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LONDON AND THE EU
Contents
INTRODUCTION
SUMMARY
1THE SINGLE MARKET
1.1 VALUING THE SINGLE MARKET
2FREE MOVEMENT OF GOODS AND SERVICES
2.1 FREE MOVEMENT OF GOODS
2.2 FREE MOVEMENT OF SERVICES
2.3 DRIVING A GROWTH AGENDA WITHIN EUROPE
3FREE MOVEMENT OF PEOPLE
3.1 LONDON’S MIGRANT WORKERS
3.2 MANAGING MIGRATION
4FREE MOVEMENT OF CAPITAL
4.1 EUROPE’S BUSINESS CAPITAL
4.2 CHANGING GLOBAL ECONOMY
4.3 UNCERTAINTY IS BAD FOR LONDON
5FUTURE OF THE EURO
5.1 FULL FISCAL INTEGRATION IS FAR IN THE FUTURE
5.2 CHAMPIONING THE SINGLE MARKET
DRIVING GROWTH AND COMPETITIVENESS IN EUROPE
APPENDIX – STUDIES OF THE COSTS AND
BENEFITS OF THE SINGLE MARKET
LONDON AND THE EU
May 2014
INTRODUCTION
Britain joined the European Community in 1973. Despite this decision
being subsequently ratified in a referendum, with two-thirds voting in
favour, the UK’s relationship with its European partners has always
been difficult. In 2013, the Prime Minister, David Cameron pledged a
future Conservative government to an in/out referendum on membership
of the European Union after negotiating a “new settlement” for the UK.
London’s business community is committed to remaining within the
European Union (EU), in large part because of the economic benefits
of the Single Market, and sees great opportunities for Britain to lead a
deepening of that market to drive jobs and growth across the country.
However, while London and the UK have benefited in the round from
EU membership, and stand to do so more in the future, this economic
integration has inevitably lead to social and economic costs for some
groups, which national and regional government need to do more
to mitigate.
It is against this background that London First assembled a working
group of senior business leaders to explore how Britain’s relationship
with Europe affects London and how Britain can seize the opportunities,
and better manage the challenges, in future. These and other discussions
with members have informed and framed the policy position on Europe
set out in this report.
3
SUMMARY
The Single Market of the EU – enshrined in the four freedoms of
movement in goods, services, people and capital – has opened up
European markets to competition by creating common rules. Estimates
of its direct benefit to the UK economy vary, but the liberalisation of trade
that has followed its introduction is seen by most London businesses as
having significantly contributed to jobs, growth and rising GDP.
Britain’s relationship with Europe is of great importance to London:
• the EU is London’s biggest trading partner, responsible for
30-40 per cent of total exports1;
•L
ondon attracts the most Foreign Direct Investment of any city
in Europe2; and
•b
eing part of the Single Market supports London’s status as
an international economic hub. 40 per cent of the world’s
largest 250 companies choose London for their European or
global headquarters, with almost half citing access to Europe
as the core reason for investing.3
Unlike New York or Hong Kong, London has a medium-sized domestic
economy, so being at the heart of the European Single Market is a
crucial part of its success.
Of course, the benefits of the Single Market have not come without
costs. The pooling of sovereignty and creation of common rules
inevitably mean that the UK government has lost independence
of decision-making in important areas of national social and
economic policy.
In particular, the free movement of people has created tensions: while
the aggregate benefit to the UK economy is clear, there are important
social and income distribution issues. Nowhere is this more obvious
than in London, where immigration has been both a vital part of the
economy’s success and yet has also increased competition for jobs,
put pressure on real wages and increased demand on public services
and housing.
However, the opportunity for London, and British, business is not
to threaten exit, but to drive the completion of the Single Market in
services and make EU membership work even better in the UK’s
interests, while vigorously implementing a programme to mitigate
adverse social and income distribution effects that undermine the
success of the whole.
4
Britain has a substantial opportunity to benefit from a growth agenda
in the EU, which would include:
• T RADE IN SERVICES
The completion of the Single Market in services has a similar
potential to increase GDP to that of the completion of the
Single Market in goods in the 1990s. London’s world-class
financial and professional service sectors and tech and
creative sectors are well positioned to exploit this opportunity.
For example, an effective European digital single market is
estimated to be worth an additional 4 per cent to European
GDP,4 currently national barriers around security and
inadequate copyright legislation inhibit the integration of
European digital markets, restrict growth opportunities
in e-commerce and put EU business at a disadvantage
compared to their American counterparts.
• INTERNATIONAL TRADE
The EU is responsible for negotiating external trade agreements
on behalf of all member states with countries outside of the
EU. These EU trade deals cover around 60 per cent of the
extra-EU trade, which would rise to 85 per cent if the EU
successfully completes the negotiations on Transatlantic
Trade and Investment Partnership (TTIP) between the EU
and the USA.5
Realising the benefits of the Single Market means accepting its
framework as a package: the four freedoms are not ‘a la carte’;
states cannot pick and choose which best suit their interests as the
freedoms work together to create an internal market. Britain benefits
from exporting goods and services to the EU; Britain, in the round,
benefits from the brightest and best who want to work here; and
countries that open up their markets to greater competition benefit
from rising wealth, as do individuals who have the right to compete
for work across Europe.
The UK is a large market and a significant player in intra-EU trade
so has a strong position within the EU from which to negotiate and to
seek to drive reform; but the idea that there is a package for Britain
that combines the benefits without the costs is a chimera.
