The Economy

Lord Newby Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord Newby (LD)]

My Lords, I thank the Government for initiating this debate. I also join the Minister in his tribute to Lord Peston. Anybody who, like me, has sat through many economic debates in your Lordships’ House will miss the energy and wit that he brought to every contribution he made. On a personal level, I will miss the friendship of someone who slightly took me under his wing when I was a new Member to your Lordships’ House. With him, I was a founder member of your Lordships’ Economic Affairs Committee, of which he was such a distinguished chairman.

The biggest foreseeable risk to the prosperity of the UK lies in the outcome of the EU referendum. Therefore, I intend to devote my remarks entirely to that today. In doing so, I regret the complete absence from the speakers list of the sages of the Government Privy Council Bench and, indeed, the UKIP Members of your Lordships’ House.

The heart of the economic argument about EU membership or not lies in our long-term trading prospects. The trading picture of the UK has changed significantly since we joined the EU in 1975. Then, trading was largely in goods; now, we are the leading services exporter as a proportion of output in the G7 and some 40% of our exports globally and to the EU are in services. The EU is now by far our biggest export destination as a whole, as the Minister said, with some 44% of British exports going to Europe. It is acknowledged that the increase we have seen with trade in the EU is directly linked to our membership of it. The Centre for European Reform says that it has raised trade by 55%, while the Government argue that it has done so by between 68% and 85%. Whatever the exact figure, it is hard to deny that it is a substantial amount.

What are the opportunities and threats to our trade from staying in or coming out? If we stay in, we know that the completion of the single market in services, which is moving forward with greater energy, will significantly benefit the UK simply because we are the leading provider of services. This is an area where there is the greatest potential for growth worldwide and an area where the UK is in a very strong position to benefit. We also know that the EU is well down the track of negotiating—and completing negotiation on—trade deals with some of the largest economies in the world, including the US, Japan and India. When those trade deals are completed, as they will be, we will get benefits from them by virtue of our membership of the EU.

We can see very tangibly what some of the benefits will be in terms of trade if we stay in. If we come out, however, we do not even know what the preferred trading relationship of those who advocate coming out is. Nigel Farage suggested yesterday that he preferred a relationship that was, as he put it, like that of either Switzerland or Norway. There is quite a big difference between Switzerland and Norway; it would be useful if he could narrow that down a bit. Boris Johnson said that we should have a deal like Canada’s and then, under criticism, said that we should have a deal like the WTO’s. Michael Gove surprised everybody by saying that we should have a deal that mirrored that of Iceland or Albania. I strongly recommend that noble Lords who have not done so read the article in the Times of 25 April by the Albanian Prime Minister. After describing Michael Gove’s suggestion as “weird”, he eloquently explained why seeking membership of the EU is in Albania’s interests and why, even before being a member, Albania’s aspirations to join the EU have “made the impossible possible”. Mr Gove threatens to turn that aspiration on its head for the UK and make what is possible for the UK in the EU impossible outside it.

[Lord Bruce of Bennachie (LD)]

Does my noble friend not also think that Michael Gove let the cat out of the bag when he said that what he really hoped was that once Britain left the EU, the EU would disintegrate, and that is really his objective?

[Lord Newby]

I think it may be his objective and I find it the most irresponsible statement I have ever heard, given the history of Europe through which we have lived and which we know from the history books.

Whatever the relationship with the EU is likely to be, it will not be on the same terms as now. Even in the closest feasible relationship, such as that with Norway, we will have to accept the rules and costs of membership with no say over them. This will have a negative effect on trade, particularly in services. In financial services, failure to retain the right of companies to passport their services from the UK to the rest of the EU, if we form an agreement on those lines, would undoubtedly lead to significant job losses in the City— some estimate as many as 100,000—to the benefit of Frankfurt, Paris and Dublin, which certainly have the capacity to pick up the baton. If we were unable to keep the passporting rights, rules set by the EU would undoubtedly over time, as sure as night follows day, disadvantage the City. So, whatever the post-Brexit relationship, our position re trade with the EU will be less favourable than it is now.

