https://cpes.org.uk/om/files/original/2b866e3d17994b3da0e5e9ec40f11819.pdf 135b59758760f145f1880e5d7ab4aa21 Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Cambridge Economic Policy Review Volume 6 No. 1 Date A point or period of time associated with an event in the lifecycle of the resource April 1980 Text A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text. Text Any textual data included in the document Chapter3 Britain and Europe At present the main subject of public discussion concerning British membership of the European Community is the size of Britain's net contribution to the EEC Budget. This is not at all satisfactory. Apart from the fact that Britain makes extra payments for food to the Community which are not included in the Budget calculation, the present focus of discussion completely ignores far more important questions about our relationship with Europe, in particular the problem of Britain's long-standing relative economic decline and de-industrialisation. Ever since the publication in 1971 of the White Paper (HMSO 1971) setting out a prospectus for Britain's accession to the Community, the economic implications of membership have, reasonably enough, been considered under two distinct headings. On the one hand there were 'static' effects, that is net transfers between Britain and the rest of the Community in the form of payments into the Community Budget and payments for imports of food from the EEC at prices higher than would otherwise be made. On the other hand there were 'dynamic' effects arising from the Common Market which would alter Britain's trade performance and have important implications for industrial investment and efficiency. It was always recognised that the static effects would be adverse, but the scale and even the direction of the dynamic effects were matters of dispute. The authors of the White Paper and all those who supported membership of the Community on economic grounds expected that the dynamic effects would be favourable and that they would eventually be large enough to offset the static effects. Others, notably Nicholas Kaldor, always maintained that, because of the weakness of British industry, the dynamic effects would be adverse and therefore that membership of the Community would, taking economic factors by themselves, be wholly disadvantageous. A new and unexpected point is that under Common Agricultural Policy (CAP) rules the present overvalued sterling exchange rate could cause serious harm to British agriculture. In this chapter we shall discuss both static and dynamic issues. There are three different kinds of question we could address: (1) What have been the consequences for Britain of having joined the Community as compared with having remained outside? (2) What would be the consequences of now leaving? (3) What are the main problems experienced by Britain under the present system of Community laws and arrangements? While the first is an interesting question, it is now purely hypothetical. Both this and the second question require characterisation of uncertain and in some degree arbitrary alternative positions. Here we shall concentrate on the third question which is most relevant to present discussion and negotiations, although we briefly turn to the second question at the end of the chapter. The static effects The 'static' transfers comprise two elements. There is first Britain's well publicised net contribution to the EEC Budget. But, second, additional payments from Britain to the Community arise because the British consumer pays prices directly to EEC producers which are in excess of world prices; these are foreign exchange transfers no less than contributions to the Budget and must always be included to obtain a complete picture. It is extremely tiresome to have to reiterate this point* but, in public discussion and in statements by leading politicians, the net Budgetary contribution is usually mentioned on its own. The result is significantly to understate transfers from Britain which, as we shall argue, substantially exceed the Б1000 million usually mentioned.t Two points should be emphasised here. The inclusion of transfers arising from intra-EEC trade in food makes an even larger difference to some other countries than to Britain. In particular France is a (small) net contributor to the Budget, but inclusion *Fully explained in CEPG (1979) and also in Godley (1980). tin their recent paper, Kay and Morris (1980) have attempted estimates of the cost to Britain of CAP membership compared with non-membership, thereby addressing a different question from ours. Their estimate of the cost to Britain (Б2.2 billion in 1980) compares the present position with an alternative in which there is no farm income support of any kind at all and no preferential price paid for dairy products to New Zealand or for sugar to ACP countries. Thus, to take only one example, the price of butter for French and English farmers would fall by about 70% (more for German farmers) with no compensation at all in the form of income support or subsidy. Apart from the unrealism of this situation, it is mistaken to blame the putative 'cost' of existing arrangements exclusively on the CAP unless one is prepared to maintain that without the CAP individual countries would not in any degree protect their own agriculture out of national resources. 