5
European countries outside of the EU, notably Norway and Switzerland,
are often cited as having the benefits without the costs, as they have
access to the Single Market outside of EU membership. However, they
are required to adopt the freedoms of the Single Market, follow its
rules and contribute to the EU budget without having any say in how
those rules are set. It is difficult to see how this arrangement would
work in Britain’s interests.
It is sometimes argued that as a country outside of the Eurozone,
Britain’s long-term interests will inevitably be compromised; Eurozone
members could, over time, become a decision making body whose
interests determine the direction of the EU as a whole.
However, the best way to ensure Britain’s interests in the Single Market
are met in the face of Eurozone integration is not to withdraw to the
side-lines, but rather to be at the centre of European policymaking.
Research carried out by the think tank German Council on Foreign
Relations shows that being at the political centre of the EU amplifies
influence; a stance on the margins has the reverse effect.6 This is
why business wants the UK government to take a more engaged role
within the EU, in order to drive economic growth and competitiveness,
and champion the Single Market.
6
1 THE SINGLE
MARKET
The Single Market of the EU has progressively removed barriers
to intra-EU trading and simplifying access to European markets
through common rules, in order to allow individuals, consumers
and businesses to make the most of the opportunities offered
by direct access to 28 countries and a population of 503 million.7
The EU is the UK’s most important trading
partner; it buys over 50 per cent of all UK
exports and provides nearly half of imports.
As the biggest and richest economy in the
world, it is responsible for a quarter of global
GDP and almost one fifth of global trade.8 While
the EU is still not a genuine internal market
(in the way the USA is) significant progress has
been made, with the direction of travel towards
liberalisation of markets and free trade
across borders.
Table 1 World’s Largest Economies
EU28US
China
Rant
123
Population
500 million 316 million 1.35 billion
GDP $17.9 trillion $16.2 trillion $8.2 trillion
% of global
imports 16.4 15.9 11.5
% of global
exports 15.4 10.5 13.4
Source: Economist Intelligence Unit/ World Bank/ http://europa.eu/
THE SINGLE MARKET
Its purpose is to break down barriers between
individual Member States and, in doing so,
to create “Four Freedoms” across the EU: the
free movement of people; the free movement
of capital; the free movement of goods; and
the freedom to provide services. The EU
has the power to legislate in a number of
areas that directly affect businesses.
These include9:
+ Product specifications, e.g. Directive
2000/36/EC on cocoa and chocolate products
intended for human consumption;
+ Competition, e.g. Council Regulation
139/2004 on the control of concentrations
between undertakings, aka the EC
Merger Regulation;
+ Employment terms, e.g. Directive 2008/104/
EC on Temporary and Agency Workers;
+ Health and safety, e.g. Directive 2009/148/
EC on exposure to asbestos at work;
+ Consumer protection, e.g. Directive 93/13/
EC on Unfair Terms in Consumer Contracts.
The cornerstones of the Single Market are the
“four freedoms” – free movement of people,
goods, services and capital. These freedoms
are enshrined in the treaties of the EU (the
Treaty) and form the basis of the Single Market
framework. The interaction of all four freedoms
are designed to ensure a genuine, seamless,
internal market where goods and services and
the factors of production (capital and labour)
are free to move to the area where they are most
valued, improving efficiency in the allocation
of resources.
Opening up markets to increased competition
and creating common rules instead of 28
different national rules has enjoyed the strong
support of business and policy makers alike.
The Government’s 2013 review of the Balance
of Competences of the EU said the evidence
showed the Single Market had made a positive
impact on the UK, concluding: “There is still a
broad consensus that it [the Single Market] is
at the core of the EU’s development, that it has
driven growth and prosperity in the Member
States, and that it should continue to do so.”10
The Single Market has also supported
international trade. EU trade deals with third
countries, including many of the fast growing
emerging economies. Around 60 per cent of
UK trade outside of the EU is with countries
that come under the umbrella of EU trade
agreements. This will rise to 85 per if EU trade
negotiations with the US are successful.11
But these benefits have not come without costs.
The Single Market requires common rules and
pooling sovereignty in European institutions,
which means the UK government has lost its
independence of decision-making in some
areas of national social and economic policy.
The common trade policy prevents the UK from
negotiating its own bilateral trade agreements
with the dynamic and fast growing economies
of the emerging markets, and the free movement
of people has had distributional effects on
some groups.
7
1.1 VALUING THE SINGLE MARKET
Putting an accurate economic value to the UK’s
membership of the EU is difficult. There are
tangible costs and benefits – such as the cost
of the contribution to the EU budget, the value
of increased trade and the cost and/or benefit
of regulation. These costs and benefits can
be quantified with varying degrees of accuracy,
however there are also intangible costs and
benefits that are more difficult, if not impossible,
to measure.
A key question is whether trading patterns with
Europe are a result of the EU as a institution, with
its market access rules and associated costs, or
whether the close geographical proximity of a
large group of rich trading partners would result
in similar effects.
now, and in the future. EU membership amplifies
the economic potential of the cross-border
European trade that would otherwise naturally
arise from close geographical trading partners.
