Whatever happens as a result of the UK’s referendum on EU membership, those in British politics, and in the British Civil Service, now face an enormous task. This column suggests how their hard work might actually lead to an outcome in which the UK remains a member of the EU. It describes a four-part action plan for those who would like to see this possibility kept open.
By David Vines*
This column takes seriously the possibility that Britain might end up remaining as a member of the European Union.
Whatever happens, those in British politics, and in the British Civil Service, now face an enormous task. In this column I suggest how their hard work might actually lead to an outcome in which we remain a member of the EU. And I describe an action plan, with four parts, for those who would like to see this possibility kept open.
It is important to first understand how we got here. The referendum vote was not a vote against the EU. It was two fingers up to London; a vote against the post-Thatcher, post-Blair economic settlement in this country, in which inequality of outcomes, and inequality of opportunity, have widened radically. Since the Global Crisis in 2008, the macroeconomic policy response in the UK – austerity – has inflicted significant costs on those who are not well off and who did not cause the Crisis, whilst the rich who caused the Crisis have got off scot-free. Labour market deregulation had already increased the vulnerability of these people; as had the concentration of opportunity in the London growth triangle. In the austere world in which these less-well-off people have found themselves, there has been stiff competition for work from skilled, adventurous and entrepreneurial migrants from Eastern Europe. These migrants have seemed like a threat – and they have been a threat. The Leave vote was, I think, a consequence of this fact.
The four parts of my remain-in-the EU action plan are as follows: adopting a New Deal in macroeconomic policymaking; developing labour-market regulations within Britain and managing migration in a way consistent with the European Principle concerning the free movement of labour; discovering how we might negotiate with the other members of the EU to achieve things which both they want and we want; and putting in front of the British people a package of reforms which satisfies the demands of those who voted Leave.
A New Deal in macroeconomic policymaking: The end of austerity
First of all, we can and should set out on a ‘New Deal’ in domestic macroeconomic policymaking
On entering office in 1933, President Roosevelt set out his New Deal which he used to fight the Great Depression. For example, the Tennessee Valley Authority was set up so as to make economic development possible in a region particularly affected by the depression. This New Deal was a Keynesian project – spend more public money – but the focus was on projects which would give a sense of collective purpose; it was coupled with many reforms which strengthened that purpose. Roosevelt’s political action offered all citizens the chance of solving their problems by acting together. In 1945 the Labour government offered a similar vision in the UK, unifying around the Beveridge Welfare State and the NHS. At the same time, in Australia (where I am from) the great Post-war Reconstruction Project put more than half a million people from the military back to work within two years, a huge number for that small country, along with many immigrants, and a large number of refugees. They set building a new country for all of them.
Something similar, on such a grand scale, is now needed in this country.
This kind of action has been prevented – up to now – by the macroeconomic policy of fiscal austerity. But, with a new government in place, that policy is now dead.
Even before the now-sacked Chancellor, George Osborne, was removed he randomly abandoned the centrepiece of his own strategy when he gave up his target to restore government finances to a surplus by 2020. In his speech he said that, given the effects of the referendum vote, the government had to be “realistic about achieving a surplus by the end of the decade”. His action really can be described as ‘random’, since ‘being realistic’ was the only reason that he was able to offer for his action. But ‘being realistic’ is not a reason. And, anyway, he is now gone.
In this new world, we have to ask how quickly is it ‘realistic’ to return the fiscal position to one of surplus? To find an answer to this question requires finding an answer to the more focused question: How big a public debt is acceptable? Of course, as Martin Wolf and many others have said, when real interest rates are negative, carrying out infrastructure investment has very little cost, and more public expenditure creates assets – whether they be roads, airports, schools or hospitals, which can be set against the public debt which is created. Nevertheless, there are limits. How much is too much? It is clear to me that there is room for more debt in the British economy, notwithstanding the scary tales told by Reinhart and Rogoff in their book This Time is Different. But this is a topic should be studied, but which has not been properly studied for this country. The absence of such a study is a scandal. Someone like Simon Wren Lewis here in Oxford could do it very well.
But what sort of a New Deal do we want?
The Northern Powerhouse is one example of what could be done. This project really could boost economic growth in the north of England, particularly in the core cities of Manchester, Liverpool, Leeds, Sheffield and Newcastle. By doing so it would provide a focus for growth away from London and the south-east. Such a project would make a difference to all manner of small and medium-sized enterprises in the north; these firms would no longer need to look 200 miles south for infrastructure support.