27 of transfers arising from 'intra' food trade makes it a net recipient of transfers to the tune of several hundred million pounds. The other point is that net transfers come to nil summed across all countries. One often reads that Britain is the largest net contributor although one of the poorest countries in Europe. The statement is misleading because there are only two net contributors of any size - ourselves and Germany. All the other countries, except Italy, are net recipients on a significant scale. According to Treasury calculations (Hansard, 1979) based on estimates by the European Commission, Britain's net contribution to the EEC Budget in 1980 will be about Б1300 million. This is slightly higher than the notorious figure of Б1000 million partly because, with a strong pound, the world price of food denominated in sterling has fallen and therefore levies on imports from outside the EEC, which Britain has to pay over to the Community, have been raised. As far as the excess cost of food imports from within the EEC is concerned, our starting point is the official estimate (by Rollo and Warwick (1979)) that in 1978 this amounted to about Б120 million.* Since 1978 the 'green' pound has been devalued by approximately 16% thereby raising the sterling price of food to British consumers while, at the same time, sterling itself has appreciated. Both of these developments have tended to widen the gap between Community prices in Britain and world prices. As against this, the volume of Britain's net imports of food from the EEC has fallen compared with 1978. Taking all factors into account, our best estimate of the excess cost of food imports from the EEC in 1980 is around Б300 million. This figure, together with the Б1300 million net contribution to the Budget, makes Britain's total net foreign exchange transfer to the EEC come to about Б1600 million this year. The new risk to British agriculture Until recently most British farmers, being relatively efficient, have done well out of the CAP. While sterling was weak it was possible for the government to raise UK farm prices, independently of what happened to 'common' prices in the Community, by devaluing the green pound.t As mentioned above, the green pound has been devalued by 16% since 1978, and this is the extent to which the growth of British farm prices has exceeded that of common prices. But recently the exchange rate for sterling has risen, bringing it almost up to the level of the green pound. According to Community practice green currencies may be altered towards actual exchange rates but not away from them (otherwise each country could set its own prices entirely independently and at the same time obtain Community funds to pay for whatever price level had been chosen). *The figure of Б120 million is an average of two figures, based respectively on recorded rates of levy and on export restitution. The paper by Rollo and Warwick should be consulted for an explanation of the methodology. tFor an explanation of how the green currency system works see CEPG (1979) and Godley (1980). 28 Thus from now on, unless sterling falls, British farm prices cannot rise by much more than common Community prices (which most members including Britain want to hold down). Yet because ofinflation British farm costs are rising at 15-20% per annum. So we now face the extraordinary possibility that our own farming industry will suffer a severe decline in real income which Community rules make it impossible for our government to mitigate, while at the same time Britain will be paying large sums to the Community to support agriculture in other member countries. The dynamic process Recall the claims originally made in the 1970 White Paper (Cmnd 4289) about the 'dynamic effects' resulting from membership of a 'much larger and faster growing market': This would open up to our industrial producers substantial opportunities for increasing export sales, while at the same time exposing them more fully to the competition of European industries.... The acceleration in the rate of growth of industrial exports could then outpace any increase in the rate of growth of imports with corresponding benefits to the balance of payments. Moreover, with such a response, the growth of industrial productivity would be accelerated as a result of increased competition and the advantages derived from specialisation and larger scale production. We may begin by considering the levels and changes in real gross national product (GNP) per capita in EEC countries since 1960. As Chart 3.1 shows, in 1960 we were the third richest country in Europe, with real GNP per capita only a little below that of Denmark and Germany. Before entry, up to 1972, Denmark and Germany greatly increased their lead and we were overtaken by the Netherlands, France and