Table 2 World’s Largest Economies
2000201220202030
(forcast)
(forecast)
EU28 EU28 US US
US US EU28 EU28
Japan China China China
Germany Japan Japan Japan
UK Germany Germany India
France UK
UK Germany
Italy France France UK
China Italy India France
Canada India Italy Brazil
Economies set to baseline of 2005
Source: Economic Research Service, US Department of Agriculture
Not surprisingly, considerable effort has been
put into analysis of the costs and benefits of
membership on both sides of the debate, but
various studies have all reached different results,
ranging from a net benefit of between 2.25 to
6.5 per cent of GDP to a net cost of 1.75 to 4
per cent of GDP attributed to EU membership,
although it should be noted that the conclusions
from these studies are not precisely comparable
(see Appendix).
A consequence of the difficultly in quantifying
intangible costs is that estimates of the value
of the EU to the economy rely on assumptions,
which are vulnerable to the bias of those
conducting the analysis. UKIP, for example,
concluded the combined direct and indirect
costs of EU membership amount to £77 billion
net cost to the UK economy,14 whereas a 2013
CBI report claims membership of the EU is
worth approximately 4-5 per cent of UK GDP
every year, equivalent to £62-78 billion.15
While economists find it difficult to agree on the
value of EU membership, business is resolute in
its belief that the Single Market has significantly
contributed to jobs growth and raising GDP.
Unlike New York or Hong Kong, London has
a medium-sized domestic economy, so being
at the heart of the European Single Market is a
crucial part of its success. As the UK economy
slides down the rankings of global economies,
the EU will remain in the top two through to 2030
(see Table 2). As such, it is likely to remain the
UK’s largest trading partner; therefore, maintaining
full access to the Single Market is critical both
8
FREE MOVEMENT OF
2 GOODS AND
SERVICES
Over the past two decades, British producers trading in goods with
Europe have benefitted significantly from the freedoms of the Single
Market. The EU is London’s largest trading partner, responsible for
30-40 per cent of all trade in goods and services.16 The completion
of the Single Market in services has the potential to drive London,
and the UK’s future growth.
2.1 FREE MOVEMENT OF GOODS
EU legislation has progressively harmonised
technical standards and created the “mutual
recognition” principle, under which goods
legally manufactured or marketed in one
Member State can move freely throughout
the EU.
Approximately three-quarters of the trade in
goods within the EU is covered by harmonised
regulations and this has benefited goods
producers in London.
The EU is the largest destination of London’s
exports in goods. In 2009, 24 per cent of London’s
exports were goods. While manufacturing is
a much lower share of GVA in London than in
other UK regions, it is still a substantial absolute
contribution to overall UK GVA.17
A British Chambers of Commerce survey of
its members found, notwithstanding the rising
importance of emerging markets, the EU is seen
by many exporting businesses as providing the
greatest prospect for growth in the short term.18
2.2. FREE MOVEMENT OF SERVICES
Services are the engine of London’s economy.
London represents 22 per cent of UK GDP but
accounts for around 44 per cent of all UK service
exports.19 The integration of EU markets in
services is not as advanced as that in goods,
yet the completion of the Single Market in digital
services alone could increase European GDP
by 4 per cent by 2020.20
The European Commission has highlighted
problems which inhibit the integration of
European digital markets, and restrict growth
opportunities in ecommerce. These include:
the fragmentation of online markets; inadequate
intellectual property legislation; and the lack of
trust and interoperability.
The Commission advocates that the digital Single
Market should be “mainstreamed” through all
aspects of the Single Market via a common
framework.21 London’s economy with its worldclass tech and digital sectors is well positioned
to benefit from such reforms.
The removal of tariffs and barriers to trading
goods across borders is relatively straightforward,
compared to those surrounding the provision of
services. Some progress has been made for
example, the Services Directive (2006)22 sets
out the legal framework for liberalisation but
more could be done.
WHY IS SERVICES INTEGRATION
SO DIFFICULT?
Goods, can be exported without the producer
and consumer being present at the same
time, but this is not generally true of services.
While some services can be provided
across borders (for example those provided
electronically), in many cases either the
recipient moves to receive the service (for
example tourism) or the provider moves, to
provide it. This makes services provision
vulnerable to non-tariff barriers such as
licensing and professional standards, which
distort free competition.
There are 800 regulated activities in the
EU, ranging in different member states from
doctors and architects to photographers,
barmen and chambermaids. Of these,
only seven – architects, dentists, doctors,
midwives, nurses, pharmacist and vets –
are automatically recognised in other
EU countries.23
These non-tariff market restrictions present
a significant barrier to service providers
operating across EU borders.
9
London’s economy is well placed to benefit from
the opportunities offered by progress towards
services integration in Europe and some have
suggested that it is possible to achieve this without
full EU membership. The argument is that the UK
(being a large and important economy in Europe)
can renegotiate a package that has all of the
benefits and none of the costs.
2.3 DRIVING A GROWTH AGENDA FROM
WITHIN EUROPE
A ‘thinner’ future relationship with the EU would
require a separate bilateral agreement with the
EU, similar perhaps to Switzerland – or joining
an existing framework such as the European
Economic Area (EEA) - the ‘Norway option.’
As a large economy with considerable expertise
in liberalisation, the UK is well positioned to
achieve this. Size matters in Europe; differences
in economic strength, demographics, foreign
policy influence and international status determine
the ability to influence the European agenda, but
leveraging this influence is made more complex
by the institutional environment of EU where
bargaining, coalitions and the ability to do deals
are important.
