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Why Labour is right to commit to ending membership of the EU internal market

 

After the transition period Labour is committed to the UK ending its membership of the EU single market. Some very talented, thoughtful, intelligent and well respected MPs along with many other leading figures in our party and wider movement would like to overturn this, but on balance we think they are mistaken in pursuing that course - for reasons we will outline here.

Democracy and Sovereignty

Accepting and implementing laws we have had no say on is completely undemocratic so for this reason above all, staying members of the EU’s internal market is not a credible policy for any democratic socialist party.

In democratic terms remaining members of the single market precisely inverts the very reasons given for why voters supported the UK ending its membership of the EU.

The primary reason leave supporting Labour voters gave for voting to leave the EU was the basic assertion of the democratic principle of national subsidiarity: that laws and decisions about the UK should be taken and – crucially - made from within the UK. During the referendum campaign remainers argued that leaving the EU formally whilst staying members of the single market would be the ‘worst of all worlds’. On this (if on little else) leavers and remainers agreed. It would be democratically untenable for us to be permanently in a position of ‘law taker’ whilst simultaneously losing what limited influence we did have on EU directives, decisions and regulations.

Given that the main reason Labour voters (and likewise all leave voters) gave for voting to leave the EU was to regain lawmaking powers and that remaining in the EU would mean having little choice over such powers, the argument that we should commit to an ongoing situation where we have no say at all on decisions we would have to implement, is profoundly undemocratic as well as logically flawed. It is simply invalid to suggest that this ‘vassal state’ scenario on a permanent basis would somehow authentically respect the referendum result.

As Jeremy Corbyn has clearly stated ‘Labour would not countenance a deal that left Britain as a passive recipient of rules decided elsewhere by others. That would mean ending up as mere rule takers.’

Controls on Immigration

Not being able to develop our own immigration policy for inward migration from the EU, including policies suggested by Labour MPs that campaigned strongly for remain, is not credible or consistent with the referendum result.

The second main reason given by Labour voters who supported leave, was that it offered the best chance of regaining control of our immigration policy.  

Jack Straw, Labour’s former Home Secretary no less, conceded in 2013:

One spectacular mistake in which I participated was in lifting the transitional restrictions on the Eastern European states like Poland and Hungary which joined the EU in mid-2004. Other existing EU members, notably France and Germany, decided to stick to the general rule which prevented migrants from these new states from working until 2011. But we thought that it would be good for Britain if these folk could come and work here from 2004.

Thorough research by the Home Office suggested that the impact of this benevolence would in any event be 'relatively small, at between 5,000 and 13,000 immigrants per year up to 2010'. Events proved these forecasts worthless. Net migration reached close to a quarter of a million at its peak in 2010. Lots of red faces, mine included.

Whilst it is true to say that as members of the EU the UK could have implemented temporary limits on the free inward migration from EU accession countries during the available transition periods, by their very nature these limits expire. For instance any restrictions on Bulgaria and Romania had to be lifted by 2014. Furthermore it is notable that none of those who now advocate remaining within the internal market were at the forefront of arguing for implementation of such temporary limits at the time and, if anything, have typically had deep anxieties about Labour adopting any policy that brought in controls on EU inward migration from new member states.

 

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In an interview last year our Deputy Leader Tom Watson made the observation that:

I think you can actually say London requires more liberal immigration policies but there are other parts of the country where immigration may be putting pressure on public services like schools and hospitals. That’s why I think when we come out of the EU we can have an immigration policy that maybe addresses both those issues.

Shortly after the referendum Stephen Kinnock MP suggested in an eminently reasonable and well argued article that Labour should continue to take a principled pro-immigration stance but that a new approach to managing migration is required:

The starting point must be to view our core values through the prism of immigration, and to conclude that immigration itself is not a leftwing value. I am resolutely pro-immigration, yet I don’t see immigration as a value; I see it as a social and economic dynamic. The difference is vital. Being pro-immigration means making it an economic, social and political success in the long term: as much immigration as is possible and sustainable, limited only by our ability to create the environment for all of Britain to thrive and feel valued.