Belgium, while both Italy and Ireland expanded faster than we did. Since we joined the Community our income has continued to grow by less than that of any other country. Taking the past two decades together, growth of real GNP per capita was (in 1979 prices) only Б1100 in the UK compared with Б1300 and Б1400 in Ireland and Italy respectively and over Б2000 in all other member countries. To what extent can this relative decline in real income be associated with Britain's trading performance? Table 3.1 shows changes in Britain's balance of payments and its main components before and after EEC entry. Over the period as a whole there was an improvement in the balance of trade in food, materials and services with the rate of increase about the same after 1972 as before. There was also an improvement in fuels, thanks to North Sea oil and gas. The balance on net income and transfers paid abroad deteriorated throughout the period; this trend accelerated after EEC entry, partly because of contributions to the Community Budget. The balance on manufactures worsened dramatically - by Б135 per capita or about Б7500 million between 1960 and 1979 - because of increasing import penetration and a weak export performance. The rate of deterioration on manufactures has been much larger since EEC Chart 3.1 Real gross national product (GNP) per capita in EEC member countries 1960, 1972 and 1979 Denmark Germany r-----------------------_,ииииииии rr---------------------.------------------------__,,.и.ииии.и.и.и.и. rrr---------------------------------------------------------------444ииииииииииииииииииииииииииииииииииии UK 1------------lи ии Netherlands France BelgiumLuxembourg Italy r-------------------~ииииииии r-------------------~ииииииии r-------------------~'ииииииии r-----------------------~иииииииии r-----------------------~,ииииииииии ~----------------------~,ииииииииии 1----------------------~иииииииииии r---------------------~иииииииииии r---------------------~ииииииииии r-------~иии ~--------------~иии r---------------~иии Ireland 0 lllllll 1-1 I 1000 1-------1--------------~иииии ~---------1'" и и и и I 2000 3000 I 4000 GNP per capita Б1979 values 1960 GNP per capita = 1972 GNP per capita 1979 GNP per capita I 5000 I 6000 Source: CEPG calculations from Eurostat, using purchasing power standards rather than actual currency exchange rates which are often misleading. 29 Table 3.1 Changes in UK balance of payments before and after EEC entry (changes in per capita balances,Б per capita, 1979 values) Pre-entry 1960-72 Post-entry 1972-79 Total 1960-79 Net trade in: Food, drink and tobacco Raw materials Fuels Manufactures Unclassified goods Services Total trade Net income and transfers +59 +51 - 15 -58 -15 +19 +40 -5 + 24a +5 +32 -77 2 +8 -10 - 38b + 83 +56 +17 -135 -17 +27 + 30 -43 Balance on current account + 35 '-48 -13 a Net change due to CAP, -Б4; due to other factors, +Б28. b Net contribution to EEC Budget, -Б17; other transfers, -Б21. Source: Eurostat. To facilitate comparisons with other countries the figures are expressed in per capita terms and have been adjusted to 1979 values using a common European price deflator (expressed in sterling). As all figures are adjusted by the same deflator, the numbers reflect both volume and relative price changes. entry despite the fact that our home market has been depressed. It is clear that North Sea oil has not been nearly sufficient to compensate Britain for its losses on manufactured trade. Notwithstanding the oil and the depression of home demand, the overall balance, which improved between 1960 and 1972, has deteriorated quite sharply since EEC entry. However, information relating to the balance of payments of any country looked at ex post (such as that contained in Table 3.1) is at best incomplete and may be misleading. This is because a country's internal fiscal and monetary policy is itself influenced by its trading performance. In the extreme case which may not be so far from the norm - fiscal and monetary policy will ensure that the current balance of payments stays close to zero so that changes in external trading performance are wholly reflected in changes in domestic demand. For such a country, observations of ex post changes in exports and imports tell us little about trading performance and the indirect impact this has had on the economy as a whole. In order to compare trading performance itself, whether over time or between countries, it is necessary to standardise in some way actual balances of payments for differences in real spending. The results of an attempt at such standardisation are presented below. In the first stage of the calculation, the results of which are shown in Chart 3.2, we standardise the balance of payments (and its main components) of each member country for the year 1972. In this chart trade data have been adjusted so as to estimate how the position of each country might have appeared if real spending had been brought to a common level (the average for the EEC 9). This adjustment involves 30 an assumption about the relationship between net imports