Is Leaving the EU the Solution to UK Problems? No, it is not.

There is very little that can be added to the debate "Brexit: yes or not". There has been so much shouted about it that it seems impossible to have a conversation about the topic without repeating the same things over and over again. But perhaps this is exactly the problem - both parts "in" and "out" are guilty of conducting a poor campaign and failing to provide good grounds for discussion.

I did not think to write this entry until very last minute thinking that many things have already been said and, as mentioned, I have been annoyed about the poor quality of the debate so far. But the permanent effects that this decision will have on the economic, political and social sphere of this country (and perhaps all the countries participating in the EU), made me change mind.
I am not even sure who exactly is the audience of this post - I have personally never met someone who openly declared their decision to vote leave. However, if you are still thinking, or know someone who is, here are some arguments for you to consider.

I will mainly focus on explaining - in hopefully very simple terms - why the UK is economically better off as member of the EU. There are many other historical, political and social reasons that are as important as the economic ones, and I will try to briefly mention few.

Why economically it makes sense to stay IN

As an economist, I am embarrassed about the quality of the debate carried out. It is not that many colleagues have not explained the advantages of being a member - most of the academic community have expressed their concerns on the leaving vote. However, they have failed in reaching the general public in a simple but informative way. The manipulation of statistical data to support certain statements has been the main fault in this campaign and it is something that needs to be addressed.

Here some of the facts from the leave.eu website and an (hopefully simple) explanation of why these are not facts!

• On Money matters: 

Leave campaign says:

"Leaving the EU would save the UK would save a "huge" amount of money. Not only would we save some £15.7 Billion per year on our net EU contribution; we would also be free from numerous, costly subsidies and tariffs imposed on us by the EU". 

Would the UK really save a "huge" amount of money?
Short answer no. 

But let's elaborate on this.
First, following the source used by the leave campaign, we can observe that UK net contribution to the EU was £8.5bn in 2015 (£7.1bn in 2014) and not £15.7bn. 

Second, despite how high this amount of money seems, this is a nominal figure. Politicians are lastly playing a lot with these big numbers to influence people's decisions, but we need to put this in perspective (i.e. see how this figure compares to other similar ones). For instance, UK's total managed expenditure for 2016-17 is expected to be around £772bn, which means EU contribution represents only 1.10% of UK's budget (source) and around 0.5% of UK GDP. This is important because it shows how sustainable this contribution is and how little saving this represents to the UK public finances. In addition, relative to its income, UK is the country that less contributes towards the EU (see Figure 1).  

Just to try to make this clearer, imagine three different families. All these families agree to contribute £50 to organise a big BBQ every summer. These families however have different net incomes (their earnings after tax). Family 1's income is £800 per month which means that Family 1 contributes with 2.5% of their salary. If Family 2's income is £4,000 their contribution is 0.5% of their salary while if Family 3 is the wealthiest with a monthly net income of £8,000 its contribution is only 0.25%. So, despite all of them contributing with the same amount, for some families this contribute will affect their finances more than for others - but they all enjoy the party spirit at the BBQ! 

Figure 1: UK contribution to EU as  % of income
(source: BBC)

How can we explain that despite the UK being a net contributor, it still benefits from being an EU member? 

To estimate the economic benefits for the UK from being part of the EU is not straight forward due to the numerous side-effects of being part of the EU. From the creation of the common market and up to the 2008 financial crisis, the EU was a growing economy and there was very little discussion on the benefits of being part of it. The common market provided with stability, a strong demand for domestic production, access to capital, just to mention few. 


