Calvin Jones examines the pros and cons of EU withdrawal for Wales

April 15th, 2014

There is a strong possibility that within the next five years, Wales might find itself within a political context more reminiscent of the 17th than the 21st Century. We could be part of a country that stops at Hadrian’s Wall. We could be outside – and perhaps even antagonistic to – all the European structures that matter.

In the first referendum that will determine this scenario – in Scotland this September – Wales has no voice. In the second, on membership of the EU (if it happens) we will have a minor one. Both votes of course have implications for Wales. Any vote to rescind the UK’s membership of the EU would change the face of Wales immeasurably.

Wales in a world of referendums

 

Tomorrow: Adam Ramsay examines the interconnections between next month’s EU election and Scotland’s referendum in September.

Thursday: Gerry Hassan provides an account of the devolution contradictions of Scottish Labour.

Friday: Walter Humes asks whether Scots Tories can return from the margins of political life.

Saturday: David Torrance on the curious case of the SNP’s shift from ethnic to civic nationalism.

 

Economic drivers are of course central. Much is often made of Wales’ openness to international trade. In 2013, Wales exported around £22billion of products, and around £10 billion of them to the EU. Overall that was about a fifth and a tenth of our economic output respectively.

And this ignores our intermediate products that leave Wales for other parts of the UK to be finished in, and exported from, other UK regions – for example from Toyota’s engine plant on Deeside, or from Tata’s Port Talbot works. Once outside of the EU, companies in Wales and elsewhere could be faced with an array of complex barriers and costs to trade with EU nations – in some cases involving import duty, in others regulations on ‘conformity’ and quality.

Of course, less than half of Wales’ trade is with the EU. There are export growth areas for Wales outside – for example, in the Middle East and China. There may also be benefits for companies in Wales that arise from stepping outside the EU – for Tata Steel, for example, there may be lower energy costs when freed from the EU carbon trading mechanisms (although this is by no means certain). For other companies, there may be lower levels of regulation and bureaucracy.

The key thing to remember here is that Wales is small – our main exporters are a select bunch – Tata, Airbus, Ford, Dow Corning and a few others. It is the responses to EU exit by individual countries and even individual executives that would matter, and this is unknowable. One suspects the attitude of Tata and Airbus (or rather the European Aeronautic Defence and Space company) to future investment in Wales might be very different.

It is not just the fact, but the nature of exit that would matter. A friendly wave goodbye, with the UK moving in next door with Norway and Switzerland in the European Free Trade Association, raises a different prospect than an acrimonious, drawn out divorce with the EU slamming the door on the UK as it leaves.

It is not just economic performance that would be affected, but social policy as well. One would have to hope that exit occurred after the 2014-2020 structural fund period, safeguarding the £1.7 billion earmarked for Wales over the next seven years.

Outside of industry and urban Wales the impacts of EU exit would, if anything be even starker. The Welsh countryside is a heavily subsidised landscape, and much of that subsidy comes, albeit in changing form, via EU systems that would cease to apply after exit. EU CAP payments account for the majority of farmers’ incomes in Wales and shape our countryside in myriad ways. Through direct payments, the Rural Development Plan and other mechanisms, rural Wales will receive at least £250 million per annum from the EU between now and 2020, with support (at a perhaps lower level) continuing far beyond that.

Many will of course rightly point out that EU subsidies are of questionable additionality and worth, certainly in effecting deep economic transformation of town or country. If previous evidence is to be believed, such funds may enable or swell existing, ameliorative interventions. However, so far they have done little to make Wales more holistically ‘competitive’.

Wales might benefit from the cold splash of water that EU withdrawal would comprise, forcing us to look more deeply and urgently at our problems, opportunities and resources.

Stock would, of course be taken under a very different regulatory framework. UK versions of employment and human rights. Environmental and other legislation might have considerably different implications for Welsh companies, employees, citizens (well, subjects) and indeed landscape. The EU Water Framework Directives and Habitats Directive, to name but two, strongly influence the management of our countryside. Their replacement with regulations perhaps less onerous or rigorous – delete according to taste – might see us with a very different landscape and seascape. Barrage anyone?

The issue for Wales is that any decision on EU membership for the UK – or the rump of the UK – is not made in a political vacuum. The shape of the Westminster government takes on a far greater level of importance in the absence of the EU – for environment, for energy, for social policy and for the labour market – and this holds even in the face of Silk and increased devolution.