in each category of trade and real GNP. We have assumed uniform 'marginal propensities' for all items except manufactures (for which the adjustment was based on each country's actual ratio of imports to GNP). The data are expressed per capita to make the results for different countries directly comparable. The chart shows the position immediately before Britain, Denmark and lrelandjoined the Community. Of the founder members, Germany and Belgium were by then very strong in manufacturing while the Netherlands was strong in food and services. France's adjusted surplus, significantly smaller than that of these three, arose from trade in food and services as well as manufactures. Italy was much weaker than the other founder members. Although its manufacturing sector was strong enough to have yielded a small surplus if per capita spending had been brought up to the EEC 9 average level, there would have been large deficits in food, materials and fuels. Of the new members, Denmark had an even stronger balance than Germany, Belgium and the Netherlands - resting entirely on food and services. The UK's position was similar to that of Italy, although it was still significantly stronger than Italy's in manufactures and services. Ireland's position was much weaker than that of any other member country because of its very small manufacturing sector. While the adjusted balances in Chart 3.2 make possible an approximate comparative evaluation of the trading performance of the different member countries in 1972, the main purpose of these calculations is to provide a base from which to assess changes in performance since that year. Chart 3.2 Adjusted balances of payments of founder and new EEC members, 1972 (balance adjusted for differences from EEC 9 average income level, Бper capita, 1979 values) Balance on Food, drink and tobacco +300 =-__ D D--o--- DENM IRELAND NETH 0_ -F~C-E-c::r- -- o ___ -100 GER BEL ITALy Raw materials D--or--и~-- -NETH- -иo---D---o--- o- -- D Fuels FRANCE ITALy DENM UK IRELAND BEL -200 +400 Manufactures 0 DENM IRELAND --~---0 0___ ~~-D I_R~DServices -700 +300 NETH BEL FRANCE ___ 0 ___ DENM ___ oUK __ -100 Transfers +100[__0 __ =-- =-- c:::::r __I!!!;;,~ -=-- =-~~ND [ -100 GER BEL NETH FRANCE DENM UK +300 __O___O__[j_:cr_ ___fj_ ==--- 0 UK Current account ITALY -600 Source: CEPG calculations from Eurostat. IRELAND 31 Chart 3.3 Changes in adjusted balances of EEC members between 1972 and 1979 (changes in balances adjusted to constant 1972 EEC 9 average income level,Б per capita, 1979 values) Balance on Food, drink and tobacco -=- ------ =- --=--+lOOt GER NETH FRANCE ITALY DENM UK IRELAND =-- c::::J- --c::::=-- _c::::J ___ -100 BEL Raw materials +lOOf -- ~- --~--- ~- -~~~--=--- ~- --~--~~D -lQOL ITALY Fuels ~+IOO[ NETH IRELAND -- D--~---~- --~- -~~;--o---o- L___J ___ -200 ITALY DENM +300 GER BEL Manufactures 0 NETH FRANCE ITALY DENM UK Services Transfers -200 IRELAND ___ o ___FRANCE ~---D+100[ __ r=:::J ___ и~- --o---~- --= [ -100 NETH DENM IRELAND +lOOt-- GER __ =---r::::=::J---=--~~-D-E-N0M ___ IRELAND DC=:J ___ -100 BEL NETH FRANCE UK +400 GER BEL FRANCE Current account 0 NETH ITALy DENM UK -300 Source: CEPG calculations from Eurostat. IRELAND 32 Chart 3.3 shows changes between 1972 and 1979 calculated from recorded balances adjusted to the same constant real spending standard for both years (the 1972 EEC 9 average level). The change in the adjusted current accounts between the two years shows broadly the extent to which a country was justified in expanding real per capita spending as a result of its trade performance. Where there is no increase in the balance after adjustment, trade performance will have warranted no growth at all in real per capita spending. As the chart shows, Germany, Belgium, the Netherlands and France all made large gains in manufactures and some gain in services which completely outweighed their loss on fuels and thereby greatly improved their overall position. Denmark came to benefit from substantial net transfer receipts through the CAP budget which, together with some improvement in manufactures, offset its losses on fuel and services. Italy's gains in manufactures and services between 1972 and 1979 barely exceeded its loss on fuels. Ireland's gains on food and transfers were less than its losses on fuels and manufactures, so that it had overall a much larger adjusted deficit in 1979 than before entry. The UK made a loss on manufactures so that, notwithstanding gains in food and materials as well as in fuels, its overall trading performance warranted no significant growth of income. To sum up, between 1972 and 1979, while the trading performance of the richer member countries (other than Denmark) was such as to warrant substantial growth of real income and spending, that of the poorer members - Britain, Italy and Ireland* warranted little or no growth at all. The UK's experience as an EEC member As far as 'static' effects are concerned the foreign exchange loss to Britain probably now exceeds Б1500 million. It was always expected that there would be a loss of this kind but