London and the EU - London First

4 downloads 214 Views 3MB Size Report
the EU is London's biggest trading partner, responsible for. 30-40 per cent of total ... in e-commerce and put EU busine
LONDON AND THE EU

Contents INTRODUCTION SUMMARY 1 THE SINGLE MARKET 1.1 VALUING THE SINGLE MARKET 2 FREE MOVEMENT OF GOODS AND SERVICES 2.1 FREE MOVEMENT OF GOODS 2.2 FREE MOVEMENT OF SERVICES 2.3 DRIVING A GROWTH AGENDA WITHIN EUROPE 3 FREE MOVEMENT OF PEOPLE 3.1 LONDON’S MIGRANT WORKERS 3.2 MANAGING MIGRATION 4 FREE MOVEMENT OF CAPITAL 4.1 EUROPE’S BUSINESS CAPITAL 4.2 CHANGING GLOBAL ECONOMY 4.3 UNCERTAINTY IS BAD FOR LONDON 5 FUTURE OF THE EURO 5.1 FULL FISCAL INTEGRATION IS FAR IN THE FUTURE 5.2 CHAMPIONING THE SINGLE MARKET DRIVING GROWTH AND COMPETITIVENESS IN EUROPE APPENDIX – STUDIES OF THE COSTS AND BENEFITS OF THE SINGLE MARKET

LONDON AND THE EU May 2014

INTRODUCTION Britain joined the European Community in 1973. Despite this decision being subsequently ratified in a referendum, with two-thirds voting in favour, the UK’s relationship with its European partners has always been difficult. In 2013, the Prime Minister, David Cameron pledged a future Conservative government to an in/out referendum on membership of the European Union after negotiating a “new settlement” for the UK. London’s business community is committed to remaining within the European Union (EU), in large part because of the economic benefits of the Single Market, and sees great opportunities for Britain to lead a deepening of that market to drive jobs and growth across the country. However, while London and the UK have benefited in the round from EU membership, and stand to do so more in the future, this economic integration has inevitably lead to social and economic costs for some groups, which national and regional government need to do more to mitigate. It is against this background that London First assembled a working group of senior business leaders to explore how Britain’s relationship with Europe affects London and how Britain can seize the opportunities, and better manage the challenges, in future. These and other discussions with members have informed and framed the policy position on Europe set out in this report.

3

SUMMARY The Single Market of the EU – enshrined in the four freedoms of movement in goods, services, people and capital – has opened up European markets to competition by creating common rules. Estimates of its direct benefit to the UK economy vary, but the liberalisation of trade that has followed its introduction is seen by most London businesses as having significantly contributed to jobs, growth and rising GDP. Britain’s relationship with Europe is of great importance to London:

• the EU is London’s biggest trading partner, responsible for 30-40 per cent of total exports1;



•L  ondon attracts the most Foreign Direct Investment of any city in Europe2; and



•b  eing part of the Single Market supports London’s status as an international economic hub. 40 per cent of the world’s largest 250 companies choose London for their European or global headquarters, with almost half citing access to Europe as the core reason for investing.3

Unlike New York or Hong Kong, London has a medium-sized domestic economy, so being at the heart of the European Single Market is a crucial part of its success. Of course, the benefits of the Single Market have not come without costs. The pooling of sovereignty and creation of common rules inevitably mean that the UK government has lost independence of decision-making in important areas of national social and economic policy. In particular, the free movement of people has created tensions: while the aggregate benefit to the UK economy is clear, there are important social and income distribution issues. Nowhere is this more obvious than in London, where immigration has been both a vital part of the economy’s success and yet has also increased competition for jobs, put pressure on real wages and increased demand on public services and housing. However, the opportunity for London, and British, business is not to threaten exit, but to drive the completion of the Single Market in services and make EU membership work even better in the UK’s interests, while vigorously implementing a programme to mitigate adverse social and income distribution effects that undermine the success of the whole. 4

Britain has a substantial opportunity to benefit from a growth agenda in the EU, which would include:  • T RADE IN SERVICES The completion of the Single Market in services has a similar potential to increase GDP to that of the completion of the Single Market in goods in the 1990s. London’s world-class financial and professional service sectors and tech and creative sectors are well positioned to exploit this opportunity. For example, an effective European digital single market is estimated to be worth an additional 4 per cent to European GDP,4 currently national barriers around security and inadequate copyright legislation inhibit the integration of European digital markets, restrict growth opportunities in e-commerce and put EU business at a disadvantage compared to their American counterparts.

