Should the UK leave the European Union?

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Returning from high-level trips from the continent, British Prime Minister David Cameron proudly boasted that the U.K. can celebrate for having forced its EU partners to steer Europe’s future not towards a U.S.-style federation of states but more of just a loose free trade area for 27 sovereign economies.  As such, according to Cameron, the U.K.’s future is with the EU rather than outside of it as, as he correctly pointed out, the U.K. economy has more to lose than gain by leaving the EU.  For one, no international banks would want to locate their European headquarters in the City of London and the U.K.’s financial industry will suffer grievous loss in the short to medium term.  Granted, the question is not whether the U.K. should or should not stay with the EU, but rather whether there is any logic to say that the U.K. will want to stay in Europe for the long term; if there is no future to stay, why not just exit now?

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Here are several factors to consider.

ECONOMIC SOVEREIGNTY.  At the time when the U.K. joined the Exchange Rate Mechanism in 1990, it was experiencing a high domestic inflation rate and the government thought that joining the ERM would force the Bank of England to raise interest rate in order to keep the sterling within the allowable 6 per cent fluctuation against the strong Deutschmark.  The high interest rate in turn brought the U.K.’s inflation rate down to a more acceptable level.  However, once inflation was under control, the government turned its attention back to economic growth and the high interest rate continually required to maintain the sterling’s position against the Deutschmark didn’t help, so the U.K. exited the ERM in 1992 after only two years.  Thus, clearly as the economic interest of the U.K. did not and will not match those of other countries (not only of its EU partners) this is why the U.K. prefers to keep its critical autonomy in fiscal and monetary policy-making.  As there is little point in pretending that the situation will ever change, this is enough proof that anything more than a loose free trade agreement with a trading partner (such as an ever closer union) is not acceptable to the British public.

UNITY CONCEPT.  European Union and the Eurozone were jointly hatched in France and Germany, whose main objectives respectively were (for France) to guide the international relations of Germany and (for Germany) to eliminate all economic competition inside Europe.  It is the German objective that is significant for the U.K. for this determines who ultimately has the final say on what goes on in the EU and Eurozone.  It is common knowledge that Germany had never been comfortable with the competitive production cost base of the southern EU member states such as Spain, Italy, France, Portugal and Greece; as such, it sees that creating a level playing field by eliminating the undervalued currencies of the southern economies would give an advantage for German industry.  Most southern economies did not object as they never truly had globally competitive industries anyway, and Eurozone membership promised them net gains in regional development funds.  France went along with the common currency idea as it already benefitted with net gains of funds from the EU Common Agricultural Policy.  French and German finances flowed into the construction industry of the southern economies which created the inevitable real estate bubbles, but both sides didn’t mind at all.  Now that the Eurozone north and south are inextricably and financially inter-dependent, that it would simply be socially disastrous for any of them to leave the Eurozone whenever there is a crisis.  It is only a matter of time that once they are tied together through a common currency, the only option forward is an ever closer union of their banking system, and eventually also of their fiscal policies and legislative functions.  Eventually, there won’t be any more sovereign national parliaments or governments within the Eurozone; it will be a federal Europe like the United States today.  Given this perspective, David Cameron’s longer term plan of driving EU policies the U.K. way seems lofty and unrealistic.

There is a very good case to support David Cameron’s Stay campaign and reject the Leave campaign.  But realistically the U.K. will not be expected to stay in the long term as firstly, it simply does not have the final say in EU matters and secondly, the U.K. has sufficiently distinctive legal, political and cultural differences with the continent that makes it want to retain them at any cost.  Those are the push out factors.  As for the pull out factors, the bigger and greener pastures of the U.S., Japan and the global economy in general will more than compensate the U.K. for any economic loss should it one day sever its union with Europe.  From these perspectives, for the immediate to medium term, the UK should stay in the EU to save its financial industry.  But for the long term however, the UK should think ahead for the inevitable eventuality of it having to leave a Germany-dominated federated state of Europe, and begin now to cultivate its own free trade deals globally, the EU as well other major economic blocs like NAFTA and ASEAN.

Comments welcomed.