To make this simple to understand let's go back to the BBQ party example. Imagine that soon the party becomes a music festival (some festivals started this way!). Of course, music festivals are more fun, but also become more expensive to organise and poorer families may not have enough resources to contribute the same as wealthier ones. However, they all benefit from the festival and now it also becomes a source of income (some families produce and sell beers, some families make good burgers, others make t-shirts and all sell these goods at the festival), and they all benefit from cooperating. People coming to the festival (i.e. paying a ticket to get in) enjoy the whole atmosphere and they want the music, the beer and the burgers all together. In addition, beer sellers also buy t-shirts and eat burgers, while burger makers enjoy a beer with their burger and wear the festival t-shirt (i.e. they create demand for the festival goods). This is the common market. Together, there is a greater demand that benefits all countries. It is in the interest of every country that all members enjoy a healthy economy because this creates demand for their domestic goods. In addition, this also creates synergies that make the common market more attractive to other countries. Back to the festival: each family could open a separate business selling burgers, beers and t-shirts in any high-street; however, the visitors enjoy the festival atmosphere and the fact that, with the same ticket, they can all have access to a variety of goods. The burger shop in the high street is nothing else that another burger shop which has to compete with many burger shops for customers. 


The financial crisis however evidenced some of the EU problems. The shock affected different economies in different ways and challenged the common currency. An explanation of the challenges of having a common currency without fiscal consolidation goes beyond the scope of this entry, and given that the UK is not in the Euro-zone (i.e. it did not adopt the Euro as own currency), there is little scope to explain this here. I am going to use this point however to briefly emphasise how the UK had the policy tools to face the crisis. The Bank of England did adopt an expansionary monetary policy (lowering interest rate and QE) but the UK government joined the austerity path: it voted for a decrease in public expenditure following the fear of an increasing public debt (again, based on the total nominal debt, but hopefully by now you understand that this needs to be put in perspective). Unemployment benefits, NHS, but also public libraries and public social services in general suffered a slash in their budget. Therefore, the current state of public finances has very little to do with the EU, but a lot to do with the economic policies adopted by the UK government. 





On Global Trade: 




Leave campaign says:

"Leaving the EU would give the UK the freedom to make its own global trade deals".  

What is the deal with trade?

This is not a lie per se. However, the implications of this statement are. The EU is the UK's largest trade partner. For sure the UK would be free to negotiate its own trade deals, but given the importance of the EU common market for the UK economy, it will begin by renegotiating a trade agreement with the EU in case of leaving. Would this be as advantageous as the current situation? Maybe. After all, in the same way as the EU is an important partner for the UK, the UK is for the EU. But even in the best scenario in which the UK gets free access to the common market (many have pointed out the case of Norway or Switzerland), the EU will impose certain conditions for this - one may well be the free circulation of workers (as for Norway and Switzerland). Given the role that immigration has played in this campaign, I am not sure how this will be a better deal than remaining in the EU. 

But there are not only economic costs involved in trading and the EU has not only been successful at removing tariff barriers. Non-tariff barriers to trade are as important and the EU has made continuous efforts to create a 'single market' within Europe. Border controls, rules of origins checks, differences across countries in regulations over product standards and safety are all barriers that make trade more costly and that will be difficult to address with a bilateral trade deal. 

This is a further argument of debate for the leave campaign: 

Leave campaign says:

"Leaving the EU would give the UK more global influence, not less". 

It is a struggle to see how this is possible. Larger economies tend to dominate the political and economic scenario at global level (whether this is right or wrong is a different matter, but this is the reality). The EU has achieved a significant recognition in all the political and economic spheres - beginning with trade. Being the main trade-bloc in the world, it has being able to strongly influence global trade policy. Going back to the festival example: once the festival becomes an important event, there are going to be many other organisations interested in getting involved with the festival organisation. Other beer providers for instance are going to be willing to provide better deals for the festival given the great opportunities to sell their products to a large group of festival visitors. Many organisations are going to be interested in advertising their activities at the festival due to the high visibility. So imagine if one of the families (even if this represents the largest one) decides to go alone and open a business in the high street instead. Do you think it would manage to get as good deals as it did during the festival? I do not think so. 

How does this affect us directly?

 Free trade in good and services means that UK can sell and buy products from the other EU countries. EU products are cheaper to buy in the UK (e.g. wine, cheese, white goods such as washing machines, fridges, etc) and UK products are more attractive for the other EU members (e.g. cars). 