• INTERNATIONAL TRADE

The EU is responsible for negotiating external trade agreements on behalf of all member states with countries outside of the EU. These EU trade deals cover around 60 per cent of the extra-EU trade, which would rise to 85 per cent if the EU successfully completes the negotiations on Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA.5

Realising the benefits of the Single Market means accepting its framework as a package: the four freedoms are not ‘a la carte’; states cannot pick and choose which best suit their interests as the freedoms work together to create an internal market. Britain benefits from exporting goods and services to the EU; Britain, in the round, benefits from the brightest and best who want to work here; and countries that open up their markets to greater competition benefit from rising wealth, as do individuals who have the right to compete for work across Europe. The UK is a large market and a significant player in intra-EU trade so has a strong position within the EU from which to negotiate and to seek to drive reform; but the idea that there is a package for Britain that combines the benefits without the costs is a chimera.

5

European countries outside of the EU, notably Norway and Switzerland, are often cited as having the benefits without the costs, as they have access to the Single Market outside of EU membership. However, they are required to adopt the freedoms of the Single Market, follow its rules and contribute to the EU budget without having any say in how those rules are set. It is difficult to see how this arrangement would work in Britain’s interests. It is sometimes argued that as a country outside of the Eurozone, Britain’s long-term interests will inevitably be compromised; Eurozone members could, over time, become a decision making body whose interests determine the direction of the EU as a whole. However, the best way to ensure Britain’s interests in the Single Market are met in the face of Eurozone integration is not to withdraw to the side-lines, but rather to be at the centre of European policymaking. Research carried out by the think tank German Council on Foreign Relations shows that being at the political centre of the EU amplifies influence; a stance on the margins has the reverse effect.6 This is why business wants the UK government to take a more engaged role within the EU, in order to drive economic growth and competitiveness, and champion the Single Market.

6

1 THE SINGLE MARKET The Single Market of the EU has progressively removed barriers to intra-EU trading and simplifying access to European markets through common rules, in order to allow individuals, consumers and businesses to make the most of the opportunities offered by direct access to 28 countries and a population of 503 million.7

The EU is the UK’s most important trading partner; it buys over 50 per cent of all UK exports and provides nearly half of imports. As the biggest and richest economy in the world, it is responsible for a quarter of global GDP and almost one fifth of global trade.8 While the EU is still not a genuine internal market (in the way the USA is) significant progress has been made, with the direction of travel towards liberalisation of markets and free trade across borders. Table 1 World’s Largest Economies

EU28 US

China

Rant 1 2 3 Population

500 million 316 million 1.35 billion

GDP

$17.9 trillion $16.2 trillion $8.2 trillion

% of global imports

16.4

15.9

11.5

% of global exports

15.4

10.5

13.4

Source: Economist Intelligence Unit/ World Bank/ http://europa.eu/

THE SINGLE MARKET Its purpose is to break down barriers between individual Member States and, in doing so, to create “Four Freedoms” across the EU: the free movement of people; the free movement of capital; the free movement of goods; and the freedom to provide services. The EU has the power to legislate in a number of areas that directly affect businesses. These include9: + Product specifications, e.g. Directive 2000/36/EC on cocoa and chocolate products intended for human consumption; + Competition, e.g. Council Regulation 139/2004 on the control of concentrations between undertakings, aka the EC Merger Regulation; + Employment terms, e.g. Directive 2008/104/ EC on Temporary and Agency Workers; + Health and safety, e.g. Directive 2009/148/ EC on exposure to asbestos at work; + Consumer protection, e.g. Directive 93/13/ EC on Unfair Terms in Consumer Contracts.

