As autumn arrives and the leaves turn yellow and red, some have noticed a change in the air. It’s not just the change of season. No, the replacement of Boris Johnson, then Liz Truss with Rishi Sunak and the return to cabinet of a number of prominent “Remainers” is causing some to smell an opportunity to “rebalance relations”with the European Union. This is code for a demand to re-join the single market (SM). 

We are being inundated yet again with forecasts of economic doom as a result of leaving the SM and customs union (CU) with any and every event inelegantly contorted to imply a Brexit effect. For example, there is the spinning of SMMT numbers on declining UK car production to imply it is all down to Brexit whilst conveniently ignoring the fact that production has collapsed globally.

Motor Vehicle Production	2015	2021	per cent change
France	1,570	918	-41.5 per cent
Germany	5,708	3,096	-45.8 per cent
United Kingdom	1,588	860	-45.9 per cent
United States	4,162	1,563	-62.5 per cent

 

I have already written about the biases of many of these commentators and provided research and analysis of how data is twisted and misrepresented to create a false narrative.

Today I thought I would take a look at the issue of UK single market membership and whether the doomsters are correct in their forecasts of economic calamity if the UK does not rejoin. Most analyses on this subject take as a starting point the economic forecasts of lower UK GDP either “actual” or in the medium/long term from leaving the SM. The problem with such analyses is two-fold. First it is impossible to “prove”. That is true whether economic commentators have taken a “forecast” for future UK GDP and then brought it down to an imagined lower number or created a “doppelganger” UK economy (based on the performance of other countries) to imply lower UK growth “achieved”.

This angle is based on actual historic outcomes, not forecasts

The second problem is that economic forecasts are naturally a self-fulfilling prophecy of the author’s personal biases. If you believe leaving the SM is bad for productivity, for example, then that is the assumption you put into your model and lo and behold, lower productivity is thus the modelling outcome.

For that reason a much better way of looking at the potential costs to the UK economy of leaving the SM is to look at the economic benefits the UK gained as a member of the SM (and yes, there were benefits). Analysing the issue from this angle has the twin advantage of being based on actual historic outcomes not forecasts and, because the data was calculated before the Brexit vote, of being based on analysis uncoloured by people’s personal prejudices regarding Brexit. 

For this purpose I have decided to look at the report entitled “20 years of the Single Market — Growth effects of the increasing European integration” published in 2014 and produced by The Bertelsmann Stiftung, an independent foundation based in Germany which is, and always has been, an advocate for accelerating the EU’s decision-making processes and promoting European integration.

Its analysis is driven by an integration index (based on an index developed by König und Ohr) in three groups: “Economic interdependencies”, “Homogeneity of the economic area” and “Economic symmetry”, using data sourced from the UN, World Bank, OECD, Eurostat and European Commission among others.

Unsurprisingly its report concludes that: “taken together, the index values clearly show that the integration of the countries of the European Union has increased considerably over the past two decades”. In other words, members have benefited economically through SM membership.

Let’s delve a little into the details of this report. Below is my representation of a table it produced (the report is in German) comparing the gross domestic product per inhabitant in 2012 with and without “progressive European integration”.

	Relative Difference in per cent	Absolute Difference in Euro
Germany	2.3	680
Denmark	2.0	720
Belgium	1.6	470
Austria	1.4	450
Finland	1.2	360
United Kingdom	1.0	310
Ireland	0.9	330
Italy	0.9	200
France	0.8	230
Spain	0.7	150
The Netherlands	0.6	190
Portugal	0.4	60
Sweden	0.4	140
Greece	-1.3	-190

 

All countries are reported to have gained in terms of GDP (except Greece), with German GDP estimated to be 2.3 per cent higher as a result of the SM adding €680 to GDP per person. As for the UK, the SM is reported to have added 1 per cent to GDP or €310 per person 

What about income gains per inhabitant over time? The table below shows its results of “absolute gains in income per inhabitant as a result of European Integration in the period 1992 to 2012 in euros at 2005 prices”.