For fifteen years regional policy and the ‘North South Divide’ has been of marginal interest to Westminster governments of both stripes, at a time when the EU has shown a deep interest and involvement in ‘territorial cohesion’.  In the (perhaps unlikely) instance of a Scottish ‘Yes’, the electoral requirement for Westminster to coddle its poorer cousins, though infrastructure development or, via the de facto regional policy of welfare, will be diminished further. Under a coalition-run England, it has already diminished significantly, with regional development funding cut by more than half.

Depending on your political prejudice, the above could be cast as the making or the breaking of Wales. But any forging of a new land would be a painful, prolonged process. In terms of GVA per capita, London is over twice the Welsh average. Inner London (commuting impacts accepted) has five times the GVA per capita of West Wales and the Valleys. The UK is already amongst the most regionally unequal of EU countries. With transport, research, defence and other spending already biased considerably towards the rich core, there is little sign of significant, sustained convergence.

Outside the EU the solution for the ‘problem regions’, the pinprick of devolution aside, would be largely British – based on distinct Anglo-Saxon notions of competitiveness, innovation and enterprise, of striving and shirking, across both town and country. The costs of any transition would also be significant, perhaps chaotic. In the long run, its might be better for Wales or it might be worse. Whichever way it would be very, very different.

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Professor Calvin Jones is an economist at the Cardiff Business School.

10 Responses to:“Back to the future on the edge of Europe”

  1. Marc James says:

    An interesting article. As someone who works in the university sector it should also be noted that our research budgets would be decimated if the UK withdrew from the EU. Billions are currently spent on research involving UK universities, including all Welsh universities, and EU partners. If that money disappered, along with students from the EU, then we would either see a huge contraction of our universities, with several closing, or universities would have to recruit far more students from outside Europe, especially Asia and, hitherto untapped, South America. You can imagine the reaction of Farage and his xenophobes to that one.

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  2. John Winterson Richards says:

    Full marks to Professor Jones for a clear-headed and generally even-handed summary of the economic issues. Given the extremist nonsense coming from both Europhiles and Europhobes, a cold-blooded look at the probabilities is long overdue.

    Looking at it from a position of pure pragmatism – albeit one that leads increasingly towards Euro-scepticism – it all comes down to the maths. The EU imposes five burdens on Welsh business: increased regulation; direct and indirect payments to the EU itself; lack of priority in international trade negotiations; restriction of access to non-EU markets; and the indirect consequences of the poor structuring of the Euro.

    Against that, it brings one definite advantage: greater access to European markets. It is idiotic for Europhobes to deny the latter and for Europhiles to deny the former. Equally it should not be pretended that the loss of EU ‘aid’ to Wales would not be hugely disruptive here in the short-term – even if the end of the collective ‘dole mentality’ would be very beneficial in the longer-term. It must not be forgotten that this is not ‘free money’ but our own money being taken from us and then handed back to us on conditions not of our choosing.

    In doing the sums, we must not lose sight of how the world has changed: twenty years ago, access to European markets was a higher priority; now globalisation is a fact. The supposed benefits of ‘collective bargaining’ in trade talks are outweighed increasingly by the need to accommodate our European trading partners and their restrictive practices. This is one of the reasons why, for example, food and fuel are far more expensive in this country than they need to be – putting us at a competitive disadvantage. Most people are still unaware of this.

    In the end, the Professor is right that it all comes down to the precise terms of any withdrawal, especially our ongoing access to EU markets. A civilised break-up would be to everyone’s benefit, but a messy divorce does no one any good.

    Of course, all this applies only to the economic side of the argument. There is a political and moral dimension which is far more important. Most of us in our private business have been offered the chance of more money to do what we would otherwise not want to do and declined it. We realise that it is better to be poorer but free than to be rich. That should be the decisive factor in European policy, irrespective of which way the economics actually points.

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  3. Jean Claude Trichet says:

    Hi Calvin,
    A small reminder that “notions of competitiveness, innovation and enterprise” are not monopolised by an Anglo-Saxon view of political economy. For instance, the last time I checked, the god-father of ‘innovation theory’ was the neo-Keynesian Austrian economist Joseph Schumpeter.

    Apologies for what may appear a facile observation!

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  4. Louis van Ekert says:

    Marc,
    If the premise is that a UK withdrawal from the EU is undesirable for Wales for the reasons you state, a logical conclusion is that Wales needs her independence. It would remove Farage as an issue, for one.

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  5. Calvin says:

    [economicsnerd]
    @JeanClaude – absolutely. It’s the implementation and understanding of such concepts that is specifically ‘Anglo-Saxon’ here in the UK. We seem to have comprehensively proved Schumpeter’s point about market dominance emerging from innovation, whilst disproving his prediction of a consequent ‘soft’ social-democratic revolution
    [/economicsnerd]

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  6. CapM says:

    I imagine that ASDA’s owners WalMart will be taking an interest.
    They wouldn’t have the burden of pesky EU employment law and so would end up making more $$$s.
    Free AND richer. The referendum’s gonna be a no-brainer for WalMart executives.

