no empirical grounding whatever.

However, in answer to my FOI request, I was referred to two UK government sources that might, it was suggested, provide some support for the minister’s claim, though they could only do so retrospectively. The first was published by BIS itself.

In the preface the then secretary of state, Vince Cable, said the essays sought ‘to draw together evidence about the impact that the Single Market has had to date’. Whatever their merits, they certainly did not do so, which left the 32-volume Balance of Competences Review.

This Review was a compilation of opinion rather than a research report. However it does intermittently cite research, the volume on the Single Market concludes with a table which lists all the comparative research regarding the economic benefits of the Single Market. The key part of this table is reproduced in Table 38.1.[9]

Chapter 38 - table

 

It is a very important table, which deserves careful scrutiny and is worth reproducing, since it shows HMG’s state of knowledge, as of 2013, about the economic impact of the Single Market. It will allow us to decide whether HMG as a whole was quite as ignorant as the responses of HMT and BIS to FOI requests suggest it was.

The first point worth noting is that the most recent of these studies is from 2008, some five years prior to this Review. While it is dated, quality does not appear to have improved much over time. Second, more than twenty years after the inauguration of the Single Market, the government had still not conducted or commissioned comparative research on the Single Market’s impact. A third point of interest is that these studies seldom refer to one another. They have evidently not been engaged in a debate, a further illustration if it were needed that the EU is without a demos.

Comments on the six studies

The first two studies are predictions, made in 1988 and 1989, and make no specific reference to the UK. They are therefore not of much help when measuring the costs and benefits of the Single Market for UK trade in 2013.

The third, Monti and Buchan, has only a single year of data to work with, 1994, a limitation which we had best put to one side. Its other limitation is that its model-derived estimates are implausible when compared with other known data. For instance, if the Single Market contributed between 1.1% and 1.5% to the EU’s GDP known growth of 2.9% in 1994, then without it, we are supposed to think that it would have grown by 1.8% or 1.4%. This seems unlikely, since the World Bank database shows that ‘high income OECD states’ as a whole grew by 3.2% in 1994, and a large proportion of these are EU members. For some reason that Monti & Buchan do not provide, EU states would have grown, but for the Single Market, at about half the rate of the other ‘OECD high income states’. In any case, their estimate of an increase of more than 1% in a single year is far above other estimates for the entire history of the Single Market, as we will see in a moment. Unfortunately, Monti did not bother to update, verify or corroborate these estimates in his better-known report published in 2010.

The fourth, by Minford et al, is mainly concerned with estimating the costs and benefits of alternative futures for the UK and the EU, rather than those already incurred by the UK specifically as a result of the Single Market. However it did suggest a cost, thus far, of 3% of UK GDP. This is, by the way, the only one of these six studies which sought to identify costs and benefits for the UK specifically.

The fifth, by Ilzkovitz et al, we have already encountered. However, the civil servant editors decided to redact their comments on many problems of the Single Market (see Chapter 25), as if they were unfit for British ears. They decided only to mention the report’s speculative assessments of the Single Market’s contribution to EU GDP and EU employment. Both seem highly improbable. For them to be true we would have to assume that without the Single Market, EU GDP growth would have been at, near or below zero from 2002-2006, while ‘high income OECD states’ as a whole were growing at 1.5 and 3.1 per cent. It is not clear why we should do this.

This study, like that of Monti & Buchan, made claims about increases in the level of employment as a result of the Single Market. They both have similar blind spots about the level of unemployment which they do not analyse, or even mention. However, to make these claims about an increase in the level of employment plausible, it is necessary to show that the level of employment within the EU increased at a higher rate than that of other OECD states. Neither do so, and we are expected to accept that increased level of employment growth, which is in no way different from other OECD countries and less than several, is due to the Single Market. That is not easy.

We are now left with just one, the much-cited study by Boltho & Eichengreen. It is important first to say what kind of study it is. It is not an attempt to report and analyze all the available evidence about the economic benefits of the EU. It is an imaginative, and highly speculative, experiment of ‘fully specifying the counterfactual’ of every stage of European integration. The study imagines what alternative policy, institution or action might have performed a similar function in the absence of those policies, institutions and decisions that determined the successive stages of integration that actually did take place. It starts from the European Payments Union in 1950. This is, as the authors say, ‘no easy task’, and necessarily involves guesswork every step of the way, as they readily acknowledge.

