The world economy is changing dramatically and looks set to grow strongly in coming decades, as I outline in my new book The Consolations of Economics. London, the UK and Europe need to ensure they position themselves in this changing and growing global economy. Cites, countries, companies and citizens need to play to their strengths, adapt and change and embrace this new globality. It is within this context that the issue of the UK and the European Union needs to be addressed.
The origins of the EU were in an era few may think is anything like now. In the wake of the Second World War Europe was in tatters. The desire to avoid another war, a dependency upon US Marshall Aid and the early stages of the Cold War were the environment in which in 1951 the European Coal and Steel Community was founded at The Treaty of Paris. At that time Clement Attlee was the British Prime Minister. The Treaty of Paris was signed by six countries, Belgium, France, Italy, Luxembourg, Netherlands and West Germany, and they agreed to a common market in iron and steel. The forerunner of the European Union was formed. Six years later the same six countries signed the 1957 Treaty of Rome and the European Economic Community was founded. There has been no turning back since.
That is the economic model that has driven Europe since. Ask yourself, is that the economic model for the changing world of the 21st century?
There is a need for the EU to be more outward looking and to compete globally. An eight-point reform plan is outlined in the report. Let me give you a flavour of the debate, highlighting four areas of reform in Europe that the UK should focus on immediately.
One: the future relationship between the Eurozone (EZ) and non-Eurozone members of the EU (non-EZ) and safeguarding the future rights of the non-EZ not to be outvoted by the EZ. This is a vital area for The City of London if the UK remains in the EU. The City remains vital to the future success of the London and UK economy, and it already needs to be wary not only of a shift of regulation from the UK towards the EU, but also that this regulation may be unsympathetic and that this imposes a regulatory burden that hampers the City versus other global financial centres. In addition to this, in the wake of the financial crisis, the City needs to safeguard its position within Europe, hence the need to focus on the future relationship between the EZ and non-EZ.
Two: ensuring the Single Market works and in doing so addressing issues relating to services, to people and to preventing regulatory intrusion. From the perspective of London, the Single Market needs to work in its four areas of services, people, goods and capital. The idea of movement of people needs to change to be take account of the fact that the expansion of the EU to the east has resulted in huge variations in income levels, pay and benefits between economies such as the UK and others in Eastern Europe. In two sectors of the London economy one in four workers are from elsewhere in Europe, these are construction and the accommodation and food sector, while in the finance and insurance sector it is one in eight. One of the important areas for the London economy is to ensure there is continued free movement of people with appropriate skills within the EU. In order to maintain public confidence in EU free movement, EU rules need to respect differing national welfare systems that have developed through national democratic choices. A clear and enforceable timetable to complete the Single Market would be ideal, but may be unachievable and thus ensuring the Single Market works may be the best option possible.
Three: change the mindset to make Europe more innovative, productive, outward looking and competitive. Unlike the reforms mentioned above that are specific, this reform is qualitative, and therefore hard to quantify. It is about ensuring that Europe thinks less about process and more about progress. This has many different facets to it, such as trying to halt unnecessary future regulation and devolving more powers to national governments where it makes sense to do so. It is about thinking about the global opportunity for Europe in a multipolar world, thus reforming the EU to achieve stronger economic growth and create sufficient jobs. Although in the near-term it is the threat of deflation and the lack of domestic demand that is Europe’s immediate problem, the further ahead one looks it is the need for Europe to compete, create jobs and fund its welfare system. The key is the need for an economic model that succeeds in the 21st century.
A fourth area of reform is non-economic, and this area too has a number of aspects, such as the need to re-establish the supremacy of UK courts in non-Single Market related rulings. The focus on the roles of the European Court of Justice and the issue of human rights, while important, highlight that is not just economic issues that are relevant in this debate.
The Europe report also provides long-term economic scenarios, looking ahead twenty years. One conclusion is that the best economic outlook for the UK over the next twenty years is if it remains in a reformed EU and helps reform it. This scenario is called a ‘Brave New World’.
London is a global city and is also Europe’s financial centre and, as such, can benefit from any policies that both increase its openness and international appeal. Two of the biggest sectors of the London economy are heavily intertwined with Europe: the City and the professional services sector. The gains from genuine reform of the EU are potentially very significant in economic terms, both for the EU and the UK. The question then is can Europe reform?
Another conclusion from the report is that if the UK cannot achieve reform in the EU then it should leave. If the UK leaves the EU and retains good relations with the EU and if the UK pursues growth-focused policies then this will provide a better economic outlook for the UK than the status quo of remaining in an unreformed EU.
It is this latter point that is perhaps the most controversial aspect of this report, as most surveys show a strong desire from business to remain in the EU, even though the same surveys frequently show deep discontent with many aspects.
The title of the Europe report is a ‘win-win situation’, to reflect the positive options ahead if the UK can help reform the EU into a competitive economy or if the UK leaves and pursues a reform-led, outward looking, open economy policy outside the EU. The UK can only achieve serious reform in Europe if it is serious about leaving, and it can only be serious about leaving if it believes this is better than the status quo of staying in an unreformed EU. It is.
*Dr Gerard Lyons is Chief Economic Advisor to Boris Johnson and his new book The Consolations of Economics (Faber&faber, 2014) is now available. The full Europe report is available online from the Greater London Authority (GLA) website.
*Boris Johnson, the London Mayor, wrote Politeia’s Aspire Ever Higher: University Policy for 21st Century.