	Average annual Income gain per inhabitant from 1992	Cumulative income gain per inhabitant from 1992–2012
Denmark	500	10,400
Germany	450	9,490
Austria	280	5,800
Finland	220	4,630
Sweden	180	3,800
Belgium	180	3,760
The Netherlands	130	2,700
France	110	2,360
Ireland	110	2,300
Italy	80	1,760
Spain	70	1,500
Greece	70	1,480
Portugal	20	500
United Kingdom	10	250

 

Bertelsmann Stiftung records that Denmark (closely followed by Germany) benefited the most from the SM in terms of individual income gains with average annual incomes €500 higher as a result of membership (cumulative over the twenty years, €10,400). In the UK, meanwhile, individual incomes are recorded as having benefited by just €10 a year (cumulative over the twenty years, €250)

To put that into perspective we look at the income data in per centage growth terms.

	Average annual Income gain per inhabitant in per cent	Cumulative income gain per Population in per cent
Germany	2.0	40.1
Denmark	1.7	34.7
Austria	1.2	24.9
Finland	1.1	22.8
Belgium	0.8	16.3
Sweden	0.8	15.9
Ireland	0.6	12.6
Greece	0.6	11.8
The Netherlands	0.6	11.2
France	0.5	10.3
Spain	0.5	9.7
Italy	0.4	8.4
Portugal	0.2	4.5
United Kingdom	0.1	1.2

 

The benefits of the SM in income terms is quite significant for many members. In Germany, for example, Bertelsmann Stiftung records a 2 per cent per annum increase in income which equates to more than 40 per cent higher income over the entire twenty years. But for the UK, SM benefits are judged to have added only 0.1 per cent per annum or 1.2 per cent cumulatively to income per person.

At a country level, that equates to significant extra income for Germany of €37b per annum and €779b cumulatively. A whopping 31.5 per cent cumulative income gain over twenty years. For the UK a much less impressive €1b a year (€20b cumulatively) or a 1.1 per cent higher income comes as a result of SM membership.

	Average annual income gain from the year 1992 in billion euro*	Cumulative income gain from 1992 in billions Euro*	Cumulative income gain from 1992 onwards in relation to real gross domestic product of the Year 2012 in per cent
Germany	37.1	779	31.5
France	7.1	149	8.3
Italy	4.9	103	7.4
Spain	3.1	65	7.0
Denmark	2.7	57	27.2
Austria	2.3	48	17.5
The Netherlands	2.1	44	8.1
Belgium	1.9	40	12.3
Sweden	1.7	35	10.3
Finland	1.1	24	14.6
United Kingdom	1.0	20	1.1
Greece	0.8	16	9.7
Ireland	0.5	10	6.0
Portugal	0.3	6	3.7

 

The report also provides some charts to demonstrate the GDP per inhabitant benefits of “progressive Integration” (the dotted line is GDP per capita excluding EU integration). It is clear that Germany has benefited considerably from the SM. The UK, not so much.

If the benefits of SM membership to the UK were so relatively small (1.0 per cent higher GDP, €10 a year higher incomes), why are so many economists forecasting so much lower UK GDP growth in the future as a result of leaving the SM?

Below are two tables taken from the Office of Budget Responsibility (OBR) reports on the effects of Brexit on the UK economy. They contain forecasts of lower future economic growth from a variety of organisations as a result of leaving the EU. The first was produced before the details of the UK/EU trade deal (TCA) were agreed, so shows forecasts based on the UK leaving the EU on either WTO terms, with an FTA or EEA (SM membership).

Two points to note. First, the OBR itself does not produce forecasts for the potential Brexit effect on the UK economy. It simply reports the estimates of others. Second, the forecasts are not for lower GDP in the future, just lower growth than they would have expected if the UK had remained in the EU. 

