Is there a chance of rejoining the EU?

Professor Geoffrey Pugh, Staffordshire Business SChool

This blog considers the political potential for the UK to rejoin the EU in, say, the next ten to 15 years.

Before the 2016 Referendum, Leavers displayed most of the passion. Remainers tended to be lukewarm in their support for the EU. Yet, after the Referendum, there was an upsurge in commitment to “Europe” – displayed in hundreds of thousands marching and six million people signing a petition to cancel Brexit – with a consistent minority wanting to commit to rejoining. If remainers display the kind of commitment displayed by UKIP, so the argument goes, then over time the ground might be prepared for a similarly spectacular reversal.

Whether this perspective can gain traction depends on both (i) long-run demographic and cultural changes in the UK and (ii) economic developments in the UK but also in the EU. Rob Ford and Maria Sobolewska (https://ukandeu.ac.uk/demographic-change-public-opinion-and-brexit/) demonstrate that generational change and the increasing share in the UK population of graduates are steadily increasing the relative political weight of the more Europhile social groups.

Against the background of long-run demographic and cultural trends, the point of this article is to argue that economic developments in both the UK and the EU will also be a major influence on the politics of rejoining. My argument can be reduced to a 2´2 matrix highlighting four potential outcomes.

Economic performance in both the UK and the EU continues to be “bad”. By bad, I mean average annual economic growth at around one per cent (so that a doubling of average living standards takes about 70 years). This is almost too slow to notice and too little to satisfy competing demands.
Economic performance in both the UK and the EU proves to be “good”, which means average annual economic growth at around 2.5 per cent (so that a doubling of average living standards takes less than 30 years). This should be sufficient to address competing claims on national income (e.g. for both reducing regional inequalities and investing in green technologies).
Economic performance in the UK is “good” but in the EU “bad”.
Economic performance in the UK is “bad” but in the EU “good”.

In each of the four cells, I add the implications for a successful campaign to create momentum to rejoin the EU.

Post-Brexit economic outcomes (Bad or Good) and
prospects for a movement to rejoin (cell contents)

Next, I explain (i) the economic reasoning that makes each set of outcomes plausible together with (ii) the reasoning behind each set of implications.

1) EU “bad” + UK “bad”.

Productivity growth (as measured by, say, the value of output per worker per year) has been very low in all the developed countries since the Global Financial Crisis. If this “secular stagnation” continues, then the economic outlook for the EU and UK alike is “bad”. The UK has probably made a bad situation somewhat worse by weakening trade integration with the EU, which will reduce incentives for the most innovative and productive firms to invest, produce and employ in the UK.

For its part, the EU seems unable to resolve the macroeconomic imbalances and consequent growth constraints imposed by the single currency. For different countries to share a single currency, their economies need to be much more deeply integrated than is the current position in the Eurozone. For example, if some countries are experiencing trade deficits and recession (e.g. Italy) while others are in surplus and growing (e.g. Germany) then to compensate for the absence of independent monetary policy (which would enable Italy to reduce interest rates and depreciate its currency) there needs to be offsetting fiscal transfers (enabling Italy to contribute less tax outflow and/or receive revenue inflows). However, fiscal transfers on a significant scale require a federal state with a very large budget. This is why the UK and USA are successful monetary unions (in both cases, around 40 per cent of GDP passes through the hands of central government). In contrast, the EU is not (the EU budget accounts for around only one per cent of EU GDP, although this is set to double in the next seven-year fiscal period as a result of the Next Generation EU Fund).

In the medium to long term, EU members (or, strictly speaking, the Eurozone countries) will either move towards greater integration or accept a continued brake on growth together with divergence in the economic performance of member states. In this situation, the EU will have little to gain from the renewed membership of a country likely to resist deeper integration. At the same time, lacklustre EU performance will be a strong disincentive to the UK to rejoin.

2) EU “good” + UK “good”.

Technological progress resulting in new fields of productive investment, high-wage employment and growth could provide a favourable context for pursuing different national growth models. In the UK it is possible that Brexit will administer a shock enabling useful reforms – e.g. under the banner of the now fashionable “industrial policy” – that will enable productivity growth to recover along with wages and output. For its part, the EU might achieve greater political integration and, on this platform, underpin the single currency with a transfer union, thereby enabling macroeconomic imbalances to be resolved and better advantage to be taken of the single currency for trade and investment. In this scenario, political pressure for the UK to rejoin is likely to be muted within the UK and to find little support from within the EU.

