How Does EU Membership Affect Traders?

19
Apr

64% of UK businesses want to reduce the EU powers while only 11% of businesses think this will have a negative impact, shown in a study of 4,000 British firms surveyed by the British Chambers of Commerce (BCC). Businesses want full power to be given back to Westminster, but how does all this affect your trading account?

There are strong arguments on both sides depending on what you place importance on. Is it more important that Britain exported £159 billion of goods to the rest of the EU or that this is £44 billion less than the EU exports to us? Or is the risk of losing your job to Eastern Europeans higher than the work opportunities made available in other EU countries? To answer this you must firstly look into the pros and cons of the EU membership and what other options there are available to the UK.

Benefits to leaving the EU:

Britain's membership in the EU has been in doubt for some time, however it was thrown into even more doubt when David Cameron vetoed in the EU's plans for a banking union. More than half of Britain's want to leave the EU according to a new Times/Popular Poll.

Britain can benefit if it was able to negotiate an 'amicable divorce' but retain strong trading links in the EU nations. It could possible to copy either the Norwegian or Swiss model. Switzerland is a member of the European Free Trade Association but not the European Economic Area (EEA). The country's relationship with the EU is framed by a series of bi-lateral treaties. However since the UK is already a member of the free trade areas it may suit the country better to copy the Norwegian model. Norway is a member of the EEA and only subject to one third of the regulation of full EU membership. However, the EEA has no say in Agriculture, Fishing, Justice and Home Office. Norway is currently one of the richest nations on earth with GDP per capita of £40,000, compared to £23,000 in the UK and an average of £21,150 for the rest of the EU. While other believe that it would be better to make a clean break from the EU so that the UK could be free to trade deals with other nations around the world.

Certain taxes wouldn't change much as the EU has limited power over tax which is largely a matter of national governments. However VAT could change as this tax has bands agreed at EU level. If the the UK was to leave the EU the country would save billions in membership fees and end the 'hidden tariff' paid by UK tax which is caused by red tape, waste fraud and other factors caused when goods are exported to the EU.

If the UK was freed from the EU it could result in a job boom. Currently more than 90% of the UK economy is not involved in trade with the EU, yet it still has to bear the burden of EU regulation. If the UK "pulls" out of the EU but stays in the EEA 1 million British jobs could be created.

Although the UK would lose influence in Brussels, Berlin and Paris the country would remain a key part of Nato, the UN Security Council and a nuclear power, creating a powerful independent voice. The UK would be free to establish bi-lateral trade agreements with countries such as China, Brazil, Russia, India and Singapore through World Trade Organisation.

One of the main differences would be that all power would come back to Westminster as parliament would regain its sovereignty and re-connect with voters. Although the country would still have to deal with the European Court of Human Rights it would be free from the European Arrest Warrant and other law and order measures.

Benefits of Staying in the EU:

Leaving the EU may work if the UK were able to retain strong trading links with EU nations, but in all honestly France, Germany and other leading EU nations would never allow Britain to pick and mix EU regulations. Although Norway and Switzerland benefit from not being part of the EU but they still have to abide by EU regulations without being able to influence them. In other words no veto at the European Council, no Votes in the Council of Ministers, Ne MEP'S, no judges at ECJ and no European Commissioner. If Britain then decided to go for a clear cut from the EU its exports would become subject to EU export tariffs.

Trading with the EU creates £400bn a year or 52% of the total trade in goods and services. Companies may benefit from reduced costs if they are freed from EU regulations however with reduced foreign investment and demand for UK exports due to the country appearing isolated. The economy could be harmed. The UK's contribution to the EU budget is a "drop in the ocean" compared with benefits that businesses gain from being in a single market. On top of this the UK could lose tax revenue if companies dealing with the Eurozone.

President Obama's oval office released a statement saying the US 'valued a strong UK in a strong EU', making it seem that a move would not be welcome among foreign partners. If Britain lost its influence in Brussels, Berlin and Paris may find itself ignored by Washington and become side-lined on issues such as the environment, security and trade.

Britain's could lose the benefits of the EU employment laws and social protections. The withdrawal from the European Arrest Warrant could mean delays for the UK in extraditing suspects from other European Countries.

David Cameron has already confirmed that a referendum is on the cards should the Conservatives win the next election in 2015 but 70% said they would not vote for the Conservatives purely based on the chance to leave the EU. Is this a reflection that the need to leave the EU although may be desirable is not actually a high priority?

GBP:

So what does this mean for the Great British Pound? The opinion seems to be split, National Institute of Economic and Social Research (NIESR) released a report suggesting foreign direct investment in the UK could fall if the UK left the EU, leading to 2.25% permanently taken off UK GDP. To such an extent if there is less investment and lower demand for sterling the GBP would be weakened. However, the pound could become a safe haven similar to the Swiss franc and therefore gain whatever the Eurozone looked in doubt.

Weaken:

If the UK was to leave, trade would be reduced as the EU is the main trading partner and that would reduce growth and weaken GBP. Also without access to EU markets non EU firms etc may move operations out of the UK and so would sell UK assets and buy in other EU countries.

Strengthen:

Some possible factors that could work in the opposite direction would be if the EU started to crumble and it was seen that the UK was getting off a "sinking ship". In this case, it could be seen as positive for the UK if the cost of the EU membership increase (from the budget where the UK is the net contributor and in terms of regulation which could stifle important UK sectors such as the financial one). If this is the case EUR would perform poorly so lower EUR/USD, and GBP/EUR could go higher. In other words if the UK leaves the EU, anything that damaged the value of the EUR such as recent crisis in Greece, Cyprus and Italian elections will increase the value of GBP.

Conclusion:

There are many arguments for and against leaving the EU. Traders will need to keep an eye on the progress of this issue , as weather the UK stays or leaves the EU it will have a large impact on the value of GBP.

 

(photo - The Guardian)

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