its scale now exceeds what was originally envisaged by at least 50%. As far as the more important dynamic effects are concerned, these also appear to have been adverse. It is certainly the case that the trend in our balance of trade in manufactures with other member countries has changed adversely since membership, notwithstanding the relative stagnation of UK output during this period. However, as we pointed out above, the most important point is not whether our position is worse than it would have been had we never joined, but rather that processes are now taking place which cannot be allowed to continue. Even if we did not have the problems associated with an overvalued exchange rate there would be no reason to expect the *The strategic policy problem for Ireland is clearly enormous because there is no reason to suppose that the adjusted balance on manufactures will not continue to deteriorate, while there must be a presumption that transfers from the EEC Budget and the recent huge capital inflows will not continue to increase. The importance of the transfers to Ireland, most particularly to Irish farmers, will make it harder for that government to take measures to stem the Irish appetite for imports. trends shown in Chart 3.3 to improve; in other words, even with further improvement in the balance of trade on fuel, a continuation of previous trends in trade in manufactured goods would impose a balanceof-payments constraint on any growth from now on. As we argue in Chapter 2, the strength of sterling is now accentuating the adverse trends in trade in manufactures. At the same time the improvement in the fuel balance will end when North Sea oil production passes its peak in a few year's time. It is for these reasons that we expect a severe recession in the short term without any recovery in the medium term unless there are radical changes in policies and institutional arrangements. Towards a solution So far the challenge to the European Community by the British government has been concerned with individual issues as they have arisen, most notably with Britain's net contribution to the EEC Budget. There has not been any attempt to put forward a coherent set of proposals which directly address the problem of Britain's relative decline and de-industrialisation. While taking the view that membership of the EEC has been wholly disadvantageous to Britain's economic interests, we have some sympathy with the irritation expressed by other member countries at the disjointed and purely negative attitude of the British government as it complains of one or another aspect of rules which were perfectly well known when we joined. Article 2 of the Treaty of Rome contains the most general statement of the Community's intention: It shall be the aim of the Community, by establishing a Common Market and progressively approximating the economic policies of Member States, to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increased stability, an accelerated raising of the standard of living and closer relations between its Member States. If this is the primary aim of the Community, it is most emphatically not what it is achieving as far as Britain is concerned, as shown in this chapter. It is possible to imagine an amended set of financial and trading relationships which would on balance be advantageous both to Britain and to the rest of the EEC. Indeed the piecemeal approach is prejudicial to the devising of any comprehensive plan; in particular drastic reduction or elimination of Britain's net contribution to the Budget as an isolated act would make it much harder to achieve changes in what, in the long term, are the vastly more important issues. It might even on balance be advantageous for Britain to go on paying large sums for the support of European agriculture in return for a change in the arrangements which at present are sponsoring Britain's industrial decline. What could such a change in arrangements amount to? One possibility is the introduction of new Community regional policies for the benefit of poor or declining regions on a scale that would arrest and reverse their divergent performances. It would be wrong to think of such policies, if properly devised, 33 as necessarily transferring resources away from any group of countries. No one would necessarily be worse off as long as the net effect were to increase output and real income in the Community as a whole compared with what it otherwise would have been. Another possibility is that relatively strong Community members should agree to the introduction by Britain of import restrictions on a large enough scale to reverse its de-industrialisation, without mutual escalation and accompanied by policies to minimise disruptive effects of the restrictions. A third possibility is that Britain could act unilaterally, even if this means leaving the Community. Proposals for a Community solution may at present seem fanciful, particularly when other member countries are so heavily preoccupied with domestic economic needs and political pressures. But damage will only be avoided if