8 February 2017

Economic war between the UK and EU is in no one’s interest


Later today, the House of Commons will vote to approve the European Union (Notification of Withdrawal) Bill 2016-17. Once it obtains Royal Assent, the Prime Minister will invoke Article 50 – and even the diehard Remainers will have to accept that it is no longer a question of whether we leave the EU, but how.

Already, many people on both sides are getting very steamed up about the prospects of a deal. Many Brexiteers think that a good arrangement can be arrived at without much fuss. But Remainers are equally worried that the EU will become nasty and belligerent in its dealings with the UK. People are obsessing about words and phrases: the “single market”, “hard Brexit”, “soft Brexit”, and so forth. There is lots of chatter about tariffs, and punitive measures.

It is easy to get excited about words, but we often forget the actual substance of what is going on.

The fundamental truth is the UK and the EU have large mutual interests. Both are, in their own way, substantial economic units.

While it is true that the EU contains 27 countries, and the UK is a single nation state, the UK’s share of EU GDP is about one sixth of the whole. The notion that the EU will be irrational enough to wage a war against an economy as large as the UK is difficult to believe.

The UK was also the second largest contributor to the EU’s budget, giving €10 billion a year on a net basis. Only Germany contributed more. If you have a person, or a corporate body, who is your second largest donor, it’s clear that they will have a degree of influence over you.

In addition to the UK’s budget contribution, there is of course the issue of the trade flows themselves. The UK currently runs an annual trade deficit of around £90 billion with the EU. This means that European businesses benefit hugely from the UK’s market. They will want this arrangement to continue.

Today, the British market is a huge boon to the EU. German exporters derive enormous benefit from the ever-present appetites of British consumers. British finance also supports businesses all across Europe.

At the beginning of February, the German finance minister, Wolfgang Schauble, told the Tagesspiegel newspaper that “London offers a quality of financial services that are not to be found on the continent”. Herr Schauble also said that “we have to find reasonable rules here with Britain”.

It is quite common, before negotiations, for both parties to indulge in sabre-rattling. Like boxers preening themselves and playing to the gallery before a fight, some EU leaders have sworn that they will play tough with Britain. It is quite likely that the Germans will insist that cooler heads prevail.

The EU and the UK will have extensive relations long into the future, just as we have in the past. As the MP for Spelthorne, which encompasses Staines upon Thames, I am particularly proud of the fact that one of our earliest treaties with France began in Staines on September 6, 1217. This treaty, as with most arrangements, combined economic and political provisions.

One of our first treaties with towns in Germany was concluded in 1474. This Treaty of Utrecht ended a trade war which had been raging between the Hanseatic League and England for six years. Visitors to King’s Lynn are still able to see the Hanseatic warehouse, established by the treaty, which allowed cities like Hamburg and Luebeck to establish a trading depot in England. By 1500, there were around 40 German merchants based in King’s Lynn, and the warehouse was in use for nearly 300 years.

The point of all this history isn’t just to indulge in some quaint trip down memory lane. It simply makes the point that Britain’s trading links with Europe did not start with our accession to the EEC in 1973, nor will they end when we leave the EU in 2019.

If English people in the Middle Ages were sufficiently astute to forge trading links with people on the Continent, there is no reason why we cannot reach trade agreements quickly in the 21st century.

Some of my fellow Brexiteers are deluding themselves if they think leaving the EU will solve all our problems.

Our economic challenges will be tackled by good policies – secure property rights, a taxation system that encourages people to invest and work, and a decent education system.

Yet on the other side, the hype around the single market and its virtues, plays into the hands of those politicians who still think we were fools to leave the EU.

The single market itself, far from being a fabled Utopia of economic success, faces serious dangers. The single currency that was supposed to be its crowning achievement is in crisis. Only this week, the IMF warned that Greece’s debt is on an “explosive” path, despite years of attempted austerity and economic reforms. Unemployment in southern Europe remains stubbornly high, with levels of youth unemployment in Greece and Spain at over 40 per cent.

Many illusions will be dispelled in the course of our negotiations to leave the EU. The first of these is the idea that the single market is an economic nirvana, from which it would be disastrous to depart.

The second myth is that leaving the single market means we will have no trading relationship with the EU. We had trading relations with European countries for centuries, before the EU was even thought of. We will continue to trade successfully, and profitably, with our friends in Europe.

The third myth is that being part of the single market in itself is a path to prosperity. If we just look around at some of the economic devastation inflicted on Greece and Spain in the past few years, we can see that mere membership of the single market is not a golden ticket to economic success.

The strong relationship between the UK and the EU will not end after our departure.  Both the UK and the EU will remain strong players on the international economic scene. Both are important pillars of the international political order. We can work together to promote shared values of democracy and tolerance.

As Wordsworth wrote two centuries ago about Switzerland, a country – like ourselves – outside the EU:

Two Voices are there; one is of the sea,
One of the mountains; each a mighty Voice.

Kwasi Kwarteng is MP for Spelthorne and author of 'Thatcher's Trial: Six Months that Defined a Leader' (Bloomsbury)