The cornerstones of the Single Market are the “four freedoms” – free movement of people, goods, services and capital. These freedoms are enshrined in the treaties of the EU (the Treaty) and form the basis of the Single Market framework. The interaction of all four freedoms are designed to ensure a genuine, seamless, internal market where goods and services and the factors of production (capital and labour) are free to move to the area where they are most valued, improving efficiency in the allocation of resources. Opening up markets to increased competition and creating common rules instead of 28 different national rules has enjoyed the strong support of business and policy makers alike. The Government’s 2013 review of the Balance of Competences of the EU said the evidence showed the Single Market had made a positive impact on the UK, concluding: “There is still a broad consensus that it [the Single Market] is at the core of the EU’s development, that it has driven growth and prosperity in the Member States, and that it should continue to do so.”10 The Single Market has also supported international trade. EU trade deals with third countries, including many of the fast growing emerging economies. Around 60 per cent of UK trade outside of the EU is with countries that come under the umbrella of EU trade agreements. This will rise to 85 per if EU trade negotiations with the US are successful.11 But these benefits have not come without costs. The Single Market requires common rules and pooling sovereignty in European institutions, which means the UK government has lost its independence of decision-making in some areas of national social and economic policy. The common trade policy prevents the UK from negotiating its own bilateral trade agreements with the dynamic and fast growing economies of the emerging markets, and the free movement of people has had distributional effects on some groups.

7

1.1 VALUING THE SINGLE MARKET Putting an accurate economic value to the UK’s membership of the EU is difficult. There are tangible costs and benefits – such as the cost of the contribution to the EU budget, the value of increased trade and the cost and/or benefit of regulation. These costs and benefits can be quantified with varying degrees of accuracy, however there are also intangible costs and benefits that are more difficult, if not impossible, to measure. A key question is whether trading patterns with Europe are a result of the EU as a institution, with its market access rules and associated costs, or whether the close geographical proximity of a large group of rich trading partners would result in similar effects.

now, and in the future. EU membership amplifies the economic potential of the cross-border European trade that would otherwise naturally arise from close geographical trading partners. Table 2 World’s Largest Economies 2000 2012 2020 2030 (forcast) (forecast) EU28

EU28

US

US

US

US

EU28

EU28

Japan

China

China

China

Germany

Japan

Japan

Japan

UK

Germany

Germany

India

France

UK

UK

Germany

Italy

France

France

UK

China

Italy

India

France

Canada

India

Italy

Brazil

Economies set to baseline of 2005 Source: Economic Research Service, US Department of Agriculture

Not surprisingly, considerable effort has been put into analysis of the costs and benefits of membership on both sides of the debate, but various studies have all reached different results, ranging from a net benefit of between 2.25 to 6.5 per cent of GDP to a net cost of 1.75 to 4 per cent of GDP attributed to EU membership, although it should be noted that the conclusions from these studies are not precisely comparable (see Appendix). A consequence of the difficultly in quantifying intangible costs is that estimates of the value of the EU to the economy rely on assumptions, which are vulnerable to the bias of those conducting the analysis. UKIP, for example, concluded the combined direct and indirect costs of EU membership amount to £77 billion net cost to the UK economy,14 whereas a 2013 CBI report claims membership of the EU is worth approximately 4-5 per cent of UK GDP every year, equivalent to £62-78 billion.15 While economists find it difficult to agree on the value of EU membership, business is resolute in its belief that the Single Market has significantly contributed to jobs growth and raising GDP. Unlike New York or Hong Kong, London has a medium-sized domestic economy, so being at the heart of the European Single Market is a crucial part of its success. As the UK economy slides down the rankings of global economies, the EU will remain in the top two through to 2030 (see Table 2). As such, it is likely to remain the UK’s largest trading partner; therefore, maintaining full access to the Single Market is critical both 8

FREE MOVEMENT OF

2 GOODS AND SERVICES

Over the past two decades, British producers trading in goods with Europe have benefitted significantly from the freedoms of the Single Market. The EU is London’s largest trading partner, responsible for 30-40 per cent of all trade in goods and services.16 The completion of the Single Market in services has the potential to drive London, and the UK’s future growth.

