The diminishing importance of Europe to the UK

Foreign Affairs & Security
Saturday, September 29, 2012
Dan Hannan MEP

There is usually a time lag in politics. Pundits carry on citing obsolete statistics for years. Even when they catch up with the facts, they are slow to adjust their world-view to them.

How often, for example, do you hear politicians and journalists claiming that ‘half our exports’ – or even ‘the majority of our exports’ – go to the EU?

I’m not sure this statistic was ever properly true. The data were distorted in two ways. First, there is what economists call the ‘Rotterdam effect’: many British exports destined for non-EU markets are routed through Antwerp and Rotterdam, thus showing up in the raw numbers as exports to the EU. Second, ‘UK exports to the Republic of Ireland’ in reality include many goods from overseas that have been shipped through Belfast.

Be that as it may, the EU now accounts, on any measure, for a minority of our trade. The Treasury Pink Book, the OECD, the European Commission: all now put the figure at below 50 per cent. The latest official figures as I write, published by the Office of National Statistics on 11 September, show that the EU now accounts for 43.6 per cent of our exports, the lowest share since the current measure was introduced in 1988.

Never mind a percentage point here or there, though. The trend is unarguable. Every continent in the world is growing except Europe. Our exports to the EU fell by 7.3 per cent in the last three months for which we have data, while our exports to the rest of the world rose by 12.8 per cent.

Where are these facts reflected in official thinking? For most of the establishment, our membership of the EU is a datum, a fact around which other policies must be fitted. The main parties, together with the TUC, the CBI and the BBC, are so used to citing the economic indispensability of EU membership that they no longer pause to question their assumption.

Like most legacy policies, EU membership once had a rationale. In the early 1970s, when we launched our third application – the one that would eventually succeed – the EEC did indeed seem an attractive prospect. Between 1945 and 1974, Western Europe had outperformed, not just Britain and her Commonwealth, but also the United States.

In retrospect, we can see why this was. The Second World War had destroyed Europe’s infrastructure, but left in place an industrious and educated workforce, restless to begin the task of reconstruction. There was, for the first time, mass immigration – within countries, as people moved from the country to the towns, from the Mediterranean littoral to the coalfields and steelworks of the north, and from former colonies beyond Europe. Europe also benefited from $12 billion in Marshall Aid, which came on top of the $13 billion disbursed between 1948 and 1952, and from the US military guarantee, which freed up defence budgets for civil use.

All this, as I say, is clear in retrospect. It wasn’t clear at the time. British observers couldn’t understand why they were being outperformed by nations that had suffered so much more badly than they had between 1940 and 1945. They didn’t see that they had finished the war with an unbearable debt burden, far greater than any of their neighbours’. They never grasped that the willingness of successive governments to inflate away that debt eroded our competitiveness and productivity, so causing the ‘British disease’. Instead, they assumed that the reason the clever Continentals were doing so well was because of the Common Market.

In the event, Britain’s timing could hardly have been worse. We joined the EEC in 1973, at the very end of Europe’s Wirtschaftswunder. The growth spurt came to a halt in 1974 with the oil shock, and never properly got going again. In 1973, the year we joined, Western Europe (defined for these purposes as the 15 member states of the EU prior to the 2004 enlargement round) accounted for 38 per cent of world DGP. Today, that figure is 24 per cent, and in 2020 it will be 15 per cent.

It’s not just that developing countries grow faster than industrialised ones. The EU has also been comprehensively outperformed by the United States and by what we used to call the Old Dominions.

Look at the graphs below, compiled by World Economics. The first two contrast the growth rates of the EU and the Commonwealth since Britain joined (in all cases, the UK is excluded from the figures). Ouch. The third and fourth, though, are the real kickers. They contrast the share of world GDP of the Commonwealth with, respectively, the original members of the EEC and the current members of the eurozone:

In June 2012, the Commonwealth’s economy overtook the eurozone's. According to the IMF, the countries within the single currency will grow at an average of 2.7 per cent over the next five years – which strikes me as optimistic – while the Commonwealth surges ahead at 7.3 per cent.

These figures destroy the premise on which we joined. Our trade has been redirected, by government intervention, away from the markets to which we are connected by language and law, habit and sentiment; markets which, unlike those in the EU, are growing.

It never made much sense to join a customs union with similar industrialised economies at the expense of the raw producers of the Commonwealth: the whole point of a market, after all, is to swap on the back of differences. But the latest figures are spelling out quite how wrongheaded our choice was.

I’m not denying that Europe matters: for all that it is shrinking, 43.6 per cent is an extremely hefty share. But the EU is becoming simply one among many of our markets, alongside NAFTA, Mercosur and so on. ANo one argues that we need to merge our political institutions with theirs so as to be able to sell to them.

Consider Switzerland. The Swiss declined to join the EU, instead negotiating a series of sectoral trade accords covering everything from fish farming to the permitted size of lorries. As a result, they are fully covered by the four freedoms of the single market – free movement, that is, of goods, services, people and capital – but are outside the CAP and CFP, free to determine their own human rights issues, and spared the budget contributions which EU members are required to make to Brussels.

Has their trade to the EU suffered in consequence? Hardly. In 2011, their exports to the EU were, in per capita terms, 450 per cent of Britain’s. Let me repeat that astonishing fact. Switzerland sells four-and-a-half times as much per head to the EU from outside as we do from inside. It’s true, of course, that Swiss exporters must meet EU standards when exporting to the EU, just as they must meet Japanese standards when selling to Japan. But, critically, they don’t allow the EU to dictate their trading arrangements with third countries.

Although Switzerland tends to replicate most EU trade accords with third countries, it can and does go further when it feels that the EU has been unduly protectionist. It has signed a free trade agreement with Canada, for example, and is in the middle of negotiating one with China. Britain, by contrast, is often dragged into trade disputes in order to protect the interests of some cosseted continental producer.

The Common External Tariff, which the UK must apply to its trade with non-EU states, now averages between five and nine per cent – a higher barrier than we had the 1920s. We have, in other words, bought trade with a dwindling European market at the expense of trade with a growing global market.

People sometimes ask me what kind of renegotiation I’d be happy with. If I had to identify a single test, it would be this. Would the United Kingdom be able independently to sign a trade deal with, say, Australia? Grant that, and much follows. Deny it, and we condemn ourselves to decline.

Daniel Hannan is a Conservative MEP for South East England and blogs at