In the case of both Switzerland and the EEA,
access to the Single Market requires participants
to play by its rules. Both have adopted all of the
fundamental freedoms of the Single Market and
contribute to the EU budget, but neither are
represented in the EU institutions. To secure
access to the Single Market, countries outside
the EU are required to adopt the rules of the
market without having any say over the design
of those rules. For these countries the only
significant advantage is exemption from
common agriculture and fisheries rules.
The UK is a large market and runs a trade deficit
in intra-EU trade, so has a strong negotiating
position with the rest of the EU, but the idea that
there is a package for Britain that combines the
benefits without the costs is a chimera.
The trade deficit may create leverage in securing
a favourable deal in goods, but services (upon
which London depends) are more difficult to
integrate and require strong institutions and the
political commitment to see off any backlash from
local producers resistant to foreign competition.
Delivering progress on services integration at the
pace and depth that the UK would want, with the
UK outside the EU and the UK then having equal
access on the right terms, is difficult to see.
The opportunity for London – and British – business
is not to leave the EU, but to drive the completion
of the Single Market in services and make the
Single Market and EU membership work even
better in the UK’s interests.
The northern European states and some central
eastern European states are natural champions
f market liberalisation and have an ally in the
Commission, which is committed to working
towards completing the market in digital, energy
and telecommunications.24 But the smaller
member states lack the economic influence to
drive this agenda through intergovernmental
negotiation and bargaining.
The UK has historically shown leadership in
driving a liberalising agenda in Europe. Prime
Minister Margaret Thatcher signed the Single
European Act, which set the timetable for the
completion of the Single Market, because she
was prepared to back European integration
where there was a clear economic imperative.25
It is not possible to lead in Europe while
threatening to leave. Being at the political centre
of the EU amplifies influence and the ability to
build coalitions; a stance on the margins has the
reverse effect.26 This is why business wants the
UK government to take a more engaged role
within the EU, in order to drive economic growth
and competitiveness.
10
FREE MOVEMENT OF
3PEOPLE
According to research by University College London, in the last decade,
immigrants to the UK from other parts of Europe made a net fiscal
contribution to the UK of £22 billion.27 Most immigrants from the EU
are in employment, make a substantial net contribution to the economy
and have deepened the pool of talent in London. But these aggregated
economic figures mask more complex impacts in different parts of the
labour market.
While the aggregate benefit to the UK economy
is clear, the free movement of people has also
increased competition and put pressure on
real wages for lower skilled workers. These
distributional effects have been more sharply
felt in London because it has attracted higher
concentrations of migrants compared to other
UK regions, as shown in Chart 1.
The Single Market is a package; the four freedoms
are not ‘a la carte’ and therefore states cannot
pick and choose which to opt-out from. The
freedoms work together to create an internal
market that creates overall benefits. The key
issue is not whether the UK can secure an optout (because this is highly unlikely), but how best
to design a programme to mitigate the adverse
distributional effects that undermine the success
for the whole.
FREE MOVEMENT OF PEOPLE
In 2004 the EU adopted a directive (2004/38/
EC) – usually referred to as the free movement
directive – which consolidated previous
EU legislation on the subject and provided
greater clarity as to the meaning of the
limitations on free movement that can be
applied on the grounds of public policy,
public security and public health.28
The free movement of people allows EU
citizens to:
+ Look for a job in another EU country
+ Work there without the need for
a work permit
+ Reside there for that purpose
+ Stay there even after employment
has finished
+ Enjoy equal treatment with nationals in
access to employment, working conditions
and all other social and tax policies
3.1 LONDON’S MIGRANT WORKERS
London consistently ranks in the top three global
cities across a range of global cities indices.29
A consequence of this success, and its open
economy, is that London attracts more migrants
than other UK regions. Chart 1 illustrates
immigrants as a percentage of the resident
population is much greater in London, with
some boroughs affected more than others.30
A driver of the city’s competitiveness is its ability
to attract international talent. London is the world’s
leading centre for high-skilled knowledge-based
workers, employing 1.5 million – compared to
1.2 million in New York and leads European
capitals by some distance.31 The demand for
high-skilled workers will continue to increase as
London grows.32
As well as high-skilled workers, London has also
attracted lower-skilled workers, who increase
competition for local jobs, which puts a downward
pressure on real wages.33
Migrants from the eight countries that joined the
EU in 2004 (Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Slovakia and Slovenia)
make up a larger share of lower skilled jobs (see
Chart 2)and workers from the wider EU make up
25 per cent of the workforce in accommodation
and food services.34 In the unskilled and semiskilled service sector, a 1 per cent point rise in
the share of migrants reduces average wages
by 0.5 per cent.35
11
Chart 1 Geographical distribution of UK residents born in EU outside
British Isles* by Parliamentary constituency, England and Wales, 2011
% of residents
London
12.8 to 17 (12)
8.7 to 12.8 (26)
4.6 to 8.7 (26)
0.5 to 4.6 (26)
© Crown copyright. All rights reserved. House of Commons Library (2013.) Source: UK 2011 Census results, accessed via www.nomisweb.co.uk
*‘British Isles’ inlcudes UK, Ireland, the Channel Islands and the Isle of Man.
12
Alongside income distribution impacts,
immigration has also created congestion
impacts in London. A failure to adequately
plan for the impact of the wave of immigration
in 2004 led to pressure on London’s housing
and already stretched public services.36
Chart 2 Percent of all workers in country-of-birth in each
job-skill level, Q1 2011
UK-born
EU14
EUA8
Rest of the World
40
35
30
25
how to implement a programme to mitigate the
adverse social and income distribution effects
that undermine the success for the whole.
