Since British Prime Minister David Cameron pledged a referendum on the UK’s continued membership of the EU, ‘Brexit’ – Britain’s exit of the EU in a handily abbreviated word - has been a hotly debated issue.
While the Eurosceptic Conservative government is seeking to renegotiate terms of membership in the EU, the Labour Party, SNP, Plaid Cymru, Lib Dems and a large proportion of the British public are in favour of staying in the EU. Last week David Cameron said it was time for the British public to have their say and settle the question about the UK being in Europe.
In a referendum, Britain will have to choose between national sovereignty and unimpeded access to EU markets. Brexit would mean renegotiating the UK’s terms of membership in the EU, with major implications for the economy. Historically the case for British membership of the EU has always rested on the country’s participation in the single market; the EU’s single market has brought sizeable benefits to Britain and boosted its trade and investment. A higher proportion of trade in terms of goods has been created for the UK than diverted from membership to the EU. This has changed in recent years though, and the EU is a less important market for the UK than it was, and likely to remain so for as long as the Eurozone fails to engineer a sustained economic recovery. In other words, a slow financial position is hampering trade, making the single market less important than it once was.
However, the prospect of Brexit will threaten the country’s economic prospects making it less attractive to foreign firms that intend to sell to other EU markets. This will impact on foreign investors’ decision to invest in the UK.
Britain faces a tough choice. Would it like to access to the single market, but with less influence on the rules that govern it? Or would it prefer freedom from EU rules and regulations, but lose an important level of access to the single market?
While membership of the EU is as much about broader political questions as economics, the economic case for staying in the Union is the issue that shouts loudest.
The idea of renegotiation of British membership to the EU is fraught with dangers. There is no guarantee that an agreement, if at all will be reached. And in the event of an agreement being reached, the question remains about the likely time line for the renegotiation of the Treaty.
Only time will tell if Cameron’s renegotiation will be effective, but the lack of communication about what exactly is being spoken about is not helping Britain gain clarity about its EU involvement, now and in the future.
By Professor Sangeeta Khorana, Professor of Economics