What do the Brexiters say? They say we do not need to worry about trade with the EU because outside the EU our trade with the rest of the world would blossom, particularly with the fastest growing countries in Asia and Latin America. This argument has been used in recent days by as wide a group as not only Michael Gove but the noble Lord, Lord Owen, and Sir Ian Botham. However, for this to be true it would have to be the case that UK companies are currently hobbled from exporting outside the EU, that we would be able to get better trade deals by negotiating on our own and that there is a reserve army of UK companies waiting in the wings ready to take up those new opportunities.

All these assertions are false. Are British companies currently constrained from exporting outside the EU because of EU rules? There is no evidence for this. True, we export less than Germany by a factor of over two to China, India, the US and Brazil. However, the fact that Germany exports so much shows that EU membership in itself is not a barrier to successfully exporting globally. Indeed, over the past decade, our exports to some of these countries has greatly increased—to China by over 70% and India by almost 30%. The reason for our relatively poor historic performance and relatively strong recent performance has had nothing to do with the EU—it is because there has been a concerted push by British exporters, backed by the Government, to increase exports to those countries which was largely lacking before. It is worth emphasising that our exports to the BRIC countries, even if you include South Africa in that definition, is well under 10% of the total, compared to 17% to the US, let alone the 44% to the EU.

The second myth is that we would get better trade deals on our own if we were not held back by the EU. This myth has been romantically advanced by Ian Botham in respect of the English-speaking, cricket-playing members of the Commonwealth.

[Lord Spicer (Con)]

One of the wisest observations on this matter of trade was made by my noble friend Lord, Lord Lawson. He said that it was all irrelevant anyway because 75% is covered by the World Trade Organization rules.

[Lord Newby]

The World Trade Organization’s rules are, in many ways, the worst option. Why are we having all these trade negotiations with countries around the world when we already have the WTO rules? The reason is that they are not good enough—otherwise we would not be spending years trying to get better deals. Incidentally, we spent years trying to get another round of WTO improvements and failed. The only reason for bilateral deals as the EU is because we could not get better deals via the WTO route.

As I was saying, all the Commonwealth countries that play cricket, as far as I am aware, have said that they wish us to remain in the EU. Indeed, the reason we have had difficulties in exporting to India is because of the protectionist policies of the Indian Government. It has ranged from difficulties in exporting Scotch whisky through to extreme difficulties for British lawyers and accountants doing business and setting up businesses in India. As to the US, President Obama made the position starkly clear last week. We would be at the end of the queue for a trade deal, a position supported by Hillary Clinton.

The third myth is that there is an army of companies champing at the bit to do business in far-flung parts of the world rather than in the EU. However, the surveys undertaken by the Federation of Small Businesses when I was a Minister pointed out that the vast bulk—well over two-thirds—of small businesses thinking of exporting for the first time looked to do so to the EU. The reason is obvious. It is inelegantly expressed in the Treasury’s equations as “dist”—that is, the distance between the UK and EU compared to other markets. Small companies often cannot afford the time, expense and complexity of undertaking sales and marketing activities in China, say, compared to France. This was borne in on me with a small manufacturing company in the high Pennines that I know. Out of the blue it got a £50,000 order from Brazil. The marketing manager was immensely excited and went to the manager saying, “I want to go to Brazil to meet these people, whoever they are, and to expand over there”. He was told, “I am terribly sorry but you can’t. We can’t afford the time or the money”. If that had been an order from France, he would have been on the next plane.

The growth rates of some of the alleged El Dorados of the BRICs and elsewhere are now lower than those in the EU and the challenges of corruption and weak legal rights in many of them have not materially abated. The overwhelming arguments about the straightforward trading advantages of being inside the EU are reinforced by the beneficial effect of membership on direct investment and productivity. The Minister has outlined those arguments and so I will not refer to them.

It seems to me that all the arguments in respect of trade are absolutely compelling and need to be deployed as effectively as possible over the coming weeks. They are set out comprehensively in the Treasury’s analysis of the long-term economic impact of EU membership and the alternatives. However, the document, despite a perfectly good summary, is not easily accessible to the lay person. Therefore my only question for the Minister is this: what is the Treasury going to do to promulgate the headline arguments in that document in a clearer and more readily understandable way?

I have not said anything about the short-term shock which leaving the EU would undoubtedly cause the UK Government, but clearly that will also be considerable. The judgment the Government have taken in having a referendum in the first place is an extremely risky one and is probably the decision by which they more than any other Government will be judged. It is in all our interests that we get it right.