Britains long-fraught relationship with the EU became more heated last week, after finance ministers and heads of state from the EUs 27 member states failed to reach a verdict on cutting the EU budget.
The EU budget summit highlighted the lack of consensus among member state governments on fiscal and monetary policy, with calls for a budget cut being led by Britain, and the pro-expansionary camp being represented predominantly by France and its southern neighbours harking back to the days of Anglo-Franco rivalries.
The possibility of a British exit, or Brexit, almost invariably dates back to the unravelling of the eurozone debt crisis, which required British taxpayers to pay approximately £12.5 billion for bailout funds towards Greece, Portugal and Ireland.
The backlash in parliament was pronounced, with prime minister David Cameron attempting to distance Britain from the responsibilities that behold eurozone leaders. Instead, Cameron was emphatic to stress that responsibility rests with the 16 eurozone heads of states and not Britain.
Since then, Britain has largely being a bystander on whittling out a Greek debt deal.
The ramifications of a British exit from Europe could be deep and profound, for Britain and, indeed, the wider eurozone economy.
Calls for a referendum have been articulated by the Conservatives and Labour Party. Camerons proposals for a referendum are expected to be outlined by the next general election. The terms of a referendum would likely avoid a straight in or out vote and favour a more reform-oriented agenda that would call for a repatriation of powers back to Westminster.
Although a Brexit remains in the balance, real politics suggest the government will favour a less confrontational position in Europe, though it still remains a high-stake option for Britain to take. Euromoney pieces together the arguments on either side of the debate.
Downsides of a Brexit
For example, there is concern that, should the UK leave the EU, foreign direct investment could be affected, as the UK is perceived as becoming more distant from key European markets. If so, then the UKs potential growth rate could be hurt. There is also the impact on the City of London to consider. Would it be able to hold on to its position as the worlds leading financial centre if it is perceived to be becoming increasingly isolated?
Moreover, there is the perception that by acting with the EU, British business will have greater access to fast-growing markets, such as China, than it would if it was standing on its own. Then there is the cost argument. The UKs net spending on the EU is tiny less than 1% of GDP [about the same as overseas aid]. To save this small amount of cash while risking damage to UK growth potential and diminishing the UKs voice in European and world matters isnt worth the risk in their view.
Institute for Public Policy Research London School of Economics and Political Science
Geopolitically, Britains influence will begin to diminish unless it remains part of a regional group. Its population is less than 1% of the world total while its economy is less than 4% of global GDP. In 2000, the UK was the fourth-largest economy in the world. Emerging economies such as China, Brazil and Russia, however, are quickly expanding. By 2020, its expected that Britain will be the ninth-largest economy, no longer holding its place within the G8. Collectively, however, the EU is 25% of global GDP. Britain will continue to benefit from EU membership in areas of global trade and climate change areas where the public still support closer links with Europe.
Economically, Britain still gains much from EU membership. IPPR estimates that leaving Europe could cost GDP to permanently be lowered by 2.25%. Through continued membership and internal reforms, such as liberalizing trade relations with emerging economies and relaxing rules across its service sectors, national income could increase by 7.1% with an increase of 47% in exports by 2020.
Forty-nine per cent of the electorate would vote to pull out of the EU compared with 28% who want to stay in, according to a poll last week by YouGov.
This wouldnt matter if the UK had a rosy future outside the EU. But the countrys economy is closely entwined with the EU, which accounted for 47% of its trade last year. It is naive to think that Britain would get full and fair access to the single market if it wasnt a member. Whats more, it would still have to play by Europes rules to trade in its market.
Britains business community doesnt seem to have woken up to the threat. If it waits too long, it might find the momentum for a Brexit is too strong to resist.
The upshot of a British exit means it could still revert to a looser confederation with Europe, while still having the benefits of free trade. This could be achieved through becoming a member of EFTA [European Free Trade Association]. After all, some of Europes wealthiest economies: Norway, Switzerland and Liechtenstein have benefited from this form of arrangement, so why cant Britain join in?
The UK is heavily economically linked to the rest of Europe through trade, free movement of people, strong financial linkages and, of course, the economic cycle and confidence. Those in favour of leaving suggest the UK would simply join the EFTA along with Norway, Switzerland, Iceland and Liechtenstein. Nearly half of all UK exports go to Europe, while the EU exports even more to the UK.
Consequently, there would be little incentive for the EU to push for the UK to leave Europe all together and risk the prospect of tariffs, trade barriers or any other restrictions to doing business. By joining the EFTA, the UK would be allowed to participate in the single market. They would have to adopt all EU legislation relating to the single market, but would have no say on these laws. However, the UK would contribute less financially to the EU budget and would not be party to the Common Agriculture Policy or the Common Fisheries Policy.
This article was originally published by Euromoney Country Risk