Economic integration delivers expected results

When Britain joined the EEC (European Economic Community or 'Common Market') in 1973 the expected benefits were all based on the theory of free trade and the process of 'Trade Creation'.

If trade barriers are removed then countries can take full advantage of comparative advantage. Countries specialise, trade more and as a result not only do the costs of goods fall, but everyone is better off.

As the EEC became the EC, then the EU the process of greater integration has continued and the pattern of UK trade has changed.

In 1973 the USA was Britain's largest trading partner. At some point in the recent past France overtook the USA as our biggest trading partner (I missed that too) and now it is Germany. France will be crestfallen, but who cares?

Recently a government economic adviser claimed that the benefits of joining the EEC were pretty weak and only based on trade. According to him the benefits have been as weak as expected.

The Daily Telegraph has details of the changing trade pattern here

EU debate - in or out?

As previously highlighted the debate on the UK's membership of the EU is becoming a major issue. In recent days there have been lots of contributions to the debate in anticipation of the Prime Ministers speech on Europe due on Friday.

One thing most people say is that Britain is a trading nation and they hope the UK can remain a member. However they then go on to make various conditions, saying it must be in the UK's interests to remain and depending on their viewpoints these conditions vary in strictness.

For economists the question is about the gains from trade. The lower the barriers to trade the more everyone benefits. There are various grades of economic integration and how far a country goes along this path determines what benefits they get. In order these steps are:

Free Trade Area  - free trade in manufactured goods only as a rule
Customs Union  - common external barriers with free trade inside the union
Common Market - Customs union plus freedom of movement for labour and capital within the Common Market
Economic and Monetary union - Common Market with one currency, eliminating the need for exchange rates
Political Union - One country

There are variations on these. The important point is that as countries allow greater integration they gain more benefits, but there are also some costs which include loss of domestic political control and in some cases the loss of the ability to pursue independent economic policy.

It would be useful to review the economic costs and benefits of EU membership now so that you can tell the political from the economics points that will be made in the next week or so.

A BBC article is here - there are many others

The debate of EU membership is really coming back

In 1975 the UK held its first ever referendum on whether it should stay in the EU (then the EEC) which it had only joined in 1973. 67.5% of people voted to stay and the Home Secretary of the day, Roy Jenkins, said that it had 'put the uncertainty behind us'.

While there have been people who have called for withdraw, such as UKIP, no mainstream politician has given it serious consideration. Today it appears that the inept and intellectually challenged Education Secretary Michael Gove believes the UK should leave (with support from, among others,  the giant brain of Iain Duncan-Smith).

I have a balanced and tolerant view of Mr Gove, but there is an economic argument for leaving the EU and that debate must now be had. The result will determine nothing less than the economic future of the UK.

The argument for joining the EEC in 1973 was that of trade creation. Barriers to trade would be eliminated between the UK and the other members and the amount of trade and specialisation would increase making everyone better off. This is classic stuff and exactly the sort of thing economists advise countries to do if they want to grow up to be big and strong.

Along with the lowering of trade barriers came political co-operation. This has included a European Parliament and a European Court. EU law supersedes UK law. This is what people like Michael Gove and UKIP object to, it restricts the ability of the UK government to act.

So is there a case for leaving the EU? Well actually yes. The result will depend on the terms of leaving. The ideal solution for the UK would be to get the same deal as Greenland when it left. That put Greenland in the same position as Norway - a part of the single EU market, but not a member.

Norway gets all the benefits of specialisation and trade, but pays nothing towards the running of the EU, has no say in the rules and gets none of the political benefits of a single European voice.

The Greenland option is going to be very hard to stop politically. The question to be decided is 'Do you want Britain to be a simple economic partner of Europe, or a political partner in Europe?'

Under starters orders.  This is going to run longer than the debt crisis!

The Mail (who else?) report Gove's views here

Why we joined the European Union

When Britain joined the European Union (called the 'Common Market' in the UK at the time) it did so because it wanted to be a member of a free trading area.

It turned out not to be as free as we thought, but in 1993, thanks in large part to an initiative by the Blessed Margaret, a 'Single European Market' was created. Here labour, goods and services and capital had complete freedom of movement.

So anyone who is an EU citizen can work anywhere in the EU, a firm can sell their services anywhere in the EU and the people can put their money in any EU bank they like.

This encourages specialisation and trade, as a result everyone is better off. It is also encourages competition and will drive down prices because barriers to entry in the market have been reduced, benefiting consumers.

The Premier League at last lost a case where they had prosecuted a pub in Portsmouth for using a foreign decoder to watch football matches. It took the European Court to rule on this matter and today the High Court had to agree that the pub landlady should get her money back. The ruling - the exclusive deal with Sky contravenes Single Market legislation.

So the EU is not all bad!

The BBC covers the story here