3) EU “good” + UK “bad”.

In this scenario, the EU establishes the political prerequisites for a single currency and sustained growth, while the UK experiences the downside of Brexit with few offsetting benefits. Faced with a thriving EU and the steady drip-drip effect of bad news about the UK economy, the apologists for Brexit may find their excuses wearing thin. The appeal of “sovereignty” may fade in the face of lack of tangible outcomes and with the passing of the generation for whom the idea of sovereignty signifies much of importance. Conversely, an increasing number of younger voters may be attracted by the relative success of the EU.

4) EU “bad” + UK “good”.

In the event of continued political and consequent economic failure in the EU combined with a successful model in the UK, re-joining a failed EU is likely to have little attraction outside the ranks of the ideologically committed.

From these four scenarios, only the third – EU “good” + UK “bad” – reinforces favourable long-run demographic and cultural trends with an economic environment in which a “rejoin” movement might gain traction. So how likely is this scenario? To answer this question, we calculate a probability for each cell in the matrix. This involves making some big assumptions; however, these can be adjusted for different judgements and thus different numbers.

My assumptions are as follows.

For the EU, “Bad” and “Good” economic outcomes are equally likely (remember, the Eurozone did survive the last outbreak of the euro crisis and the will among member states to make the EU work is greater than typically recognised in the UK). So, we assume that both outcomes have a probability of 0.5.
For the UK, let’s say that the “Bad” and “Good” economic outcomes are also equally likely, each with a probability of 0.5.

These are my preferred assumptions, because – in my view – long-run forecasts about the relative performance of economies do not permit any greater precision. However, many will disagree. On the one hand, Europhiles might prefer the following indicative scenarios and corresponding probabilities: Britain is most likely doomed to decline outside of the EU (80% chance of a “bad” outcome for the UK); and the EU will be economically successful as it progresses towards an “ever expanding union of the European peoples” (80% chance of a “good” outcome for the EU). On the other, Eurosceptics might reverse these probabilities: seeing great opportunities for a Britain freed from the deadweight of inflexible regulations and an EU endlessly preoccupied by attempts to reconcile the contradictions of a doomed single currency. Allowing for caricature, such views are common among the hard cores of the respective camps.

According to my 50-50 assumption, each of the four outcomes depicted in the matrix have a probability of 0.25 (0.5´0.5=0.25, i.e. a one-in-four chance). If you are not a gambler, then odds of three to one against a favourable economic environment for rejoining – i.e. EU “good” + UK “bad” – might be discouraging.[1] Yet, for revolutionaries, these are rather good odds.

The “hard core” in both camps will take comfort from different assumptions: on the indicative 80-20 assumptions,

Europhiles will see overwhelmingly favourable economic terrain for re-joining (an 80% chance of a “good” EU outcome and an 80% chance of a “bad” UK outcome jointly suggest a 80% ´ 80% = 64% probability of Outcome 3, favourable to re-joining, while
Eurosceptics will see a 20% chance of EU “good” and a 20% chance of UK “bad” outcomes, hence 20% ´ 20% = 4% probability of Outcome 3, so virtually no chance of a future case for re-joining on economic grounds.

Europhile assumptions suggest an increasingly supportive economic context for rejoining, and even for European federalism, should Britain prove unable to turn its new found sovereignty into economic advantage. Yet the EU’s trajectory towards, and economic need for, a deepened “union of the European peoples” currently has little support in the UK, even among remainers (Rob Ford and Maria Sobolewska note that “60% of Remain voters in the 2016 British Social Attitudes survey also wanted to see the EU’s powers reduced”). Consequently, even in a political environment in which demography, cultural change and economic developments create opportunity for undoing the UK’s current “hard Brexit”, political agency will be decisive. If a “rejoin” movement succeeds in winning hearts and minds, thereby moving European Federalism into the political mainstream, then a majority may be created for the UK to rejoin a future, more deeply integrated EU. Conversely, if the argument is conducted on the basis of an instrumental balancing of costs and benefits, then the outcome may well be prolonged renegotiation leading to closer cooperation – heading towards a “Norway” type of relationship – rather than to renewed membership.

[1] Each outcome has a probability of 0.25 (i.e. a one-in-four chance). Three outcomes (cells) thus have a joint probability of 0.75. One cell (say, Number 3) has a probability of 0.25. Hence, the odds of any single outcome are 3 to 1 against.