Around the country there are many other such possibilities, especially in regions where economic prospects are at their most bleak: in Devon and Cornwall, in the Welsh valleys, and in the far north east just below the Scottish border. A random example of what could be done is fixing the A1 from Newcastle to Edinburgh; this would mean that there is a second divided highway connecting Scotland with England in addition to the always-clogged M6. There are many other examples; many, many houses – and schools – are needed, and can and should be built away from London.
The cuts to public services in these regions have been savage and have very significantly increased the sense of alienation from London. These can – and should – be reversed. And the education system needs to provide better opportunities for underprivileged young people in these areas, so as to provide a way out from dependency on welfare benefits; this would hold out a carrot, rather than relying on the stick of cuts to benefits which is all that has been happening up to now. Many young people in these areas – even if they are well-enough trained – literally cannot afford to go south in search of valuable work. And when they get there they find skilled immigrants out-competing them in job queues
One way of thinking about what might be possible would be to extend the Barnett formula, which is used to allocate public expenditure to Northern Ireland, Scotland and Wales, to a number of disadvantaged regions within England.
But how should we to move to the best set of public-infrastructure projects? Which projects to choose? How to create the sense of a New Deal?
Australian experience may provide an answer this question. The Hawke-Keating labour government in Australia in the 1980s and early 1990s – a government now revered for its radicalism – called a National Economic Summit in Canberra at the beginning of its time in office. At this conference the great and the good got together with a range of people, both big and small, and together this crowd achieved something of a consensus on national economic policymaking. The meeting certainly engendered a common sense of public purpose. This Australian example might be one which is worth copying.
The possibility of imposing restrictions on the free movement of labour
Second, we need a better understanding of how changing the treatment of migration in this country might, nevertheless, make it possible to avoid a conflict with the EU’s principle of the free movement of labour. Since continued access to the Single European Market is conditional upon respect for the principle, this understanding is important.
Free movement of workers is a fundamental principle of the EU; it is enshrined in Article 45 of the Treaty on the Functioning of the European Union, and developed by EU secondary legislation and the case law of the Court of Justice. Citizens of countries in the EU are entitled to: look for a job in another EU country, work there without needing a work permit, reside there for that purpose, stay there even after employment has finished, and enjoy equal treatment with nationals in access to employment, working conditions and all other social and tax advantages.
Nevertheless, things could have been different looking backwards. First of all, had the UK government put austerity aside and borrowed in 2010 at very low interest rates to build housing, schools, hospitals and roads, mainly away from the London triangle, we could have much more easily accommodated the many migrants who were coming here. Second, we could have maintained restrictions on the movement of labour of the kind which other European nations maintained in relation to new member states. Transitional arrangements have applied in most of the EU’s enlargements and most recently applied in the case of last two Accession Treaties of 2003 and 2005. These measures allowed member states to restrict temporarily the right of workers from the countries that had just joined the EU to move freely to another member state to work, and could have been on place on the UK until 2011. The outcome of these two policies, taken together, would have been a more rapid recovery – as demand was boosted. Yet there would have been somewhat fewer immigrants and a much greater sense of opportunity for underprivileged domestic residents. And with such an alignment of policies in place there would have been a much warmer welcome for those migrants who did still come here. This approach to policy could have been, and should have been, coupled with the much earlier imposition of the national living wage in such a way as to rule out the large-scale hiring of imported labour, by large-scale labour subcontractors, at very low wages, which we have witnessed ever since the accession of the new member states, actions which have effectively undercut working conditions at the lower end of the labour market. If this had been done, many of the bad outcomes described at the beginning of this document could have been avoided.
Will we be able be able to do something like this in the future, either whilst negotiating the UK’s relationship with the EU from outside, or whilst remaining within the EU? This does not seem impossible. There is already a safeguard clause in the Treaty which authorises a member state to re-introduce restrictions on the free movement of labour, as a defensive measure, in the context of a “serious labour market disturbance”. An example is the restriction which Spain was permitted to introduce in 2011, in relation to workers from Romania. The existence of such a safeguard clause in the Treaty serves to move the principle of freedom of movement from an absolute right to a conditional right, dependent on particular circumstances, the exercise of which becomes subject to discretion. The question then becomes one of whether such discretion might become possible, having regard to UK circumstances, in the future. There is not yet a clear answer to that question.
