Does the Shoe Fit?

The Single Market and Customs Union never worked to the advantage of the UK economy.

Shoe fit - stars pinchingIf the shoe won’t fit, don’t wear it – walk away. That’s good advice from a podiatrist and an appropriate analogy for an economist or lawyer. The EU has never been a comfortable fit for the UK economy or legal system. In this post we review how ill-fitting the Single Market (SM) and Customs Union (CU) have always been for the UK.

It may be a fair argument to say that Britain should stay close to the SM/CU because her economy is so entwined with the EU’s that walking away is going to hurt too badly.

Clearly there are problems with disengagement that affect some companies or sectors but there are potential advantages for others, especially smaller firms that have little to do with Continental trade but are bound by its cumbersome rules. Consumers may also benefit from lower world prices after the abolition of tariffs and protective regulations that only serve other members’ interests [1]. The economic consequences can be debated but not proven either way, certainly not over the longer term. The actions taken by the UK, the success of the EU relative to other large economies and the state of the global economy will all crucially affect the outcome.

The forecasts of those who believe that the UK has to remain in close harmony with the EU generally consider only those changes that will affect the UK. However, the pandemic plus the trade battle between the US and China, the world’s two economic superpowers, will profoundly alter the trade environment. We have previously discussed the fragility of some EU national economies [2], and the coherence of the whole, or the eurozone in particular [3]; to assume a healthy future for the Project is a leap of faith rather than reason. But then faith is what the EU relies upon; the evidence for its economic success is sparse and unconvincing, at best, and the UK has not benefited historically. [4] (We strongly recommend reading the linked post to complement this one.)

If we are to judge the Project’s success then improving people’s lives must be pretty near the top of the agenda. Actually, from the point of view of the EU’s mandarins that hardly seems to figure at all, for them success is measured in terms of achieving ‘Ever Closer Union’, which is their strategic goal, regardless of how it affects the rest of us. What about the workers then?

Having a job is a good start. For more than two decades before the Referendum the EU’s unemployment record was poor compared with other developed nations, especially for young workers [5]. A good, well-paid job matters too of course. On average, real wages depend on productivity but over the same two decades the UK’s improvement lagged behind comparable non-EU economies, by 6% against the US for example.

Workers 1Employment rights matter too and the Union does demand minimum standards. For example, there must be at least 20 days annual leave – the UK requires 28 days. Working mothers matter so the EU requires at least 14 weeks maternity leave at sick-pay levels – UK rules say companies must offer 52 weeks, 6 weeks at 90% of salary, then 33 weeks at statutory levels, plus the job must stay open to the new mum for the rest of the year. Britain’s minimum wage is about the highest amongst all members and ex-members. The legendary ‘race to the bottom’ threatened by Labour and the unions doesn’t seem to be a likely priority once the leash is off.

If UK productivity and pay have not been uplifted by SM/CU membership at least employment levels were good, there seems to have been little correlation with the EU and rather more with America. Which is interesting because exports have grown faster with the US and the rest of the world – so it wasn’t lack of effort from British companies. It was supposed to be easier to export across the Channel with common rules and zero tariffs, not to mention the ‘economic gravity’ effect which M. Barnier says threatens the SM if its rules do not apply to the UK after the Transition [6]. Well the UK was 36th out of 40 exporters of goods to the EU and the SM scarcely applies to services, the UK’s strongest sector.

Low-pay immigration (with full and immediate entitlement to benefits to which the incomers need not have contributed) has in some cases caused harm and resentment. By depressing wages and providing employers with an alternative to investing it may also have contributed to the productivity gap.

Another of the ‘four freedoms’ which the EU claims must not be compromised by a country that isn’t bound by Single Market rules – as judged by the CJEU – is the free movement of capital. It is already compromised. Britain fought for years for a level playing field until Directive 2004/25/EC was introduced, based on its own Takeover Panel rules. The UK has been very free, arguably too free: which other nation has as many of its essential utility providers owned by Germany, France or Spain (energy, water, airports, mobile phone and postal services)? But these are the very countries that are most keen on promoting and protecting their national champions. Germany had a big fright when Vodafone bought Mannesmann in 2000 but has tightened things up, despite a few clashes with the EU judges.

Edouard Philippe 1France too has successfully fought off foreigners, “Let’s not be naive, we won’t hesitate to stand up if French champions come under threat, especially in case of a takeover threat,” then Prime Minister, Edouard Philippe, said in 2017 [7]. The Florange Law of 2014 mandates that French companies give two votes to any share held for longer than two years. In addition, any hostile bidder must negotiate with French workers before proceeding with a takeover – Germany has a similar rule. These obstacles made takeovers by British companies difficult, yet more than half of UK-quoted shares, by value, are owned by investors based abroad. Protection against, for example, aggressive US corporations (e.g. Kraft) in the interest of ‘long-termism’ may be good but within the Single Market they are a fraud against the sacred SM freedoms.

On balance the CU/SM seems not to have been good for the UK’s economy, in terms of: growth, productivity, tariffs, exports, freedoms (services, immigration and capital), over-regulation of small business, strangulation by data protection and of financial services and agriculture, exploitation of fisheries; meanwhile our employment, research and environmental standards needed no help from the EU.

Why pay to be in something so widely unsuccessful for the UK?

[1] The Future’s Oranges

[2] Italy Missing the Target

[3] Themes-8: Economics-2

[4] Did the EU Bring Us Growth?

[5] 93-2015; EU12 cf. 8 other developed nations: those unemployed for 12 months or more 44% cf. 20% for the 8 others; for 15-24 year-olds was 24% cf 8%

[6] It’s a Rip Off

[7] Reuters 20 Nov 2017: told to a meeting of the National Industry Council in the northern Paris suburb of Bobigny.



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