This would include central government
implementing a cross-departmental strategy
to deal with the public services and housing
effects of recent and future immigration; greater
devolution to local government to manage
local impacts; and a step-change in education
and skills policies to give local talent the
competencies and employability skills to
compete on a level playing field with
migrant workers.
20
15
10
5
0
Low
Lower middle Upper middle
High
A2 (Bulgaria and Romania) and A8 (Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Slovakia and Slovenia) member states.
3.2 MANAGING MIGRATION
Negotiating opt-outs from the free movement
of people legislation is not a credible strategy
to cope with the consequences of immigration.
The Single Market’s fundamental principles
are not ‘a la carte’; free movement is as integral
to participation in the Single Market the free
movement of capital, goods or services. The
free movement of people legislation also applies,
in general terms to EEA countries outside the
EU (Norway, Iceland and Lichtenstein).37
The Swiss recently narrowly backed a referendum
to bring back strict quotas for immigration from
EU countries. However, the vote invalidates the
Swiss-EU agreement, which provides Switzerland
with access to the EU’s Single Market. If the
Swiss go ahead with restrictions on free
movement, it is likely to result in restrictions
to market access.38
As Foreign Secretary, William Hague, said,
“If national parliaments all around the EU were
regularly and unilaterally able to choose which
bits of EU law they would apply and which
bits they wouldn’t, the European single market
wouldn’t work…”39
The key issue is not whether the UK can secure
an opt-out (because this is highly unlikely), but
13
FREE MOVEMENT OF
4 CAPITAL
The Single Market is not just about intra-EU trade, virtually all
Single Market policies have, to some extent, an international aspect,
whether through international regulatory co-ordination or through
trade agreements which open up the EU market to extra-EU trade
and investment.
A crucial driver of London’s success is its role
as an international trading hub for people, ideas
and capital. Functioning as the business capital
of the EU has arguably underpinned, or at least
enhanced, London’s global status and attracted
significant inward investment.
4.1 EUROPE’S BUSINESS CAPITAL
London’s open economy, English speaking
workforce and stable political regime are assets
which make it very attractive for international
economic activity. In the absence of a large
domestic economy – like that of New York –
access to the Single Market is a significant
asset to London’s attractiveness.
London’s success as a global financial centre
is partly explained by the fact that it is Europe’s
financial centre. London is responsible for 78
per cent of foreign exchange turnover and 74
per cent of EU trading in interest rate derivatives.40
London is the leader among EU cities for
Foreign Direct Investment (FDI) and accounts
for approximately 30 per cent of all UK FDI.41
Over 40 per cent of firms from outside the EU
coming to the UK cite access to the Single
Market as the core reason for investing.42
40 per cent of the world’s largest 250 companies
choose London for their European headquarters.
This compares with just 8 per cent choosing
Paris, London’s closest rival.43 For inbound
companies from outside of Europe and emerging
markets the figure is even higher at 60 per cent
overall, with London hosting all of the inbound
top 250 company headquarters from emerging
market economies such as Brazil and Mexico.44
4.2 CHANGING GLOBAL ECONOMY
In recent years emerging and developing
economies have grown at an average annual
pace of 8.5 per cent, compared to less than 1 per
cent average growth in the Eurozone between
2003 and 2013.45 It is argued that being tied to
EU trade agreements is a disadvantage, as it
prevents the UK from negotiating with more
dynamic economies and historical trading
partners such as the Commonwealth nations.
However, in global trade it is hard to see any
model outside of the EU in which the UK would
command the same influence as the world’s
largest market.
The EU is responsible for negotiating on external
trade issues on behalf of all member states.
While it is of course possible to negotiate bilateral
agreements – for example Mexico has more
bilateral trade agreements than any other country46
– the UK’s negotiating position will not be as
strong outside the EU. Over a third of total world
trade originates in Europe, the EU is the top
trading partner for about 80 countries and
therefore the prize is considerably larger than
a bilateral agreement with the UK alone.
The EU has concluded 37 Free Trade
Agreements including South Korea, Mexico,
South Africa, Chile and most recently Canada.
An agreement with Singapore is agreed but
not yet in force.
14
4.3 UNCERTAINTY IS BAD FOR LONDON
A change to Britain’s relationship with the EU
that could create potential restrictions on access
to the Single Market is a source of uncertainty,
which risks delaying or preventing investment
decisions. Although it is difficult to prove
quantitatively, conversations with London First
members suggest that, among other factors,
uncertainty over the UK’s future relationship
with Europe is playing a role in delaying some
multinationals from investing in London, even
though the capital continues to score highly
as an attractive place to do business relative
to competitors.
Completing the Transatlantic Trade and
Investment Partnership (TTIP) between the
EU and the USA – which, if successful, would
be the biggest trade and investment deal in
history, encompassing half the world’s GDP
and a third of its trade47 – would demonstrate
a commitment to achieving free trade through
the EU.
As in all EU negations, there are competing
interests determined by the structure and
priorities of individual national economies. For
example, the UK is pushing hard for a sector
level agreement in financial services, given the
importance of the sector to the economy. The
UK must play its part in pressing for the widest
possible TTIP agreement. Failure to complete
TTIP will be a significant blow to free trade and
self-inflicted harm to EU interests.