The referendum had a clear message: the limitless nature of freedom of movement, despite its proven economic benefits, is not socially and politically sustainable. That’s why opposing freedom of movement isn’t the same as opposing immigration. Two key values of the society we must build are openness and non-racism. These values aren’t defined by the number of immigrants, but by the quality of experience every person has of this country.

It is abundantly obvious that even such carefully considered policy developments, fully consistent with the traditions and values of our party, would simply not be possible from within the single market. The futility of pursuing such an outcome alongside continued membership of the EU’s internal market is demonstrated by the impossibility of even gaining the minor concession that those who arrive during the transition period will not automatically gain the same rights as those who moved here before we formally leave.

Quite how we are supposed to retain full membership of the EU single market and persuade resolute EU Commission negotiators that the UK alone can permanently depart from the core principle of free movement of migration remains a mystery.

Economic Growth

Despite renewed and less cataclysmic predictions of consequent falls in economic growth if we do not continue membership of the EU internal market, versions of ‘project fear’ redux still lack credibility. Our ability to end austerity, grow real wages and improve GDP per person depends largely on genuine improvements in productivity and rebalancing the economy, not on prioritising trade with our European neighbours over a fast growing economy outside the EU.

It is asserted by Labour advocates of staying within the internal market, occasionally in even more dire and dramatic terminology than was used during the referendum, that so terrible will be our economic predicament if we don’t continue membership of the EU’s single market that a future Labour government won’t be able to fund anti-austerity, that there would be a multi-billion pound shortfall in public finances meaning less money available for public services.

Whilst well intentioned, this outlook is somewhat outdated and on balance flawed for several reasons.

In the first place, however surprisingly, there is little if any definitive evidence that membership of the single market has led to increased annual GDP growth in the UK. In fact it is a persistent and widely repeated myth that the economic performance of the UK improved after joining the EEC in 1973. Furthermore in the 25 years since completion of the single market from 1992 to 2016 the average annual UK GDP growth rate was actually lower than in the previous 25 year period.   

1967-1991


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1992-2016


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As you can see, prior to 1992 UK growth mainly fluctuated between 0-2% but since has tended to fluctuate between 0-1%. To be fair the decline is marginal with the average growth for the former 25 years being 2.5% and 2.2% in the latter 25 years. However you might think that, had our membership of the single market been such an unmitigated boon to our economy, you would at least see some overall improvement in the average GDP growth rate since the single market was introduced.

The second point is that the recently leaked Treasury papers suggesting that leaving the EU will reduce our economic growth are flawed for sound economic reasons. As Larry Elliott the Guardian’s economics editor has pointed out - GDP on its own is not a particularly good measure of how the economy is doing overall - the predictions are based on flawed methodology including some highly implausible assumptions - and the short term predictions the Treasury gave during the referendum (along with many professional economists) have been demonstrated as comprehensively inaccurate, meaning that longer term predictions of dire economic outcomes, if anything, have even less credibility.

Indeed virtually all economic forecasts made by major economic institutions since the referendum result have also been shown to be wrong (albeit with far smaller errors) with the UK economy typically outperforming the predicted growth rate.