The UK manufacturing sector is one of the most important sectors in the UK. It is an important source of employment and many jobs depend on the demand of these products. Therefore, even if the UK managed to negotiate a good trade deal with the EU (i.e. no tariff for UK exports), some of the non-tariff barriers will increase the cost of production (greater controls for the UK goods going into the EU, compliance with two regulations - UK and EU - in order to be able to access the market, etc). Another way in how the cost of production may increase is through the increase of the price of inputs in the manufacturing sector. There is a significant within-industry volume of trade between UK and EU which means that these countries exchange intermediate goods used in the production of final goods (e.g. Rolls-Royce makes engines for Airbus). Increased controls will decrease trade due to higher costs.  Increased cost of production means higher prices which will make the UK products less competitive and EU consumers may start looking for substitutes to these goods. Lower demand means that many firms may  decrease the amount of jobs created in every single year (and even reduce the number of people employed).

In addition, some firms may decide to relocate outside of UK due to the lack of access to the common market. Imagine those firms for which the main provider or buyer is in the EU, they will prefer to be under the same legislation as their main trade partners and this may mean to finally make the decision to relocate. Destroying employment sources, decreasing investments and therefore having a negative impact in the UK economy (in fact, the major UK car manufacturing industries  have shown support to remain, see here). 

Less jobs, less job creation, lower investments and higher prices for goods and services will shrink the economy and therefore affect living standards for many living in the UK.   The shrinkage of the economy will further reduce the ability of the UK to play an important role at international level, which means less global influence and not more in contrast with the Leave campaign claim.  

More on trade and some estimates of how this may affect the UK economy can be found in this report by the LSE.  

• On Redistribution:


Let me add one more thought on the economic aspects of leaving the EU. A lot has been said about the disparities between countries (e.g. UK should not subsidise Bulgaria workers) but very little has been mentioned on the inequalities within countries. This is something that has been broadly neglected by both sides of the campaign. Figure 2 shows the estimated average per capita of EU funds that the UK will receive between 2014 and 2020. According to Dunford (from the Telegraph), some regions such as Cornwall and West Wales will receive over £800 per person from the EU Structural and Investment Fund - similar to the funds received by Romania and Bulgaria. 

Figure 2: EU funds in the UK
(source: The Telegraph)

In fact, UK is not just London, and there are several parts of the country that have struggled more than others after the financial crisis (but they were already falling behind before 2008). European funds are used to support sustainable economic development and reduce disparities but this is not only valid  between countries but also within countries. The EU funds aim to give a boost to the poorest regions no matter where they are located (in richer countries rather than in poorer ones). 

I currently live in Coventry. The West Midlands is a relative poor region of the UK and while walking around this region I have been pleasantly surprised to see the projects that are being financed with the EU funds. If you are familiar with the region, The Fargo Village provides support to small businesses and artist from the area giving a more attractive environment to the community (remember the festival example? well this is very similar!). This project is partly financed by EU funds. More generally, I invite you to walk around your city (especially if you live in one of the regions in red) and notice the blue logos with the EU flag (similar to the one in Figure 3).

Figure 3: EU logo

There is no reason why the UK could not address these disparities without necessarily being part of the EU. However, the latest policy measures (such as austerity) have contributed towards the enlargement of the gap between rich and poor regions in the country. In addition, the loss of jobs projected in the case of a victory of leave over remain, will not just shrink the whole economy, but very likely will also affect these regions more than others. Back to the car industry, Jaguar-Land Rover is the main employer in Coventry and they have manifested their support for remain (see here). 

Some Other Reasons

There are many things that can (and need to) be improved in the EU. But the benefits for being on such a large community go beyond economic reasons. The European project is a dream made reality after a long period of instability in one of the most divided regions in the world. It is easy to forget the luxuries that you can afford here when you grew up and lived here for most of your life, but as foreigner one can really appreciate the progress done in the last decades by the EU. Here some further reasons to stay (and fight for always keep improving and achieve a better EU). 