15
5 FUTURE OF
THE EURO
The governments of the Eurozone accept that a new form of governance
is required to manage the single currency and a framework that sets
out a path towards closer economic and money union is in place.
Eurozone members have embarked on a
programme of closer fiscal and monetary
integration. The first stage – banking union –
is underway; the next stage is to move towards
greater fiscal union, mutualisation of debt and
stricter economic and budgetary surveillance.
The final stage is the pooling of sovereignty in
fiscal decisions.48
Progress towards economic and monetary
union (EMU) presents two risks to UK interests:
the Eurozone creates a membership class of
its own, which limits the opportunity for the UK
and other non-Euro members to influence the
agenda; and the Euro project may continue to
consume all of the energy of reform, crowding
out the opportunity for services liberalisation.
5.1 FULL FISCAL INTEGRATION
IS FAR IN THE FUTURE
The general framework for EMU is place, but
the political commitment to its implementation is
not. The initial ambition of the banking union – to
create a common deposit guarantee scheme –
has been scaled back to avoid triggering Treaty
change and there is no evidence of popular
support in any Eurozone country for a transfer of
powers at the level required for full fiscal union.
This has implications for how quickly and deeply
EMU will occur; the current Commission has no
plans to bring forward any legislation in relation
to stages two and three of EMU, which would
also require Treaty change.49
If economic conditions in the Eurozone continue
to improve, then this may well result in Eurozone
members pushing the difficult decisions on
monetary union into the future. The sovereign
debt crisis has demonstrated it that the Eurozone
fails to act until it is forced to, and even then will
only take the minimum small steps necessary to
avert crisis.
5.2 C HAMPIONING THE
SINGLE MARKET
The UK, Denmark and Sweden have an option
not to join the Euro, but all other EU members
and new members have a legal obligation to
move towards adopting the single currency,
and indeed for most joining the Euro is part of
their political ambitions; therefore, the number
of Euro-outs will diminish over time.
The legal relationship between the Eurozone
and the EU institutions has yet to be fully
defined, but the Eurogroup and the European
Council formation of the Eurozone have
established their own presidencies. The UK
will be absent from many of the important
interactions of the finance ministers of Europe;
this is undeniably a risk to Britain’s interests.
In order to protect these interests, the UK
government has successfully secured a ‘double
majority’ voting mechanism in the European
Banking Authority (EBA). Key decisions relating
to standards applying across the Single Market
will need to be approved by a simple majority
of members of the EBA Board of Supervisors
of both participating and nonparticipating
Member States.50
Further guarantees that recognise the central
importance of the Single Market will be required
as Eurozone members take steps towards fiscal
integration. The only way to ensure the Single
Market remains a priority is not to withdraw, but
rather to be at the centre of European politics.
This requires an engaged Britain in Europe
acting as a counterweight to Eurozone bias
and championing the Single Market at
every opportunity.
16
DRIVING GROWTH
AND COMPETITIVENESS IN EUROPE
London First members are committed to the Single Market and therefore
to remaining in the EU. The four fundamental freedoms of the Single
Market (free movement of goods, services, people and capital)
have served London’s economy well, boosting intra-EU trade and
international trade and investment. London does not enjoy the large
domestic economy of competitor cities like New York or Hong Kong;
therefore direct access to European market is a significant source of
its attractiveness to international business.
The EU will continue to be London’s largest trading partner in the
future. London’s economy of world class business clusters in financial,
professional services, tech and creative are well positioned to take
advantage of the opportunities offered by deeper integration of
European services markets. To capture these benefits means
accepting the Single Market as a package; the freedoms are not
‘a la carte’ – the creation of an efficent internal market depends on
all freedoms working together.
The opportunity for London – and British – business is not to leave,
but to drive the completion of the Single Market in services and make
the Single Market and EU membership work even better in the UK’s
interests, while implementing a programme to mitigate the adverse
social and income distribution effects that undermine the success
of the whole.
17
APPENDIX
STUDIES OF THE COSTS AND BENEFITS
OF THE SINGLE MARKET
• UKIP – How much does the European Union cost Britain? Based on
conclusion that “for 2010, the combined direct and indirect costs of
EU membership will amount to... £77 billion net” (2010)
• Civitas. A cost too far? ‘Most likely’ estimate of annual cost is put at
4 per cent of GDP per year (2004)
• Institute for Economic Affairs, (Minford et al) Should Britain leave
the EU? Midpoint of estimated range of “3.2-3.7 per cent of GDP
in ongoing costs” (2005)
• Institute of Directors EU membership – what’s the bottom line?