The severe inaccuracy of George Osborne’s ‘Project Fear’ predictions and the shortcomings of international agency assessments are critically evaluated in ‘How the Economics Profession Got it Wrong on Brexit’ by the Centre for Business Research, at the University of Cambridge. The non-partisan working paper by a team of economists, all except one of whom voted remain in the 2016 referendum and who ‘would do so again if given the chance’, is a must read for professional economists and economic students alike. Whilst a full outline of their report is not appropriate here, in summary  the Treasury was ‘particularly cavalier in its approach, both in its application of gravity analysis and in applying a ‘knock-on’ impact from trade to productivity’. To put it bluntly George Osborne’s Treasury gave a distorted economic outlook of a vote to leave the EU by engaging in unjustified exaggerations of those factors likely to suppress economic growth and simultaneously played down and even ignored those factors likely to enhance economic growth. The unscrupulous, if not duplicitous, approach taken with gravity models is a particularly glaring example of a deeply flawed manipulation of an otherwise reasonably sound economic theory. For example George Osborne’s Treasury simply ignored the fact that, aside from Malta, the UK is the only EU member state that exports more outside the EU that it does to other EU member states. It is a shame and a frustration when leading figures on the left quote ongoing Treasury assessments with approval when it is fairly clear that such classic Whitehall mandarin sleight of hand is still being deployed. The report Commissioned by Sadiq Khan (more on which later) is far more reliable than anything coming out of Philip Hammond’s Treasury.  

For those less familiar with econometrics, one of the working paper’s authors Dr Graham Gudgin, Research Associate at the Centre For Business Research, Judge Business School, University of Cambridge, and Labour voter also gives assessments of more recent economic forecasting and how these are presented in the media comprehensively here and briefly here.  

Returning to the historical context we can look at the key periods for the UK economy in the last 50 or so years using GDP per capita.

1963-1983

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As you can see from the above graph, in the ten years prior to joining the EEC 1973 compared to the ten years following there is no discernible improvement in the rate of performance of the economy. Overall GDP per capita in both decades increased but if anything by discernibly less in 1973-83.

1973-2013

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In the 40 year period since joining the EEC, comparing the two 20 year periods before and after the completion of the single market (although critically not in services - more on which later), we can see a slight improvement in the rate of growth of GDP per capita in the second 20 years. This correlation might indicate that membership of the single market did help our economy but, as we know, correlation does not equal causation and the primary cause of the slightly faster growth in per capita GDP is more likely to have been caused by the overall growth in the global economy. We can see this by comparing the UK with our two largest trading partners using the measure of standard of living: GDP per capita PPP (Purchasing Power Parity) for the maximum period for which these statistics are available.

1990-2017

 

USA

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Germany

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UK

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What can be gleaned from this comparison is that, from the western world recession of 1990-92 until 2000-2002 when the dot com bubble burst, the UK economy performed well overall, as did our trading partners both inside and outside the EU, and over the whole period of 1990-2016 if anything the UK is more closely correlated to the US economy than to Germany’s.  

Via Trading Economics you can make similar comparisons between Canada and France or look at the Netherlands and Australia, or Spain, and New Zealand. There are certain distinctions but broadly the pattern is the same for almost all so-called ‘Western’ economies, a sustained period of economic growth between late 1992 and 2007, and critically there was strong growth regardless of whether the country was a member of the EU single market or not.

What all these statistics clearly show, and frankly most serious unbiased economic analysis demonstrates, is that the UK’s economic performance is closely reflective of the global economic situation with no discernible indication that our membership of the single market has had a substantial or even marginal beneficial (or indeed detrimental) effect.

That is not to say that Labour Leave disagrees with promoting free trade, far from it. This is why long standing party member, Labour Leave supporter and Professor of Industrial Economics, David Paton, has recently published a pamphlet The Left Wing Case for Free Trade with a foreword from Labour MP Graham Stringer.  One of the clear flaws in all the predictions of poor economic growth for the UK outside membership of the EU internal market is the assumption that any loss in trade will greatly outweigh any gains in trade we make through promotion of free trade with the rest of the world outside the internal market’s customs union. It is worth reflecting that a Customs Union makes it easier to trade with those countries within it but at the cost of making it more difficult to trade with those countries outside.

However when we look at our balance of trade we are in surplus in both goods and services with the rest of the world outside the EU and in services with the EU, and yet in the one area where the single market has been fully completed, namely in goods, we are in deficit. In fact, with the exception of Ireland, our trade deficit in goods with the EU almost entirely accounts for our overall trade deficit globally. To repeat for the sake of emphasis: our overall balance of trade deficit is mainly due to the one area where we have a completed single market with the EU. In other words our trade deficit in goods with the EU is so substantial that it not only outweighs our large surplus with the EU in services but outweighs our overall surplus in both goods and services with the rest of the world. This is despite the fact that the EU represents considerably less than half our overall international trade.