Their final estimate of 5 per cent GDP included in the table refers to this whole 60 year process of European integration. Their estimate of the Single Market is more modest: ‘As an upper estimate it could, thus, be argued that perhaps half of the SMP’s gains, as estimated by the Commission in 2002, might not have been obtained in its absence.’[10] They estimate that the Single Market has been responsible for a total increase of between 0.75 and one percent of EU GDP. They say nothing about whether or not the UK shared equally in this increase, but they do point to the ‘almost certainly substantial’ costs of the CAP.[11]

Conclusion about HMG’s present state of knowledge

The fairest conclusion from these studies would be that they tell us next to nothing about the benefits of the Single Market for the EU as whole, and nothing at all about the benefits of the EU or the Single Market for the UK specifically.

The civil servant editors saw things differently in a 2013 HMG report: ‘most studies suggest that the GDP of both the EU and the UK are appreciably greater than they otherwise would be, thanks to economic integration through the Single Market.’[12] Most studies… appreciably greater. Hmm. Only one of these studies specifically addressed possible UK costs and benefits, and it decided that costs outweighed the benefits.

They lead me to conclude that HMG is indeed as ill-informed as the responses to the FOI requests suggested, and worse still, that it does not care to admit it. In the case of the EU, its civil servants have, over many years, preferred to ignore their Green and Magenta rule books on evidence-based policy, and hidden from their ministers just how ignorant they and we are.

Next time we hear a minister, ex-minister or prime minister speak confidently of the benefits of the Single Market or the EU’s trade agreements, it would be foolish to trust them, on the grounds that they have been briefed by civil servant advisers who have conducted, or commissioned and reviewed all the relevant research. They haven’t.

This review of the evidence available to the HMT, BIS and the FCO up to 2013 suggests they are probably relying on dated scraps of less than relevant research, much of it drawn from the European Commission. IT also seems likely that the research has been selected and arranged to suit the policy of the government of the day.

It may be that the reluctance of successive governments to monitor, analyse and report on the impact of the EU on the UK economy was to prevent the issue becoming a politically salient one. Whatever the reason, it has helped to keep the British public in the dark, but judging by this evidence, it has kept HMG in the dark as well.

Notes

[1] https://www.gov.uk/government/publications/treasury-analysis-of-third-party-assessments-of-cost-benefit-analyses-of-eu-membership

[2] fn 25, supra HM Treasury, EU Membership and FDI. undated. The five papers are available at https://www.gov.uk/government/publications/treasury-analysis-of-third-party-assessments-of-cost-benefit-analyses-of-eu-membership

[3] Footnote on the NIESR model

[4]  This quote is not from this report. It is from the 2005 EU membership and FDI report. Available at: http://bit.ly/1q5P1Xw

[5] ‘The effect of EU withdrawal on employment is relatively small in relation to the change in output. After twenty years it is within 0.1% of the baseline level….The extent of the fall depends on how monetary policy operates. If policy is relaxed as the economy contracts, then the maximum decline in employment is approximately 75,000. If interest rates and the exchange rates do not fall, then employment would fall by approximately 160,000 after three years as a result of UK exit from the EU.’ p.405, ibid.

[6] This storyboard is not paginated.

[7] As explained in detail in Myth & Paradox of the Single Market

[8] The reference to these two works raised the same question as the ‘five tests’ research at HMT. The DBIS researchers have conducted many valuable studies of international trade, and have also conducted a number of impact assessments of specific EU policy proposals. The latter are, of course, narrowly-defined, ad hoc inquiries, but it is puzzling that these same researchers were never asked, now and then, to address the larger question of the costs and benefits of the Single Market.

[9] Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 2013 p.72

[10] Which were ‘of the order of 1.5 (1/2) to 2 per cent of GDP

[11] Barry Eichengreen and Andrea Boltho, The Economic Impact of European Integration, (2008) p.33

[12] Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 2013 pp.6,40


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