Estimated net cost of 1.75 per cent GDP per annum (2000)
•U
S International Trade Commission The impact on the US economy
of including the UK in a free trade agreement with the US, Canada
and Mexico. Estimate refers to the impact on UK (-0.02 per cent of
GDP) of the UK withdrawing from the EU and ‘joining’ NAFTA (2000)
•C
ecchini et al. (1988) on behalf of the European Commission
conducted an analysis of the potential impact of the Single Market
and calculated a potential wealth effect of 4.25-6.5 per cent of GDP
(for the original twelve member states)
•E
uropean Commission Quantifying the potential macroeconomic
impact of the Single Market, shows a 4.8-5.7 per cent rise in GDP
since 1987 (2010)
• CEPR, (Boltho and Eichengreen), The Economic Impact of European
Integration, argues that economic integration in Europe led to 5 per
cent additional income gains (2008)
• National Institute of Economic and Social Research The
macroeconomic impact of UK withdrawal from the EU. Estimate
refers to the permanent impact on the level of GDP of the UK
withdrawing from the EU is 2.25 per of GDP (2004)
• Department for Business Innovation and Skills - estimate refers to the
trade benefits of EU membership since the early 1980s and refers
to impact of membership of income per capita is a +6 per cent
increase (2010)
• CBI Our Global Future report claims that EU membership is worth
around 4-5 per cent of GDP or between £62bn and £78bn per year
(2013)
18
WORKING GROUP MEMBERS
Stuart Popham, Vice Chairman EMEA Banking, Citigroup (Chair)
Cyrus Ardalan, Vice Chairman, Head of UK and EU Public and
Government Relations, Barclays Bank
Sir Andrew Cahn, Vice Chairman, Public Policy, EMEA
Nomura International
Miles Celic, Director of Group Strategic Communications, Prudential
Robert Elliott, Chairman and Senior Partner, Linklaters
Alan Keir, Chief Executive Officer and Group Managing Director,
HSBC Bank
George Kessler, Joint MD, Kesslers International
Michael Pritchard, Director, EMC
John Studzinski, Senior Managing Director, Global Head,
Blackstone Group
EXPERT WITNESSES
Jacqueline Minor, Head of Representation UK,
European Commission
Dr Andrew Lang, Associate Professor, London School of Economics
Lord Liddle, Former Special Adviser on European matters to the
Prime Minister and the President of the European Commission
We would like to thank the members of our working group
and expert witnesses for their contribution. The analysis
and conclusions contained in this report are those of London
First and no endorsement should be inferred from any one
individual or organisation referred to above.
19
Economics, December 2011
European Policy Center. ‘The
Economic Impact of a European
Digital Single Market’ Copenhagen
Economics, March 2010
21
House of Lords European Union
Committee. ‘Re-launching the
Single Market’ 15th Report,
London, April 2011
22
The Services Directive (2006)
was designed to liberalize market
access for cross border service
provides but it did not adopt
mutual recognition of rules, rather
the directive provided for free
access which allows governments
to impose restrictions for reason
relating to protection of consumers,
environments public safety
and health.
23
European Commission. ‘Towards
a better functioning Single Market
for services—building on the
results of the mutual evaluation
process of the Services Directive’,
European Commission, COM
(2011) 20 final, 27 January 2011
24
See European Commission.
‘Digital Agenda for Europe’ http://
ec.europa.eu/digitalagenda/
digital-agenda-europe
25
BBC News. ‘Thatcher and her
tussles with Europe’, 13th
April 2013.
26
J. Barr and F. Passarelli (2009),
“Who has the power in the EU?,”
in Mathematical Social Sciences,
3/2009, pp. 339–66.https://
ip-journal.dgap.org/en/ip-journal/
topics/state-powerwithin-european-integration
27
Dustmann and Frattini (2013),
The Fiscal Effects of Immigration
to the UK, Discussion Paper
Series CDP No 22/13, Centre for
Research and Analysis of Migration,
UCL,November 2013
28
Home Office/ Department for
Work and Pensions. ‘Review of
the Balance of Competencies:
Internal Market – Free Movement
of Persons‘, Call for Evidence,
May 2013. Available at https://
www.gov.uk/government/uploads/system/uploads/attachment_data/file/200497/
Free_Movement_of_Persons_-_
Call_for_Evidence.pdf
29
AT Kearney. Press Release.
‘New York, London, and Paris are
Top Global Cities, with Beijing
Making the Top 10 for the First
Time in 2014 A.T. Kearney
Global Cities Index, 15th April
2014. Available at http://www.
atkearney.com/news-media/
news-releases/newsrelease/-/
asset_publisher/00OIL7Jc67KL/
content/new-york-london-andparis-are-top-globalcitieswith-beijing-making-thetop-10-for-the-first-time-in2014-a-t-kearney-globalcitiesindex/10192#sthash.
GeWZmD3x.dpuf
30
Home Office/ Department for
Work and Pensions. ‘Review of
the Balance of Competencies:
Internal Market – Free Movement
of Persons‘, Call for Evidence,
May 2013. Available at https://
www.gov.uk/government/uploads/system/uploads/attachment_data/file/200497/
Free_Movement_of_Persons_-_
Call_for_Evidence.pdf
31
The Deloitte study finds that
London is substantially the
biggest global hub for high-skill
knowledge-based sectors. These
currently employ 1.5 million people
in London, compared to 1.2 million
in New York, 784,000 in Los
Angeles, 630,000 in Hong Kong
and 425,000 in Boston.
32
Deloitte. ‘London Futures:
Globaltown: winning London’s
crucial battle for talent’,
Deloitte, 2013
33
Migration Advisory Committee
Report. ‘The labour market
20
impact of relaxing restrictions on
employment in the UK of nationals
of Bulgarian and Romanian EU
member states’, December 2008
34
Annual Population Survey (2012)
35
BRIEFING Oxford University.
‘Labour market effects of
immigration’, Migration
Observatory, March 2014.