Secondly, as the EU itself envisages, 90% of all economic growth in the coming years is going to come from outside the EU. Even taking into account gravity modelling, misused by those predicting catastrophe, it makes very little sense to prioritise EU trade over the rest of the world by shackling us in membership of either the single market or, frankly, the customs union, which would disable us from negotiating lower and zero tariff barriers where appropriate with the rest of the world where we are in a trade surplus, and which accounts for at least 56% of our existing trade (and is the likely source of 90% of global growth). The point is emphasised by the following graph.

 

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Growth gains from immigration   

In ‘Preparing for Brexit’, the sensible economic report commissioned by the current Labour Mayor of London Sadiq Khan for the Greater London Authority and carried out by economic consultants Cambridge Econometrics, several future scenarios are considered including a ‘remain’ baseline. The worst case envisaged, falling back on WTO rules in 2019, the predicted loss in GVA (Gross Value-Added - similar to GDP, but excludes indirect taxes like VAT) would be 3% by 2030.

However what is notable is that any envisaged slower growth in Sadiq Khan’s report is mainly based on a reduction in working-age inward EU migration. But as already mentioned increases in GDP via increases in working age population do not per se improve overall standard of living. GDP, although a vital measure, does not on its own give a complete picture of how an economy is doing.

That a country can increase its GDP just by increasing its working population does not tell you a great deal, but it might give a clue as to what some supporters of the single market are really thinking. Perhaps they see the increased working population that continued freedom of movement will bring as increasing our GDP and thus raising more revenue to spend on public services. This is problematic because, as we explored in our previous paper, increases in population can be too rapid for the much needed corresponding increase in capacity of public services, perhaps less obviously with health but more clearly in schools, transport and housing. That is probably one reason why, although freedom of movement may well have bolstered GDP overall, for many this did not in itself lead to a wider sense that we had an equivalent improvement in our overall standard of living, especially after the economic crash of 2008.   

Rather oddly the Mayor of London’s report doesn’t include the best case scenario of a two year transition and then a Canada-style free-trade agreement augmented for financial services, much of which the EU has already agreed to. However even assuming falling back on WTO rules after a two year transition, by factoring in the impact of immigration on population the reduction in per capita GVA, would only be 0.5% by 2030, and presumably even less with a free trade agreement in place after the transition. In these scenarios such reductions are well within margins of error over such a long period and would therefore likely involve little or no discernible change in standard of living compared to the report’s ‘remain’ baseline.

The Euro

Another reason why the case for our continued membership of the single market makes little sense is the Euro and the ongoing problems it causes. Whilst those arguing for retained single market membership rightly point out that this would not entail having to abolish Sterling and becoming part of the Eurozone, the implicit underlying assumption, that the existence of the Euro won’t impact us, is at best doubtful. As we explained previously, the austerity the EU imposed upon Southern Europe has been greatly exacerbated by membership of the Euro, so it is hardly surprising that the EU expects itself to account for only 10% of global growth. So whilst the cyclical upturn from within the Eurozone is long overdue, and this will help improve UK exports to the EU, the grave structural problems with monetary union are likely to remain or worsen over time. Prioritising trade with an EU dominated by the ongoing problems of the Euro makes little sense even though the Eurozone is currently experiencing a very welcome, albeit partial, economic recovery.    

SMEs and Big Business

In the run up to the referendum in January 2016, YouGov polling found that of the CEOs of large businesses as much as 93% of them backed remain, whilst for the owners of SMEs the same figure was as low as 47%, and the same polling found that ‘the smaller the company, the less likely they are to support continued membership’ of the EU. In January this year (2018) YouGov polling, whilst giving a mixed picture, also found that a ‘majority of Britain’s midsized companies want the country to leave the EU single market and the customs union’.