2.1 FREE MOVEMENT OF GOODS EU legislation has progressively harmonised technical standards and created the “mutual recognition” principle, under which goods legally manufactured or marketed in one Member State can move freely throughout the EU. Approximately three-quarters of the trade in goods within the EU is covered by harmonised regulations and this has benefited goods producers in London. The EU is the largest destination of London’s exports in goods. In 2009, 24 per cent of London’s exports were goods. While manufacturing is a much lower share of GVA in London than in other UK regions, it is still a substantial absolute contribution to overall UK GVA.17 A British Chambers of Commerce survey of its members found, notwithstanding the rising importance of emerging markets, the EU is seen by many exporting businesses as providing the greatest prospect for growth in the short term.18

2.2. FREE MOVEMENT OF SERVICES Services are the engine of London’s economy. London represents 22 per cent of UK GDP but accounts for around 44 per cent of all UK service exports.19 The integration of EU markets in services is not as advanced as that in goods, yet the completion of the Single Market in digital services alone could increase European GDP by 4 per cent by 2020.20 The European Commission has highlighted problems which inhibit the integration of European digital markets, and restrict growth opportunities in ecommerce. These include: the fragmentation of online markets; inadequate intellectual property legislation; and the lack of trust and interoperability.

The Commission advocates that the digital Single Market should be “mainstreamed” through all aspects of the Single Market via a common framework.21 London’s economy with its worldclass tech and digital sectors is well positioned to benefit from such reforms. The removal of tariffs and barriers to trading goods across borders is relatively straightforward, compared to those surrounding the provision of services. Some progress has been made for example, the Services Directive (2006)22 sets out the legal framework for liberalisation but more could be done. WHY IS SERVICES INTEGRATION SO DIFFICULT? Goods, can be exported without the producer and consumer being present at the same time, but this is not generally true of services. While some services can be provided across borders (for example those provided electronically), in many cases either the recipient moves to receive the service (for example tourism) or the provider moves, to provide it. This makes services provision vulnerable to non-tariff barriers such as licensing and professional standards, which distort free competition. There are 800 regulated activities in the EU, ranging in different member states from doctors and architects to photographers, barmen and chambermaids. Of these, only seven – architects, dentists, doctors, midwives, nurses, pharmacist and vets – are automatically recognised in other EU countries.23 These non-tariff market restrictions present a significant barrier to service providers operating across EU borders.

9

London’s economy is well placed to benefit from the opportunities offered by progress towards services integration in Europe and some have suggested that it is possible to achieve this without full EU membership. The argument is that the UK (being a large and important economy in Europe) can renegotiate a package that has all of the benefits and none of the costs.

2.3 DRIVING A GROWTH AGENDA FROM WITHIN EUROPE

A ‘thinner’ future relationship with the EU would require a separate bilateral agreement with the EU, similar perhaps to Switzerland – or joining an existing framework such as the European Economic Area (EEA) - the ‘Norway option.’

As a large economy with considerable expertise in liberalisation, the UK is well positioned to achieve this. Size matters in Europe; differences in economic strength, demographics, foreign policy influence and international status determine the ability to influence the European agenda, but leveraging this influence is made more complex by the institutional environment of EU where bargaining, coalitions and the ability to do deals are important.