Any change in this direction will not be easy to bring about. Some European economists are already discussing the idea of managed migration. For example, some economists floated such ideas at the ECB’s annual Jackson Hole-like conference in Sintra, near Lisbon, a little over two weeks ago. But, it does seem that opposition would be strong. It appears that the current unmanaged EU migration policy may well be a kind of political equilibrium that it would now be hard to change. Any attempt to bring about such a change would be running against two kinds of opposition. The countries of central and eastern EU would feel cheated, since the opportunity to work abroad has become a central aspiration of so many of their citizens’ ambitions. And those in the EU15 would be likely to oppose any change in free labour mobility as a matter of principle, since this freedom was enshrined in the original treaty of Rome and has never – until now – been questioned. Notwithstanding all of what has just been said, I think that a movement in this direction within Europe is inevitable. I discuss this point further below.
Understanding the needs of our European partners
Third, we need to realise that the great European Project is now in grave danger and that our European partners need our help.
A German passion for implementing rules, coupled with a French determination to centralise power in Brussels, has led to an increasingly disagreeable political process within Europe, and to dwindling support for the European Project. This puts at risk the continued cooperation within Europe not just on the economic issues being discussed in this column, but also on foreign policy, on judicial issues, and on security and defence. That cooperation has been has painstakingly created, in 75 years of extraordinarily important work, and is now at risk.
I saw this danger at first hand very recently when I spent three days at the ECB conference in Sintra. At the meeting, senior Portuguese European Parliamentarians described to me how oppressive German ‘leadership’ has become for countries like Portugal, especially when accompanied by erratic support from France, and to people like them. They said to me that British officials, and politicians, have been of great assistance to Parliamentarians from countries like Portugal, and to the objectives of their southern European countries, in this difficult environment. We are now in danger of betraying these people.
There are three key issues at stake, even when confining the discussion to cooperation on economic matters.
The first of the great European economic projects, European Monetary Union, is under severe threat – as we all know. Much effort will be necessary, over the next ten years, to create an EMU which works properly – and indeed to prevent EMU from collapsing. That will require Europe to find a form of banking union, a form of fiscal insurance, and a new set of rules for macroeconomic policymaking, which taken together adequately spread throughout the Eurozone the costs that EMU membership currently imposes on countries in the southern European periphery. I myself have written extensively about the grave mistakes which have been perpetrated in the mismanagement of Europe’s monetary union, about the risks which this mismanagement is imposing on the global economic system (both in Britain and further afield), and about how this mismanagement can be fixed. Many other economists have written about this, too. There is much to sort out here, all of which is of direct concern to Britain.
The second of the great European economic projects – the free movement of labour – is also under severe pressure, not just in the UK but in the EU. I believe that this project will also will need to be amended in relation to the other 27 members of the EU and not just in Britain, over the next ten years. Many analysts in Europe, not just in Britain, are already carefully considering how this might be done, including through changes in the kinds of exemptions described above, or through labour market regulations. It is clear that visa-free travel and fast passport lines will remain for the movement of persons. But I think it inevitable that automatic rights to work and settle will come to be constrained. Likewise, I think that the sensitive issues of control over welfare and benefits, over the provision of health services, and over the issue of asylum will all end up being partly returned to national control. Done properly, a reformed EU will still see significant exchanges of people for travel, work, and study. But I think that it will need to satisfy – and will satisfy – a desire to retain some national political control over these flows. I described above how strong the opposition to this kind of change might be. Nevertheless, I think that it will happen. Here too there is much to sort out of direct relevance for Britain.
This third great European economic project – the Single Market – is not under immediate threat. But it is incomplete. The extension of the Single Market from goods to services is a challenging task, one which will bring great rewards to British service providers, as and when it happens. But this will only happen if this extension is done properly. There is much heavy lifting to be done here too.
Many thoughtful people in Europe are now thinking about what to do next. The Five Presidents Report, published last year, sets out a view about one possible way forward, a view which, in my view, is profoundly mistaken because it sees the centralisation of European power as the only way forward. Debate over that report – especially as it concerns the three issues which I have raised above – will be of very great importance for Europe’s future, and for Britain’s future.