Clearly, whatever else you might say, it is undeniable that small and medium sized firms are considerably more Eurosceptic than their big business counterparts. This is understandable for very good reasons. Putting the question the other way: why did remaining in the EU apparently reach over 90% support among big business leaders while the picture with their small and medium sized counterparts is far more balanced and reflective of the country at large?

Firstly, small and medium sized firms are more nimble and better equipped to adapt to changing circumstances whereas big business is slower and less able to react quickly to change. However, what is arguably more important for smaller firms, especially market entrants, is the lobbying capture of the EU by big business.

This is not the place to get into a detailed analysis of big business corporate capture, or ‘oligarchic capture’ of the key EU institutions - readers who are interested can explore information about the nature of EU corporate lobbying at the Corporate Europe Observatory, and read a lengthy explanation of oligarchic capture at Open Democracy. In short, large global businesses are far better equipped and resourced in lobbying at the EU level and it is in their interests to make EU rules and regulations suit their business model. Contrary to what one might expect, this often involves endorsing and encouraging complex regulations which, due to economies of scale, are easier for larger businesses to manage and their implementation is predictable within the time frame those larger businesses need. The intention of such regulations is often to prevent competition from new smaller market entrants who would otherwise be able to give their larger counterparts more vigorous competition.     

Further to this it is necessary to recognise how single market regulations are in violation of economic subsidiarity, which discriminates against SMEs. Smaller firms in particular may export very little into the EU single market, or not at all, yet everything they produce must comply with 100% of EU regulations. No wonder YouGov found that ‘the smaller the company, the less likely they are to support continued membership’ of the EU.

This perspective is often characterised by Labour advocates of continuing single market membership as a ‘race to the bottom’ on workers’ rights, but as Open Britain and the Labour Campaign for the Single Market have already conceded ‘in many areas, current standards of UK rights are higher than the EU requirements’. One just has to imagine the Labour movement’s response, were a Tory government even to consider reducing workers’ rights just to the legal minimums required by the EU, to realise that such a caricature is somewhat absurd, and certainly has no credibility with the millions of trade union members who voted leave, often against the advice of their leadership.    

It is also crucial to note that, as the much respected House of Commons Library indicates, small and medium sized firms (micro, small and medium) together account for 99.9% of all UK businesses, 52% of the turnover, and 60% of UK employment. Lastly, as these statistics indicate, large companies are typically not based in the UK and are therefore much less swayed by our domestic interests. In fact only 8% of UK based companies export to the EU. These represent 12% of our economy and of course should be listened to, but they should not crowd out those UK based business voices, in the majority, who want to leave membership of the single market. What is discouraging is how small and medium sized firms, regularly described as the engine of our economy, are routinely ignored by the media and much of the political establishment. That their view has apparently also escaped the attention of many in the Labour movement is disappointing to say the least.

Rebalancing the Economy

As we have seen, for the first 10 years of the Blair-Brown Labour Government we had clear economic growth fostered by a relatively benign global economic situation – which continued despite the rise of Islamist terrorism and the instability of the ensuing global conflicts in which we were involved.

Rightly, much of the tax revenue that this growth helped secure was spent on bringing our NHS and schools up to a decent 21st century standard.  Once much less favourable global economic circumstances arose, however, this model of managing our finances without bringing in any underlying radical transformative changes to re-balance the economy meant that the support of those who the Labour party needs to hold a governing majority quickly evaporated (and that is after the 4 million or so votes we lost between 1997-2005). Furthermore parts of the country that had seen little improvement over the growth years felt even more abandoned. That 13 years of Labour government left many poor communities feeling economically more or less just as they were, or worse, than when we came into government, neatly demonstrates that a model based on artificially boosting GDP through large scale immigration and spreading redistribution via tax credits and other measures cannot be the extent of our radicalism in future. Even the GDP per person statistics disguise the horrendous imbalances in the distribution of productive industries, incomes and asset wealth across Britain.