In the case of both Switzerland and the EEA, access to the Single Market requires participants to play by its rules. Both have adopted all of the fundamental freedoms of the Single Market and contribute to the EU budget, but neither are represented in the EU institutions. To secure access to the Single Market, countries outside the EU are required to adopt the rules of the market without having any say over the design of those rules. For these countries the only significant advantage is exemption from common agriculture and fisheries rules. The UK is a large market and runs a trade deficit in intra-EU trade, so has a strong negotiating position with the rest of the EU, but the idea that there is a package for Britain that combines the benefits without the costs is a chimera. The trade deficit may create leverage in securing a favourable deal in goods, but services (upon which London depends) are more difficult to integrate and require strong institutions and the political commitment to see off any backlash from local producers resistant to foreign competition. Delivering progress on services integration at the pace and depth that the UK would want, with the UK outside the EU and the UK then having equal access on the right terms, is difficult to see.

The opportunity for London – and British – business is not to leave the EU, but to drive the completion of the Single Market in services and make the Single Market and EU membership work even better in the UK’s interests.

The northern European states and some central eastern European states are natural champions f market liberalisation and have an ally in the Commission, which is committed to working towards completing the market in digital, energy and telecommunications.24 But the smaller member states lack the economic influence to drive this agenda through intergovernmental negotiation and bargaining. The UK has historically shown leadership in driving a liberalising agenda in Europe. Prime Minister Margaret Thatcher signed the Single European Act, which set the timetable for the completion of the Single Market, because she was prepared to back European integration where there was a clear economic imperative.25 It is not possible to lead in Europe while threatening to leave. Being at the political centre of the EU amplifies influence and the ability to build coalitions; a stance on the margins has the reverse effect.26 This is why business wants the UK government to take a more engaged role within the EU, in order to drive economic growth and competitiveness.

10

FREE MOVEMENT OF

3PEOPLE According to research by University College London, in the last decade, immigrants to the UK from other parts of Europe made a net fiscal contribution to the UK of £22 billion.27 Most immigrants from the EU are in employment, make a substantial net contribution to the economy and have deepened the pool of talent in London. But these aggregated economic figures mask more complex impacts in different parts of the labour market.

While the aggregate benefit to the UK economy is clear, the free movement of people has also increased competition and put pressure on real wages for lower skilled workers. These distributional effects have been more sharply felt in London because it has attracted higher concentrations of migrants compared to other UK regions, as shown in Chart 1. The Single Market is a package; the four freedoms are not ‘a la carte’ and therefore states cannot pick and choose which to opt-out from. The freedoms work together to create an internal market that creates overall benefits. The key issue is not whether the UK can secure an optout (because this is highly unlikely), but how best to design a programme to mitigate the adverse distributional effects that undermine the success for the whole.

FREE MOVEMENT OF PEOPLE In 2004 the EU adopted a directive (2004/38/ EC) – usually referred to as the free movement directive – which consolidated previous EU legislation on the subject and provided greater clarity as to the meaning of the limitations on free movement that can be applied on the grounds of public policy, public security and public health.28 The free movement of people allows EU citizens to: + Look for a job in another EU country + Work there without the need for a work permit + Reside there for that purpose + Stay there even after employment has finished + Enjoy equal treatment with nationals in access to employment, working conditions and all other social and tax policies

3.1 LONDON’S MIGRANT WORKERS London consistently ranks in the top three global cities across a range of global cities indices.29 A consequence of this success, and its open economy, is that London attracts more migrants than other UK regions. Chart 1 illustrates immigrants as a percentage of the resident population is much greater in London, with some boroughs affected more than others.30 A driver of the city’s competitiveness is its ability to attract international talent. London is the world’s leading centre for high-skilled knowledge-based workers, employing 1.5 million – compared to 1.2 million in New York and leads European capitals by some distance.31 The demand for high-skilled workers will continue to increase as London grows.32 As well as high-skilled workers, London has also attracted lower-skilled workers, who increase competition for local jobs, which puts a downward pressure on real wages.33 Migrants from the eight countries that joined the EU in 2004 (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) make up a larger share of lower skilled jobs (see Chart 2)and workers from the wider EU make up 25 per cent of the workforce in accommodation and food services.34 In the unskilled and semiskilled service sector, a 1 per cent point rise in the share of migrants reduces average wages by 0.5 per cent.35