• Peace  

The European Union has its origins in the European Coal and Steel Community (ECSC) established in 1951 as an attempt to prevent further war in Europe (a continent already devastated by two World Wars). The ECSC created a common market for coal and steel among its member states (six at the time: West Germany, Italy, France, Belgium, the Netherlands and Luxembourg) in order to avoid further conflicts over the Ruhr and Saar regions. The ECSC succeed in neutralising competition between European nations over natural resources. It may not seem a big deal, but think about how many wars around the world had their origins on disputes over natural resources (with some still ongoing!).

In 1960s there were the first attempts at enlargement and in 1973 Denmark, Ireland and the UK joined the European Community. In 1980s Greece, Spain and Portugal joined and today the European Union comprises 28 member states. It is the first successful attempt in the world to create an organisation among countries based on the principles of supranationalism. Despite all the failures that EU is now accused of, there is one real fact that characterises the EU: since its origins it has promoted  and achieved peace in a region that otherwise was a deadly battle camp for many years (ask some of your grandparents or great-grandparents if they are still alive) and the period of peace that we are lucky enough to live in is a great proof that the EU was a successful experiment.

• Travelling

As mentioned before, if you were born in the EU after the 1960s, you will hardly know what a visa is, how long border controls take, and in general you know very little about real limitations to your desire of visiting places.

The weekend in Italy, the holidays in Greece, camping in Cornwall, driving a car all the way to Skye Island, Christmas markets in Germany, beaches in Portugal, etc are all quite accessible once you live in the EU. Low airfares and no border controls for EU citizens make this feasible. Foreign students in UK universities are fascinated about the possibilities that their UK colleagues have to travel around. And even if you do not enjoy travelling you may understand the benefits that a booming tourism industry means for a country: job opportunities is an important one.

In addition, at university level, students enjoy an incredible opportunity to do part of their studies in another country. Besides the great opportunity that is learning another language and live abroad while you are a student, this also gives them the opportunity to create a network of contacts that turns useful once these students join the labour force.

• Migration

Of course, and I have left this for last because I really struggle to understand how the debate leave-remain has mainly being based on this, there is the migration issue that seems to dominate the debate.  I do not aim to explain in detail all the points about migration, but let just briefly explain some of the main points.

Leave campaign says:

"The UK is currently obliged to accept ALL persons entering from Europe, regardless of skill level".

The common market, also means free circulation of labour force from the EU (not from Europe!). EU migration into the UK is not new and it has been going on for over 20 years. In addition, as a series of researchers show (see some UCL research here), European migrants actually pay more in taxes than they take out in benefits which contributes to the growth of the UK's economy.

The fear of foreign workers "stealing" jobs is based on the idea that the number of jobs is fixed. Therefore it is a race between 'us' and 'them' to get the only jobs available. However this a misconception on how the labour market works. Firms are constantly creating (and destroying) jobs depending on the state of the economy. In a booming economy, firms are willing to hire more workers. Of course, when the economy is in a downturn, firms tend to stop hiring (only in more extreme cases they will fire workers) therefore decreasing the job creation rate. The financial crisis represented a downturn for the UK economy, the worst in many years.

As already mentioned, this downturn was followed by a series of austerity measures that make the situation worse, especially for the less-skilled workers due to the reduction of unemployment benefits, cuts to public services including the health system, cuts to social housing. Therefore, it is not migrant workers "putting pressure" on the system, but it is a series of policy decisions made by the government.

More than 60% of the new  EU migrants have a university degree (i.e. are not considered low-skilled workers). They work in the financial sector, in technology and other industries that constantly show a shortage of qualified workers. Therefore, it is the UK capacity to create jobs, rather than social insurance that attracts EU workers into the UK. Finally, there are so many benefits of having a diversified labour force that are difficult to account for. Several researchers demonstrate a higher productivity in multicultural environments such as the advantages of people understanding different cultures and backgrounds (and languages!) which turns out to be very useful when making a deal.


I think, I have very little to add here. I have written more than I expected and it is perhaps too late, but it is clear that I am in favour of remaining in the EU. I have tried to argument the reasons why is this the right choice while demonstrating that the arguments in favour of leaving are mostly flawed.