I admire the open debate in Britain on the pros and cons of leaving or staying in the European Union. But on EU questions the UK has always shown a lack of both interest and knowledge. When I am in London I never miss the opportunity to ask people, especially taxi drivers, their opinion on ‘Europe’ – but I have given up including the euro in those questions.
I must make one point clear. The EU – and, even more so, economic and monetary union – is a long way from being in perfect condition, or even on the way to completion. But when it comes to the referendum, I hope British voters’ fear of uncertainty will prevail over illusionary hopes of Brexit. Plainly, a UK departure would have repercussions for the whole continent.
The analogy with non-members Switzerland or Norway is misguided. Whether they are in or out of the EU makes little difference to the way the rest of the continent is run. By contrast, the EU after Brexit would be significantly different; it would be deprived of British pragmatism and more open to further regulation and centralisation.
We would see a strengthening of protectionist attitudes that are popular in France and other countries. From an economic point of view, EU members would of course wish to maintain liberalisation in trade and capital flows. But politically the issue is far less straightforward, in view of the widespread sympathy for protecting national markets.
The British electorate must be very confused – it is exposed to contradictory calculations on the consequences of Brexit, ranging from tremendous gains in welfare to very gloomy scenarios. The ultimate result looks likely to reflect voters’ long-held prejudices rather than rational arguments.
The No camp sees Britain outside the EU once again enjoying full sovereignty, relieved from European regulatory burdens, stopping EU budget payments and regaining full control of its borders. At the same time, the UK would retain unlimited access to the single market. This is indeed a rosy scenario – but the reality may be more nuanced.
The British make a great deal out of no longer being bound by the commitment to ‘ever closer union’ – and the UK is not only country that debates this point. But it needs to be put into context. Because of monetary union’s present problems, even those countries that (unlike the UK and Denmark) do not have a legal EMU opt-out have shelved, in practice, the obligation to join the euro. This could change if EMU gets into better shape and non-euro currencies themselves face waves of speculation and volatility. In due course, I believe euro membership will shift from a legal obligation to a question of national interests.
In many fields, we need to separate fact from illusion. The view that freeing the British from rigid European regulation would boost UK economic activity appears flawed. According to the Organisation for Economic Co-operation and Development, the UK’s labour and product markets are, respectively, the EU’s least and second least regulated. Further gains from leaving the EU must be relatively small.
Britain has had the highest growth among the Group of Seven countries over the past three years – the result, perhaps, of its ability to enjoy the best of both worlds outside the euro but inside the single market. Moreover, EU membership has not prevented sterling from gaining importance in the international monetary and financial system. On the other hand, it is illusory to think that London’s status as a financial centre would benefit from the British imposing sovereignty on regulation. Some international banks are already planning to reduce their activities and staff in London after ‘Brexit’. Counteracting this threat with a return to permissive regulation would be a tremendous risk.
Referendum uncertainty has already depressed sterling. The UK has attracted huge amounts of foreign direct investment, partly because of EU membership. If UK trade suffered outside the EU, Britain’s sizeable current account deficit might become a still bigger problem. The balance of risk and reward points to one firm conclusion – for its own good, and for Europe’s, Britain should stay in.
Otmar Issing, a former member of the executive board of the European Central Bank and the Deutsche Bundesbank, is President of the Center for Financial Studies in Frankfurt.