As Jon Cruddas MP put it in a speech in 2013:

For me, thirteen years of Labour Government made Britain a better place. Hospitals and schools rebuilt; millions of children lifted out of poverty. But in 2010 we suffered arguably our worst defeat since 1918. We cannot ignore the fact that not everyone seemed that grateful. We have to ask ourselves some tough questions. Did we underplay the importance of relationships and trust between people that should lie at the heart of public services and institutions? Did we use the market and the state as instruments of reform without real transfer of power, ownership and responsibility to people? Did we drift into becoming instinctive centralisers?

This, of course, forms part of a more in depth critique of the last period of Labour government, but what needs to be unambiguously conceded is that we did not rebalance the economy or do anything substantial to see industry return to our de-industrialised heartlands. As our founder John Mills has pointed out:

Without the decision made by the UK electorate on 23rd June 2016, the need for radical changes to our approach to the UK economy’s competitiveness would probably have taken much longer to come to the surface. Now they are much more pressing. Do we have the courage and wisdom to make the choices which now need to be made?

What the next Labour government must do, and the entire Labour movement should unite behind, is a constant focus on how best to see a revival of modern manufacturing in our traditional Labour heartlands, still so decimated by the de-industrialisation of the Thatcher-Lawson years. That so little was achieved on this in 13 years of majority Labour government has to be counted against all the achievements we made for working class communities in those years.

Conclusion: Labour and Democracy

As Maurice Glasman, elevated to the House of Lords by the previous Labour leader Ed Miliband, pointed out before the referendum:

For many years the European project has served as an alternative to Labour having a serious politics of national transformation, of building the coalitions necessary to constrain capital and strengthen democracy.  It was a national political weakness that led to the enthusiastic embrace of the EU and it remains a refuge from domestic political defeat.

Those who argue that Labour should continue such an alternative to developing our own radical vision for our country are, despite their best intentions, continuing a process that sees us failing to represent the majority of voters in our heartlands who feel let down and even ignored by the leaders of our party over too many years

Caroline Flint MP, and our former Minister of State for Europe, rightly argued at the 2017 Progress AGM ‘Those who aim to keep us in the Single Market know full well that this is EU membership in all but name’ and she also warned of the consequent danger for Labour of looking like ‘liars’.

It is worth reflecting that as much as 62% of those earning under £20,000 voted to leave the European Union, and of all the social class groupings it was only the AB classes that voted by a large majority (57%) to remain in the EU. It was wrong of so many in our Party to argue that Labour voters did not vote to remain in the EU because the instruction to do so from the party leadership had not been clear enough. Likewise it would be a grave mistake to assume that those same voters do not see a pursuit of retaining EU single market membership as motivated by a desire to keep us members of the EU in all but name.

Somewhat ironically, a week after resigning as Chair of the National Infrastructure Commission to fight Brexit, Lord Adonis suggested that Britain needs a second Attlee to tackle ‘the crisis of reconstruction and endemic poverty, while being resolutely internationalist and engaged abroad’. At Labour Leave we heartily endorse this approach whilst remembering that Labour’s first and probably finest Prime Minister was resolutely opposed to the UK joining what he described as a federated Europe, arguing that ‘federation is about the most difficult form of government to work’. Referencing Britain’s ties to the Commonwealth he concluded:

Britain then you see is something more than a European country, it’s a link between many countries in many continents; and therefore I do not believe that Britain can federate with continental Europe; we can and do join with our friends on the continent in many joint enterprises, and we share with them many interests, but we cannot be absorbed in a federated Europe.   

As a movement and a party let us return to our working class roots and unite to develop a renewed vision of what our party can do once again to embody the majority of the people we were founded to work with, represent and empower.  

Labour Leave shares a number of viewpoints from external commentators, both Leave and Remain, without necessarily endorsing any of the viewpoints therein.


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