The OBR reports that the average forecast for lower UK GDP growth as a result of leaving the EU with an FTA is 3.0 per cent in the first table and 4.0 per cent in the second table (although it should be noted that the OBR did not, for some reason, select the same sources for both tables).

If SM membership over 20 years only added 1.0 per cent to UK GDP, why would these economic forecasters predict lower GDP over the next 10–15 years by 3–4 per cent? I think I can explain.

Let’s look at some of these forecasts in more detail. As you can see in the second table the NIESR is predicting the UK economy to be 3.9 per cent smaller by 2030 with an FTA. However, its forecast for GDP per capita is only 3.0 per cent lower — thus 0.9 per cent of the lower growth comes from forecasts for lower immigration alone. NIESR informed me that the single biggest factor in the 3.9 per cent (lower GDP) figure was its forecast for lower productivity — the impact of lower productivity alone represents 2.1 per cent of the 3.9 per cent forecast decline. This means that just two variables — lower productivity and lower immigration — are responsible for 3.0 per cent of the lower growth forecast. Or to look at it another way, the forecast for lower GDP driven only by the loss of single market and customs union membership / increased trade friction, is just 0.9 per cent.

Felbermayr et al in the OBR table (Felbermayr, Fuest, Groeschl and Stöhlker) in its piece “Economic Effects of Brexit on the European Economy” forecasts 1.8 per cent lower UK GDP versus staying in the EU by 2030. However, the majority of this lower growth forecast was due to an estimate for lower immigration. On a per capita basis, its forecast was only 0.6 per cent lower GDP in the event of an FTA deal. 

A pattern is starting to emerge. Although the forecasts of lower UK GDP growth as a result of leaving the SM appear higher than the benefits accrued as members, strip away just two forecast elements — immigration and productivity — and they are broadly the same. In the region of 0.6–0.9 per cent of GDP, this is broadly in line with the Bertelsmann Stiftung report estimate of UK SM benefits.

The other factors driving the bulk of lower GDP forecasts are, however, not set in stone but a matter for future policy decisions. Take immigration. All the forecasts for lower GDP growth rely on significant future falls in UK immigration numbers. Maybe the British people decide that lower GDP growth (but higher GDP per capita growth) is a price they are prepared to pay for less migration. Or perhaps they will decide to accept higher numbers. Either way, the GDP effects have nothing to do with the loss of SM membership.

As for the other significant factor — productivity — why should UK productivity be affected by leaving the SM, when there is no evidence that it was boosted by SM membership in the first place (over and above that included in the Bertelsmann Stiftung’s 1.0 per cent GDP boost figure)?

UK productivity is currently about 25 per cent below the best of our G7 peers. It has effectively stalled since the Great Financial Crash in 2008 and barely improved since 2000 — all as an EU member. That has been the case for most of our EU peers with no evidence that SM membership had any effect at all.

Having left the EU and SM, and hence now in a position to make our own rules and regulations, trade deals et cetera , the UK could choose to focus on policies designed to improve productivity and hence economic growth. 

The possibilities are innumerable, but let’s just look at just one area: AI and robotics, where the UK is viewed as among the global leaders — only just behind China and the US according to a Big Innovation Centre and Deep Knowledge Analytics report. 

PWC in its June 2017 report on AI and robotics estimates that UK GDP could be boosted by over 10 per cent by 2030 (the equivalent of an additional £232bn) if we get our policies right. Professor Juergen Maier, in his October 2017 Government report, is even more bullish, estimating that the “fourth industrial revolution” could add over £455bn to the UK economy (about 18 per cent) and create over 175,000 jobs if implemented correctly. 

An increase in UK GDP of between 10–18 per cent from industry 4.0 alone rather puts the 1 per cent loss of GDP from SM membership into perspective doesn’t it?

Do not let the doomsters and EU SM supporters fool you. Whilst leaving the SM has meant increased trade friction, the reality is the actual “cost” to the UK economy overall is small. It pales into insignificance compared to the potential economic benefits of getting the UK economy, rules, regulations and investment environment right as an independent nation.