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How Vince Cable and David Lidington inflate the EU’s benefits

Jonathan Lindsell, 18 February 2013

For the past three weeks, Vince Cable (Business Secretary, Liberal Democrats) has been telling anyone who will listen that Cameron’s referendum pledge is a threat to the British economy. More specifically, he claims:

[A]Just under half of UK’s exports of goods and services are sold into the Single Market; [B]3.5 million British workers have jobs which depend on our ability to trade freely across the Single Market…economic studies show that the opening up of EU markets has added significantly to our economic welfare: [C] up to an estimated £3,300 per household per year over the last 20 years.

Vince Cable, 21 January 2013

Ed Davey cited extremely similar figures back in 2011:

“EU countries account for [A] half of the UK’s overall trade and foreign investments. As a result, around [B] 3.5 million jobs in the UK are linked to the export of goods and services to the EU…The single market may be responsible for income gains in the UK between 2% and 6%, that is [C] between £1,100 and £3,300 a year per British household.”

-Ed Davey MP, 18 July 2011

The same figures were wielded by David Lidington, Minister for Europe (Conservative) in this correspondence with the Bruges Group. Suspiciously similar numbers pop up all over the political world, from the parliamentary submission  of the Director of Chatham House, to a Cambridge University speech by José Manuel Barroso, President of the European Commission himself!

I call foul.

The quoted statistics arise from this 2011 Analytical Paper produced by the Department of Business, Innovation & Skills (‘BIS’) and the Department for International Development (DfID).

The issues are that 1.) The BIS/DfID paper’s figures aren’t quite the same as the claims Vince and Ed have been making, or 2.) Cameron’s plans don’t actually threaten them.

[A]  “European markets account for half of the UK’s overall trade and foreign investments…

-(BIS/DfID, p.3)

This is a quantifiable, well-referenced claim in the BIS/DfID report, and there is no problem with it. The problem is with Cable’s suggestion that the UK would forfeit some or all of this market access if Cameron renegotiated our EU membership or withdrew. As I showed earlier, this simply isn’t true, since there is such a large trade deficit between Britain and the EU-26 that free trade will be an integral part of any foreseeable outcome. A recent Civitas study confirms this, as does Roger Bootle, winner of the prestigious Wolfson Economics Prize.

Even in an absurdly unlikely worse-case scenario in which Britain leaves the EU with no ‘Free Trade Agreement’, the relationship would be subject to World Trade Organisation “Most Favoured Nation” rates, which are 0% on most commodities and would at worst only impact a few sectors. There will be no abrupt exodus of business or capital – market access and strong trade will continue.

[B]Around 3.5 million jobs in the UK are linked to the export of goods and services to the EU.” (p.3)

Jobs being linked to business which is itself linked to an unthreatened free trade does not equate to a serious menace, nor does it justify Cable’s alarmist use of the term ‘dependent’.  Such rhetoric is little better than rabble-rousing, a cynical use of the spectre of unemployment to shock the public into opposing sensible EU renegotiation. Moreover, Tim Congdon disputes the 3 million jobs claim here.

[C] “The Single Market may be responsible for income gains in the UK between 2% and 6%, that is between £1100 and £3300 a year per British household.” (p.3)

According to the OECD, a 10 percentage point increase in trade exposure is associated with a 4 per cent rise in income per capita, [therefore] increased trade with Europe since the early 80s (around +15 percentage points) may be responsible for around 6% higher income per capita in the UK. This represents £3,300 a year per British household.” (p.4)

 

There is a new layer of confusion here!

The referenced OECD formula says no such thing. In a decade-old study which has no focus on the EU or its impact, the OECD says:

An increase in trade exposure of 10 percentage points … could lead to an increase in steady-state output per capita of 4 per cent.

The Sources of Economic Growth in OECD Countries, (OECD Paris, 2003, p.88)

The authors state very clearly that, “Calculations should only be taken as broad indications” (p.87).

They do not not state, “Calculations should be applied to a totally different scenario and used as a key foundation for a G8 economy’s macroeconomic plans”.

Note: BIS and the politicians discuss ‘per household’, not ‘per capita’. Whoops.

Even assuming the resultant figures are realistic despite using an old formula for an unintended purpose, deploying ‘per capita’ estimates in this context entails a great distortion. At the best of times, looking at a country’s wealth and dividing it by the number of citizens is a blunt tool since the ‘mean’ (average) is skewed upwards in countries with high income inequality. When specifically investigating the benefits of a free trade union, this problem is amplified because the average worker in Peterborough sees little benefit from a greater ability to trade with Vienna or Budapest. The ‘winners’ of free trade arrangements are large exporters and importers, i.e. companies or wealthy individuals.

Intermediate Conclusion

Europhile politicians rely on an outdated report to justify European Union membership on economic grounds. The BIS/DfID report misquotes an imprecise OECD formula, applies it to a data set it was never intended for, and concludes with a sensationalist headline figure that might as well have been invented.

 

‘Gross’ Deception

If you aren’t yet convinced, consider this. All the statistics Vince and Ed have thrown at us are ‘gross’ figures – that is, they only show the positives. Surely, in a debate over our country’s economic future, it’s intellectually insincere to casually neglect mention of publicly-available figures such as the UK’s contribution to the EU budget?

In reality, Vince should be giving us a ‘net’ figure which accounts for the costs, not just the benefits. EU membership is not free – far from it.

Estimating Britain’s recent direct budgetary contributions is difficult, so here is a range of opinions:

–          Dr Lee Rotherham of The TaxPayers Alliance calculates the UK’s net contribution in 2010-2011 was £8.3 billion (i.e. after rebate, CAP contributions, structural funding etc. has been deducted).

–          UKIP MEP, Gerrard Batten, similarly shows that Britain’s annual contribution to the EU Budget for 2010 was £15.3 billion gross or £6.9 billion net, using government ‘Pink Book’ statistics (p.22).

–          Dr Tim Congdon’s report uses Treasury EU Finances figures (p.12) to arrive at £15.6 billion gross and £8.1 billion net for 2010-11. This represents 1.1% gross or 0.6% net of UK GDP.

–          Even the Centre for European Reform, a broadly ‘Europhile’ think tank, estimates that the UK’s 2012 net contribution was £7.4 billion.

 

These are only the direct, tangible costs that we explicitly know the UK pays to Brussels each year. They are far more concrete figures than the flawed government estimates of the EU’s economic effect.

Some would go much further in highlighting the EU’s economic ‘cons’. For example, Lord Mandelson, a German EU Commissioner, and the Dutch Finance Minister have all estimated that EU regulation costs 3.5-5.5% of GDP – a greater figure than Cable’s ‘pros’! Add to that the wasteful Common Agricultural Policy, which drives up domestic food prices, and your ‘EU balance sheet’ starts to look extremely lopsided.

Such a cost-benefit analysis would require more space than one blog post. For now, we may simply conclude that the government’s shoe-in statistics for trumpeting the EU cause are ill-thought out, poorly calculated, inaccurate hot air.

For more of our work on Britain and Europe, including books, research papers and objective teaching materials for use in schools, visit here.

 

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