11

Chart 1 Geographical distribution of UK residents born in EU outside British Isles* by Parliamentary constituency, England and Wales, 2011

% of residents

London

12.8 to 17 (12) 8.7 to 12.8 (26) 4.6 to 8.7 (26) 0.5 to 4.6 (26)

© Crown copyright. All rights reserved. House of Commons Library (2013.) Source: UK 2011 Census results, accessed via www.nomisweb.co.uk *‘British Isles’ inlcudes UK, Ireland, the Channel Islands and the Isle of Man.

12

Alongside income distribution impacts, immigration has also created congestion impacts in London. A failure to adequately plan for the impact of the wave of immigration in 2004 led to pressure on London’s housing and already stretched public services.36 Chart 2 Percent of all workers in country-of-birth in each job-skill level, Q1 2011 UK-born

EU14

EUA8

Rest of the World

40 35 30 25

how to implement a programme to mitigate the adverse social and income distribution effects that undermine the success for the whole. This would include central government implementing a cross-departmental strategy to deal with the public services and housing effects of recent and future immigration; greater devolution to local government to manage local impacts; and a step-change in education and skills policies to give local talent the competencies and employability skills to compete on a level playing field with migrant workers.

20 15 10 5 0

Low

Lower middle Upper middle

High

A2 (Bulgaria and Romania) and A8 (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) member states.

3.2 MANAGING MIGRATION Negotiating opt-outs from the free movement of people legislation is not a credible strategy to cope with the consequences of immigration. The Single Market’s fundamental principles are not ‘a la carte’; free movement is as integral to participation in the Single Market the free movement of capital, goods or services. The free movement of people legislation also applies, in general terms to EEA countries outside the EU (Norway, Iceland and Lichtenstein).37 The Swiss recently narrowly backed a referendum to bring back strict quotas for immigration from EU countries. However, the vote invalidates the Swiss-EU agreement, which provides Switzerland with access to the EU’s Single Market. If the Swiss go ahead with restrictions on free movement, it is likely to result in restrictions to market access.38 As Foreign Secretary, William Hague, said, “If national parliaments all around the EU were regularly and unilaterally able to choose which bits of EU law they would apply and which bits they wouldn’t, the European single market wouldn’t work…”39 The key issue is not whether the UK can secure an opt-out (because this is highly unlikely), but

13

FREE MOVEMENT OF

4 CAPITAL The Single Market is not just about intra-EU trade, virtually all Single Market policies have, to some extent, an international aspect, whether through international regulatory co-ordination or through trade agreements which open up the EU market to extra-EU trade and investment.

A crucial driver of London’s success is its role as an international trading hub for people, ideas and capital. Functioning as the business capital of the EU has arguably underpinned, or at least enhanced, London’s global status and attracted significant inward investment.

4.1 EUROPE’S BUSINESS CAPITAL London’s open economy, English speaking workforce and stable political regime are assets which make it very attractive for international economic activity. In the absence of a large domestic economy – like that of New York – access to the Single Market is a significant asset to London’s attractiveness. London’s success as a global financial centre is partly explained by the fact that it is Europe’s financial centre. London is responsible for 78 per cent of foreign exchange turnover and 74 per cent of EU trading in interest rate derivatives.40 London is the leader among EU cities for Foreign Direct Investment (FDI) and accounts for approximately 30 per cent of all UK FDI.41 Over 40 per cent of firms from outside the EU coming to the UK cite access to the Single Market as the core reason for investing.42 40 per cent of the world’s largest 250 companies choose London for their European headquarters. This compares with just 8 per cent choosing Paris, London’s closest rival.43 For inbound companies from outside of Europe and emerging markets the figure is even higher at 60 per cent overall, with London hosting all of the inbound top 250 company headquarters from emerging market economies such as Brazil and Mexico.44

