Is the CBI right to claim the net benefit of the EU to the UK is 4-5% of GDP?

Is the CBI right to claim
the EU benefits UK GDP by 4-5%?

As we discussed in our previous post, the CBI's report on Europe, published today, makes for interesting and thought-provoking reading. However, the CBI’s estimate of the net benefits of EU membership isn’t the strongest part of the report.

The CBI puts the net benefit at between £62bn and £78bn, or between 4% and 5% of UK GDP. This, it claims, is equivalent to £3,000 per household or £1,225 per individual. Credit to the CBI for trying to inject some hard numbers into the debate. However, putting a single figure on the costs and benefits of such a complex arrangement is notoriously difficult – as we ourselves know too well. The CBI does readily admit that in its report, and to be fair, very clearly qualifies its figure.

 

Still, there are at least three problems with this figure, which in combination means it should be taken with a huge pinch of salt.

 

Arbitrary extrapolation based on a highly limited literature review: Ultimately, the figure is taken from a literature review of previous estimates of the benefits. On average, the literature surveyed puts the net benefit of EU membership at between 2%  and 3% of GDP. The review covers only five pieces of literature with the most recent one being from 2008. This is a very small pool of literature to draw from. More critically, the CBI goes onto assert,

“Since these studies are not mutually exclusive…it is not unreasonable to infer that the net benefit arising from EU membership is somewhat higher than 2–3%, perhaps in the region of 4–5% as a conservative estimate.”

It’s widely accepted that EU membership comes with unquantifiable benefits, but the CBI takes a massive leap of faith here. It seems to suggest that the net benefits of different aspects can be tallied up given that they are not mutually exclusive – and it may well be that dynamic effects triggered by, say, EU market access mean net benefits are often underestimated. However, curiously, the CBI provides no proper explanation or evidence for why it settled on 4% to 5%, leaving us guessing where this extra net benefit actually comes from. Having discussed this with the CBI, it’s clear that they have aggregated the net benefits of various aspects of the EU from different studies.

 

While there is logic in this approach, given the diverse nature of the studies it is tricky to simply add parts of the up, assuming that they work the same together as they do in isolation. After all, there is a reason why these studies have struggled to produce a clear figure for all the areas themselves. Once this approach was chosen more detail should have been included in the CBI report, even if it meant adding a statistical or economic annex (given the hugely sensitive nature of the EU cost-benefit debate).

 

No proper counterfactual is given: What are these net benefits measured against? Does the CBI assume that the UK outside the EU would be left with no trade deal and no single market access? If not, then the net benefit is presumably lower than the 4% to 5% identified. This is the classical shortcoming of most EU cost-benefit studies. In the CBI study, the problem is exacerbated by the fact that the various pieces of literature that it draws from will themselves have diverse counterfactuals.

It’s all the more surprising given that the CBI rightly goes to great lengths to discuss the counterfactuals when it comes to the costs of EU membership, arguing for example that some EU regulations would remain even if the UK left the EU given that they would be domestically needed or pursued by international groups  (which we agree with).

 

Why the same rigour is not applied to its calculation of the net benefits of the EU is not clear. UKIP-types have mastered the art of measuring EU costs with no reference to a counterfactual (see here for a fine example). To a large extent, the CBI study falls into the same trap.

 

Benefits aren’t evenly distributed: Lastly, in an understandable attempt to present an easily digestible figure, the CBI converts its percentage number into pounds and presents it as an evenly distributed benefit over households and individuals. Of course, this is unlikely to be the real benefit felt by households or individuals, with any benefit distributed unevenly and in ways which are nearly impossible to measure.

CBI concludes the UK should stay in a reformed EU - but leaves some important questions open

What would actually happen if the UK left the EU?

The Confederation of British Industry (CBI) has today published a report on Britain's position in the EU, which unsurprisingly concludes that Britain should remain in the EU. It is a decent, thought-provoking read. The CBI, of course, has historically tended to back further integration (see its support for adopting the euro). However, beyond the headlines, the organisation is actually surprisingly critical of the status quo and recognises things need to change:

"The EU has moved too far from ‘adding value’ to ‘adding functions’, resulting in ‘mission creep’ in several areas. The recent Dutch declaration that 'the time of an ‘ever closer union’ in every possible policy area is behind us' offers a positive indication that other member states are also looking at how to refocus the EU.

British business is convinced that, by staying in a reformed EU, the UK can get the best of both worlds – access to markets in Europe and beyond that build on our innate strengths."

Again, this goes to show that it's wrong to try to characterise the Europe debate - particularly as it relates to business opinion - as a polarised discussion between "pro-Europeans" and "eurosceptics" (the BBC has slipped into that again in its coverage today). What's clear is that virtually no one wants to be seen as backing the status quo.

Within the very broad "reform camp", there is of course a wide range of opinions. We agree that reform is possible and if attainable the UK should stay in a reformed EU rather than leave, as we set out last year in our report 'Trading Places' (which the CBI report draws from). The CBI report also offers some decent ideas for reform, including a sunset clause for EU laws in areas such as employment, a fresh single market drive, including in services, (which we definitely agree with), and crucially, that the "next" EU treaty includes institutionalised safeguards against the EU becoming an effective extension of the eurozone.

We have three observations, however:

First, the CBI "strongly" supports EU reform. While it plays down the risk of the "worst-case" scenarios in areas such as Eurozone caucusing, over-regulation and internal / external protectionism, it begs one question: what will the CBI's position be in a scenario where such reforms are absent and the worst-case scenarios materialise?

Second, how confident is the CBI in its estimates of the benefits of EU membership - £3,000 per household. The study notes,

"most studies cited find that the net benefit of EU membership to the UK is around 2–3% of GDP"

From which the CBI infers:

"It is not unreasonable to infer from a literature review that the net benefit arising from EU membership is somewhere in the region of 4–5% of UK GDP"

We'll look at this figure in a separate blog post, as it's important.

Finally, on the trade-offs involved in leaving, the CBI argues:

"Were the UK to leave the EU, it is not likely to adopt an off-the-peg solution; rather, it would negotiate a bespoke relationship with the EU"

We agree. There are models for 'non-membership of the EU': the Swiss, Norwegian and Turkish, but, as we set out last year, none of them would be suitable for the UK. The CBI also recognises that it would be an individual 'bespoke' UK negotiation.

We wouldn't be nearly as pessimistic as the CBI regarding the prospects of striking a decent deal outside the EU. However, absent a damascene conversion in key parts of Europe which will have to approve a new deal (over and above basic WTO-rules), there are likely to be drawbacks. As the CBI argues:

"market access – in particular the type of access that passport regimes provide – is unlikely to come without obligations on the regulatory side, including the likely adoption of EU rules without any ability to influence these."

So it is not that the UK could not leave the EU, and the downside can easily be overestimated, it is that a continuity deal the UK may be able to achieve is not likely to be as good as staying in a reformed EU.

So, here is the challenge we should all row behind: reform the EU as fast as possible, and in any event before the UK holds a referendum.