36
Migration Advisory Committee
Report. ‘The labour market
impact of relaxing restrictions on
employment in the UK of nationals
of Bulgarian and Romanian EU
member states’, December 2008
37
Official Jounral of the European
Union. DIRECTIVE 2004/
38/EC OF THE EUROPEAN
PARLIAMENT AND OF THE
COUNCIL, 29 April 2004
38
Financial Times. ‘Swiss clash
with EU foreshadows tensions if
UK votes to leave’, 9th February
2014
39
Financial Times. ‘William Hague
pours cold water on Tory EU
rebellion’, 12th January 2014
40
CityUK. ‘The UK and EU: A
mutually beneficial relationship’,
December 2013
41
GLA Economics. ‘London and
Foreign Direct Inward Investment:
Case for London’, Technical
Report 2, November 2004
42
Deloitte. ‘London Futures: London
Crowned Business Capital of
Europe’, Deloitte, 2014
43
Deloitte. ‘London Futures: London
Crowned Business Capital of
Europe’, Deloitte, 2014
44
Deloitte. ‘London Futures:
Globaltown: winning London’s
crucial battle for talent’, Deloitte,
2013
45
Global Finance. ‘The World’s
GDP Growth per Region’.
Available at http://www.
gfmag.com/component/
content/article/119-economicdata/12376-economicdataworlds-gdp-growth-by-regionhtml.html#ixzz30ZMVACwZ
46
Congressional Research
Service. ‘Mexico’s Free Trade
Agreement’, July 2012
47
European Commission. ‘Towards
a better functioning Single Market
for services—building on the
results of the mutual evaluation
process of the Services Directive’,
European Commission, COM
(2011) 20 final, 27 January 2011
48
–European Commission.
‘Blueprint for a Deep and Geniune
Economic and Montary Union’,
http://ec.europa.eu/commission_2010-2014/president/news/
archives/2013/04/20130430_1_
en.htm
49
Financial Times. ‘Schäuble warns
EU bank rescue agency needs
treaty changes’ Financial Times,
12.05.2013
50
The European Banking Authority
(EBA) is an independent EU
Authority which works to ensure
effective and consistent prudential
regulation and supervision
across the European banking
sector. Its overall objectives are
to maintain financial stability
in the EU and to safeguard the
integrity, efficiency and orderly
functioning of the banking sector.
Design David Carroll & Co
GLA Analysis of London’s
Exports, Working Paper 50, GLA
Economics, December 2011
2
GLA Economics. ‘London and
Foreign Direct Inward Investment:
Case for London’, Technical
Report 2, November 2004
3
Deloitte. ‘London Futures:
London Crowned Business
Capital of Europe’, Deloitte, 2014
4
European Policy Center. ‘The
Economic Impact of a European
Digital Single Market’ Copenhagen
Economics, March 2010
5
TheCityUK (2014), Analysing the
Case for EU Membership: How
does the economic evidence stack
up?, Analytically Driven, April 2014
6
J. Barr and F.Passarelli (2009),
“Who has the power in the EU?,”
Mathematical Social Sciences,
3/2009, pp. 339–66.
7
European Commission. ‘A Single
Market for Goods’. 26th February
2014. Available at http://
ec.europa.eu/internal_market/
top_layer/goods/index_en.htm
8
TheCityUK (2014), Analysing the
Case for EU Membership: How
does the economic evidence
stack up?, Analytically Driven,
April 2014
9
House of Commons Library.
‘Leaving the EU’, RESEARCH
PAPER 13/42 1 July 2013
10
HM Government. ‘Review of
the Balance of Competencies
between the United Kingdom
and European Union: Single
Market, 2013
11
TheCityUK (2014), Analysing the
Case for EU Membership: How
does the economic evidence stack
up?, Analytically Driven, April 2014
12
Nick Clegg speech. ‘Richer,
stronger, safer and greener
Europe’, 08.10.2013. Available
at http://www.libdems.
org.uk/speeches_detail.
aspx?title=Nick_Clegg_speech_
on_a_richer%2C_stronger%2C_
safer_%26_greener_
Europe_&pPK=99b7871a-4d464721-9315-10468f985813
13
Based on research by South
Bank University and the National
Institute of Economic and Social
Research (NIESR). South Bank
reported in 2000 that around 3.5
million jobs depend on exports
to the EU and - in NIESR’s
report - that “up to 3.2 million are
associated directly with exports
of goods and services to other
EU countries.”* However, these
estimates refer to As NIESR
explicitly acknowledged in
its report, “there is no a priori
reason to suppose that many of
these [jobs], if any, would be lost
permanently if Britain were to
leave the EU.”
14
UKIP - How much does the
European Union cost Britain?
Available at http://www.
ukipmeps.org/uploads/file/
Cost_of_the_EU_25_5_11.pdf
15
CBI. Press Release. ‘In with
reform or out with no influence’.
Available at http://www.cbi.org.
uk/media-centre/press-releases/2013/11/in-with-reform-ourout-with-noinfluence-cbi-chiefmakes-case-for-eu-membership/
16
GLA Analysis of London’s
Exports, Working Paper 50, GLA
Economics, December 2011
17
GLA Analysis of London’s
Exports, Working Paper 50, GLA
Economics, December 2011
18
British Chambers of Commerce.
‘Market barriers stifle opposition’.
2012. Available at http://www.
britishchambers.org.uk/
assets/downloads/policy_reports_2012/12-04-05%20
FACTSHEET%20-Trade%20
Barriers%20and%20ops%20
FINAL.pdf
19
GLA Analysis of London’s
Exports, Working Paper 50, GLA
1
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