4.2 CHANGING GLOBAL ECONOMY In recent years emerging and developing economies have grown at an average annual pace of 8.5 per cent, compared to less than 1 per cent average growth in the Eurozone between 2003 and 2013.45 It is argued that being tied to EU trade agreements is a disadvantage, as it prevents the UK from negotiating with more dynamic economies and historical trading partners such as the Commonwealth nations. However, in global trade it is hard to see any model outside of the EU in which the UK would command the same influence as the world’s largest market. The EU is responsible for negotiating on external trade issues on behalf of all member states. While it is of course possible to negotiate bilateral agreements – for example Mexico has more bilateral trade agreements than any other country46 – the UK’s negotiating position will not be as strong outside the EU. Over a third of total world trade originates in Europe, the EU is the top trading partner for about 80 countries and therefore the prize is considerably larger than a bilateral agreement with the UK alone. The EU has concluded 37 Free Trade Agreements including South Korea, Mexico, South Africa, Chile and most recently Canada. An agreement with Singapore is agreed but not yet in force.

14

4.3 UNCERTAINTY IS BAD FOR LONDON A change to Britain’s relationship with the EU that could create potential restrictions on access to the Single Market is a source of uncertainty, which risks delaying or preventing investment decisions. Although it is difficult to prove quantitatively, conversations with London First members suggest that, among other factors, uncertainty over the UK’s future relationship with Europe is playing a role in delaying some multinationals from investing in London, even though the capital continues to score highly as an attractive place to do business relative to competitors. Completing the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA – which, if successful, would be the biggest trade and investment deal in history, encompassing half the world’s GDP and a third of its trade47 – would demonstrate a commitment to achieving free trade through the EU. As in all EU negations, there are competing interests determined by the structure and priorities of individual national economies. For example, the UK is pushing hard for a sector level agreement in financial services, given the importance of the sector to the economy. The UK must play its part in pressing for the widest possible TTIP agreement. Failure to complete TTIP will be a significant blow to free trade and self-inflicted harm to EU interests.

15

5 FUTURE OF THE EURO The governments of the Eurozone accept that a new form of governance is required to manage the single currency and a framework that sets out a path towards closer economic and money union is in place.

Eurozone members have embarked on a programme of closer fiscal and monetary integration. The first stage – banking union – is underway; the next stage is to move towards greater fiscal union, mutualisation of debt and stricter economic and budgetary surveillance. The final stage is the pooling of sovereignty in fiscal decisions.48 Progress towards economic and monetary union (EMU) presents two risks to UK interests: the Eurozone creates a membership class of its own, which limits the opportunity for the UK and other non-Euro members to influence the agenda; and the Euro project may continue to consume all of the energy of reform, crowding out the opportunity for services liberalisation.

5.1 FULL FISCAL INTEGRATION IS FAR IN THE FUTURE The general framework for EMU is place, but the political commitment to its implementation is not. The initial ambition of the banking union – to create a common deposit guarantee scheme – has been scaled back to avoid triggering Treaty change and there is no evidence of popular support in any Eurozone country for a transfer of powers at the level required for full fiscal union. This has implications for how quickly and deeply EMU will occur; the current Commission has no plans to bring forward any legislation in relation to stages two and three of EMU, which would also require Treaty change.49 If economic conditions in the Eurozone continue to improve, then this may well result in Eurozone members pushing the difficult decisions on monetary union into the future. The sovereign debt crisis has demonstrated it that the Eurozone fails to act until it is forced to, and even then will only take the minimum small steps necessary to avert crisis.