This is a discussion in which British engagement is crucial, not just for Britain but for all of the other 27 members of the European Union. There have been times in the past when Britain has been insufficiently concerned with Europe: in the run up to the Napoleonic Wars, Britain was preoccupied with its Empire; immediately before WWI, Britain was preoccupied with Northern Ireland. The consequence, in both of these cases, was not a good outcome. It is imperative for Europe that Britain remain engaged with the future design, and reform, of the EU.
Achieving a more satisfactory outcome whilst still remaining within the EU
Finally, we need to understand that the three points which I have made above, when taken together, might actually point to a way forward in which Britain remains a member of the EU.
My argument in support of this claim has four steps which I now set out in order.
First, I believe that a rush to trigger of Article 50, without a clear plan, and without implicit agreement about this plan from the rest of Europe, would be a disaster. Gus O’Donnell assured us, ten days ago, that it is within the power of the UK’s highly-trained and professional Civil Service to ensure that any such rush is avoided, and that the necessary planning is done carefully and professionally, in a measured manner.
Second, it is my considered view that such careful planning will lead to a realisation that, if we leave the EU, we will endanger our membership of the Single Market and yet not obtain a satisfactory outcome about the movement of labour. That is to say, I think that any Brexit negotiations, even when pursued carefully, will point towards to an outcome which makes this country very much worse than it is now. It seems unlikely that having decided to leave the EU, the UK would want to get into an EEA agreement which is far worse for the UK then EU membership. And the Swiss arrangement is deadly. So the only remaining option is a Canadian-type FTA or another kind of FTA, with no free labour mobility and no passporting for financial services. Such an outcome would basically be a free trade area in goods (minus agriculture) and a partial free trade area in services (without access for finance or access to European rulemaking). This does not look attractive to me, and I doubt that it will be attractive to the British people. I think that there is a very real danger of regret and acrimony at the end of any such negotiations, even if they are undertaken seriously and carefully, when those who voted Leave come to see that actually leaving the EU would cause very serious damage to their own economic and political future.
Third, as a result of the previous two steps, I believe that those in the centre ground of British politics, and those in the British Civil Service, now need to develop a set of plans for the kind of negotiated outcome they would like which might keep this country within the EU and give a better outcome for the country than leaving. But I also think that any such plans will need to respect the objectives of those who voted for us to Leave, objectives which arise out of the circumstances that I described at the beginning of this note.
Fourth, in order to keep alive the possibility of such a Remain outcome, I believe that Article 50 should not be triggered until it is clear that there is a promise that the outcome of negotiations is put to a referendum, alongside a well-thought through alternative plan of what might happen if the country stayed a member of the EU. Otherwise there should be a parliamentary election on this question.
Any offer to the British public about the possibility of remaining within the EU – designed in part to appeal to those who voted Leave – will need to combine four things.
- It will need to offer hope for the future in the form of a New Deal in macroeconomic policymaking, built around a scheme of public works, and a commitment to abandon the policy of austerity, in the way which I have described above.
- It will need to involve a set of reforms to the domestic labour market, and to the rules about migration, which limits the damage which unimpeded free movement of labour undoubtedly causes to those who are less well off in the country.
- It will need to be made much clearer to the British public – in a way which has not happened up until now – just how much the future of people in Britain depends on the preservation and strengthening of the Single Market within Europe, with Britain as a leading member engaged in that strengthening.
- Finally it will need to be made clear that Britain will not join EMU. I have not mentioned this point up to now, but it does seem that many who voted Leave did so out of the fear, not sufficiently dismissed by the Remain team, that Britain would be somehow be sucked into the monetary union. It will also need to be made clear and that Britain will play a part in helping ensure that Europe finally manages macroeconomic policymaking within the Eurozone, in a way which is better for the Eurozone, for Britain, and for the rest of the world.
Such a way forward could, with skill and care, be properly presented to those within Britain who voted Leave as addressing their concerns.
Such a way forward could also be presented to other European countries as helping them to solve some of their concerns, which I have identified above, rather than just solving our own. In particular, it will be necessary to establish an outcome in which reforms to labour-market regulation in the UK, and to the management of migration, can be made to sit alongside the EU principle about the free movement of labour, as and when that that principle is renegotiated within Europe, as it undoubtedly will be.
Preparing such an alternative plan will require very skilful leadership. But I believe that we need such a plan and that we are more than able to create it.
About the authors:
* David Vines, Professor of Economics and Fellow of Balliol College, University of Oxford; CEPR Research Fellow