there is a sufficiently wide perception of the grave nature of the иcrisis which Britain now faces. To what extent do the above proposals contravene the Community's rules? There seems to be no fundamental constraint on new regional measures and a substantial increase in payments out of the social and regional fund. It is true that the Community will face a Budget problem through exhaustion of its 'own resources' when the maximum 1% value-added tax (VAT) precept on members is reached. But this limit will in any case be reached shortly because of rising expenditure on agriculture. Future augmentation of 'own resources' could be made part of a wider bargain which included far greater expenditure on regional programmes. As far as any form of protection is concerned, it should first be pointed out that, ever since the 'green' currency arrangements were introduced, the principle of free trade has been breached. As long as the green mark is below par or the green pound above par, highcost German farmers are being protected against low~ost British farmers as effectively as if there were a straight tariff. Even if the question of industrial protection is looked at from a strictly legal point of view, the matter is not entirely unambiguous. The Treaty of Rome contains several articles concerning action to deal with balance-of-payments problems. This part of the Treaty starts with the request that Each Member State shall pursue the economic policy necessary to ensure the equilibrium of its overall balance of payments and to maintain confidence in its currency, while ensuring a high level of employment and the stability of the level of prices. (Article 104) Obviously Britain and some other member countries are in practice failing to fulfill these objectives. What action the Treaty allows them to take is less clear. Article 108 envisages measures of mutual assistance and, ultimately, safeguard action by a state in difficulty, all under authorisation of the European Commission and Council of Ministers. To this extent the Community has an obligation to initiate remedial action - an obligation which it has so far patently failed to discharge. Finally, Article 109 allows unilateral action by a member state where a sudden balance-of-payments crisis occurs and the Council of Ministers fails to make immediate decisions, although such action can be suspended or abolished by the Council. Here, however, the 'Luxembourg compromise' comes into play. In the 1960s France succeeded in blocking majority decision-making on the Agricultural Policy, which it considered would damage a vital national interest. The compromise reached at that time was to leave unresolved what should be done if agreement could not be reached on any very important matter. Majority decision-making had been called into question and was not confirmed. It therefore remains open whether Britain could veto a Community decision to abolish measures taken unilaterally under articles 104 and 109. Obviously the real issue is more political than legal. If Britain imposed import restrictions, the other members could in effect expel Britain from the Community and take counter-measures. At a minimum, under the GATT, they could apply their Common External Tariff (which is however only 7% or less on most manufactures) against UK exports. On the other hand, if Britain were simply expelled, the Community would face major difficulties in disposing of its food surpluses and in fmancing the CAP without our large Budget contribution. There would evidently be plenty to discuss before measures of retaliation could be taken. Our concern now is that a whole range of strategic options for Britain's relationship with Europe, and their implications for all concerned, should be discussed positively and imaginatively. This would be more realistic and productive than continuing to squabble over minor policies and Budget issues as if nothing fundamental were at stake. References CEPG 1979.PoliciesoftheEEC, Chapter 2,Economic Policy Review, No. 5, Department of Applied Economics, University of Cambridge, Gower Press, April Godley, W. A. H. 1980. The United Kingdom and the Community Budget, in W. Wallace (ed.), Britain in Europe, Joint Studies in Public Policy, London, Heinemann Hansard 1979. Reply to Parliamentary Question, 5th November, Written Answers, Col. 113 HMSO 1971. The United Kingdom and the European Communities, Cmnd 4715, London, July Kay, J. A. and Morris, N. 1980. The Common Agricultural Policy, London, Institute for Fiscal Studies Rollo, J. M. C. and Warwick, K. S. 1979. The CAP and resource flows among EEC member states, Government Economic Service Working Paper No. 27, London, November 34 и  Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Chapter 3 Britain and Europe Creator An entity primarily responsible for making the resource Members of the CEPG Source A related resource from which the described resource is derived Cambridge Economic Policy Review Volume 6 No 1, pages 27 - 34 Date A point or period of time associated with an event in the lifecycle of the resource April 1980