EU will bend towards us in Brexit negotiations

Now the mood shifts to Brexit. Or at least that is the way the next big decision for the British people is being framed: the renegotiation of the UK relationship with the European Union and then the in/out decision before the end of 2017, maybe even next year. As George Osborne has said, the Government does have “a very clear mandate” to renegotiate the deal. So the negotiations will take place and then we will vote. Simple as that.

Except that it isn’t. The idea that there is a clear in/out choice ignores two realities. One is that our economy is and will remain closely integrated with continental Europe. That is not going to change – although physical location matters less now than it did a generation ago, and other relationships such as language and culture matter more, it is still massively important. The other is that we are already outside the EU’s most important project, the single currency. Given what has happened to the euro, and indeed is happening right now in Greece, there is a near-zero possibility of the UK ever joining it, assuming that it survives intact.

So our relationship with Europe will always be at some point along a spectrum. At the one end there would be leaving the EU but joining Norway and Switzerland in an enlarged European Free Trade Association (EFTA). At the other is remaining technically a full member of the EU though opting out of aspects that we don’t like, such as the euro. The issues are at what point along that spectrum would we feel most comfortable (which embraces whether we would be more or less prosperous), and how do we manoeuvre ourselves into that position.

The “most comfortable” question is a tricky one, for there is no clear-cut answer. Insofar as you can say anything sensible about the economic advantages and disadvantages, it would probably be easier to remain an EU member. The business community, by and large, is in favour of that. The trouble for large companies and for organisations such as the CBI is that they were almost entirely in favour of Britain joining the euro, some giving dire warnings of what would happen if we failed to join.

Thus Sir Richard Branson: “We cannot be part of the single market without being part of the single currency.” Sir Martin Sorrell, head of WPP: “If the government rules out membership of the euro… it would be damaging for British-based business.” The heads of Nissan, Toyota and Unilever also weighed in with dire warnings, and while it is mean to kick a man when he is down, this is what Nick Clegg said: “The euro, despite the foolish assumptions of many commentators… has provided great internal stability to the eurozone.”

As it turned out, we have been massively more comfortable outside the eurozone, and the credit for that should go to Sir John Major, who got the opt-out in the first place, and subsequently to Gordon Brown and Ed Balls for resisting pressure from Tony Blair to get us in. However, having been wrong about the euro does not necessarily mean business is wrong about EU membership, and while companies would live with whatever the electorate decides, if they warn that there are costs, we should at least listen. There are lots of economic studies which suggest that Brexit ranges from a sizeable minus in terms of lost growth and lower living standards, to a reasonable plus. But as we all know, economic studies are only as good as the assumptions behind them. While it may seem a weasel answer, it is that the economic consequences – and hence how we would feel as a result – are probably less important than they are flamed up to be. There may be a short-term/long-term issue here: in the short-term the economic costs of leaving would be negative, but in the long-term they would be positive. But we don’t know.

If in narrow economic terms there may not be much in it either way, so it may be in social terms. The huge social issue of course is migration, but the idea that leaving the EU would have much effect on migration is misleading for three reasons. First, only one-third of the 7.5 million migrants to the UK have come from the EU. Second, it would be hard as a member of EFTA to exclude EU citizens from coming to Britain. Switzerland has much higher levels of inward migration relative to population than we do.

That leads to the third reason. Switzerland imports labour because it is prosperous and successful. The main reason why the UK is attracting so many migrants is that it is growing more quickly than the rest of Europe. Inward migration is a function of economic success, and we would have to ask whether we really want to be less successful.

If you conclude from all this that we need to find some relationship where we can pick the things we want from Europe but reject those we don’t, the next question is how we get there.

That is what negotiations are for. The UK stance seems to be that it wants to be part of a reformed Europe, but there is a certain arrogance in assuming that Europe should reform in the direction that suits us. We may be disappointed. On the other hand, a better deal for the UK should be attainable, because it suits both sides to engineer that. Power is evenly balanced. While the UK takes only 10 per cent of EU exports and Europe accounts for nearly half of our exports, we have a substantial trade deficit with Europe: they sell more to us than we sell to them. Furthermore, it looks on the European Commission’s own projections that the UK will become the most populous European country in about 30 years’ time, and probably the largest economy. Strategically it would be bad news for the EU to lose such a member. There will be a deal.

As to whether the British electorate accepts that deal – well, there does seem to be a majority at the moment in favour of retaining EU membership, but that could change. Most comforting, though, is the notion that the British electorate never makes a mistake: somehow or other it always manages to choose the least bad of the options placed before it.