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  7. Dan Evans says:

    JWR wrote:

    “We realise that it is better to be poorer but free than to be rich. That should be the decisive factor in European policy, irrespective of which way the economics actually points”

    Interesting. You don’t follow that logic when it comes to Wales in the UK. Why not?

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  8. R.Tredwyn says:

    I am a bit bemused by appeals to freedom in the context of the EU. A country signing any international treaty sacrifices freedom of action. If abiding by EU treaty obligations is an intolerable loss of freedom, what about the WTO? Lots of restrictions there. NATO, the UN both impose obligations on us and the latter requires a subscription. Should we leave them all? It is quite true that a proportion of the British public got clutched about the EU and ‘sovereignty’ a few years back. I wonder why. They don’t seem very bothered about comprehensive snooping into their lives by US and UK intelligence agencies which our politicians show no appetite to control. One of life’s mysteries, at least to me.

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  9. John Winterson Richards says:

    Dan, the distinction between ‘freedom’ and ‘independence’ is not emphasised enough in the media and popular discourse. Although often used interchangeably, they are definitely not the same thing. Were Wales to become independent, the collectivism and socialism of the Welsh ruling class make it probable that Welsh would enjoy less practical freedom than they do at present.

    Mr Tredwyn, on the same principle of practical freedom, perhaps the time has indeed come to review all our international contracts. We are no longer in the Cold War era. Those of us who were strong supporters of NATO when it was a defensive alliance were embarrassed when Messers Clinton and Blair turned it into a vehicle for a war of aggression against Serbia – and are now worried about its expansionist policy in the Ukraine. Equally, those of us who understood the practical benefits when the ‘special relationship’ with the United States had some substance to it, especially in the Reagan-Thatcher years, feel that it might be time to put a little distance between ourselves and American foreign policy when the Obama administration treats us with open contempt. As for the UN, the only reason we should remain a member is because our seat on the Security Council enables us to ‘punch above our weight’: without that, saving our subscription would sound like a good idea. The WTO is in a different category because it is intended to promote free trade, which is one of the most basic of practical freedoms.

    Many Welsh people would have endorsed this way of thinking in Gladstone’s time. Perhaps our forefathers were wiser than us.

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  10. John R Walker says:

    On the issue of which international groups the UK needs to belong to there is a case for looking at how Switzerland manages its foreign affairs. It’s interesting that Switzerland only became a full member of the UN in 2002 following a referendum – before that they had been observers. That’s democracy! How Switzerland manages without the EU is almost a template for the UK.

    http://en.wikipedia.org/wiki/Foreign_relations_of_Switzerland

    The key difference between Switzerland and the UK in its relations with many global treaty organisations is that they have their own representation on these bodies working for the benefit of Switzerland. Now the UK all too often allows the EU to negotiate on our behalf and not necessarily in our best interests. A lot of so-called EU law in the UK is actually international treaty law handed down to us whether we want it or not.

    It seems crazy but even small countries like Norway and Iceland actually have more influence over their own international treaty negotiations than we in the UK do now. I would say we need to reverse this decline in our right to manage our own affairs, and that means leaving the EU as a minimum position.

    We need to return to running our own international affairs selecting carefully which elements of the UN protocols, in particular, and others are in our best interest. Do we really need the WHO telling us what our blood pressure and cholesterol levels should be? Do we need to be in the Council of Europe and bound by its political Court? I think not! Do we need to be in the EU to access the single market when we can do so via EFTA and/or the EEA without the political overhead of an EU ‘constitution’ which is clearly not in our best interests? Do we need to be in NATO or can we survive as a neutral state with or without an independent deterrent?

    These are the kind of questions which only UKIP is currently prepared to ask! Sadly they don’t do it very well and a lot of that is down to Farage’s long-standing failure to employ suitable researchers. UKIP is asking a lot of the right questions but they have failed to come up with researched answers. That is not, in itself, a reason not to vote for them because the rest of the political class and most of the 4th estate is on automatic pilot and all heading in roughly the same direction!

    If the UK will be better off reasserting the kind of independence Switzerland has, and we had before Heath knowingly deceived the people by taking the UK into Monnet’s ‘European project’, then Wales will arguably share in that benefit. The evidence from self determining countries in Europe suggests the UK can be better off out of the EU.

    But it is way past time for a full and frank debate about the UK’s political and economic future and the established political parties are stonewalling that debate.

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