5.2 C HAMPIONING THE SINGLE MARKET The UK, Denmark and Sweden have an option not to join the Euro, but all other EU members and new members have a legal obligation to move towards adopting the single currency, and indeed for most joining the Euro is part of their political ambitions; therefore, the number of Euro-outs will diminish over time. The legal relationship between the Eurozone and the EU institutions has yet to be fully defined, but the Eurogroup and the European Council formation of the Eurozone have established their own presidencies. The UK will be absent from many of the important interactions of the finance ministers of Europe; this is undeniably a risk to Britain’s interests. In order to protect these interests, the UK government has successfully secured a ‘double majority’ voting mechanism in the European Banking Authority (EBA). Key decisions relating to standards applying across the Single Market will need to be approved by a simple majority of members of the EBA Board of Supervisors of both participating and nonparticipating Member States.50 Further guarantees that recognise the central importance of the Single Market will be required as Eurozone members take steps towards fiscal integration. The only way to ensure the Single Market remains a priority is not to withdraw, but rather to be at the centre of European politics. This requires an engaged Britain in Europe acting as a counterweight to Eurozone bias and championing the Single Market at every opportunity.

16

DRIVING GROWTH AND COMPETITIVENESS IN EUROPE

London First members are committed to the Single Market and therefore to remaining in the EU. The four fundamental freedoms of the Single Market (free movement of goods, services, people and capital) have served London’s economy well, boosting intra-EU trade and international trade and investment. London does not enjoy the large domestic economy of competitor cities like New York or Hong Kong; therefore direct access to European market is a significant source of its attractiveness to international business. The EU will continue to be London’s largest trading partner in the future. London’s economy of world class business clusters in financial, professional services, tech and creative are well positioned to take advantage of the opportunities offered by deeper integration of European services markets. To capture these benefits means accepting the Single Market as a package; the freedoms are not ‘a la carte’ – the creation of an efficent internal market depends on all freedoms working together. The opportunity for London – and British – business is not to leave, but to drive the completion of the Single Market in services and make the Single Market and EU membership work even better in the UK’s interests, while implementing a programme to mitigate the adverse social and income distribution effects that undermine the success of the whole.

17

APPENDIX

STUDIES OF THE COSTS AND BENEFITS OF THE SINGLE MARKET • UKIP – How much does the European Union cost Britain? Based on conclusion that “for 2010, the combined direct and indirect costs of EU membership will amount to... £77 billion net” (2010) • Civitas. A cost too far? ‘Most likely’ estimate of annual cost is put at 4 per cent of GDP per year (2004) • Institute for Economic Affairs, (Minford et al) Should Britain leave the EU? Midpoint of estimated range of “3.2-3.7 per cent of GDP in ongoing costs” (2005) • Institute of Directors EU membership – what’s the bottom line? Estimated net cost of 1.75 per cent GDP per annum (2000) •U  S International Trade Commission The impact on the US economy of including the UK in a free trade agreement with the US, Canada and Mexico. Estimate refers to the impact on UK (-0.02 per cent of GDP) of the UK withdrawing from the EU and ‘joining’ NAFTA (2000) •C  ecchini et al. (1988) on behalf of the European Commission conducted an analysis of the potential impact of the Single Market and calculated a potential wealth effect of 4.25-6.5 per cent of GDP (for the original twelve member states) •E  uropean Commission Quantifying the potential macroeconomic impact of the Single Market, shows a 4.8-5.7 per cent rise in GDP since 1987 (2010) • CEPR, (Boltho and Eichengreen), The Economic Impact of European Integration, argues that economic integration in Europe led to 5 per cent additional income gains (2008) • National Institute of Economic and Social Research The macroeconomic impact of UK withdrawal from the EU. Estimate refers to the permanent impact on the level of GDP of the UK withdrawing from the EU is 2.25 per of GDP (2004) • Department for Business Innovation and Skills - estimate refers to the trade benefits of EU membership since the early 1980s and refers to impact of membership of income per capita is a +6 per cent increase (2010) • CBI Our Global Future report claims that EU membership is worth around 4-5 per cent of GDP or between £62bn and £78bn per year (2013) 18

WORKING GROUP MEMBERS Stuart Popham, Vice Chairman EMEA Banking, Citigroup (Chair) Cyrus Ardalan, Vice Chairman, Head of UK and EU Public and Government Relations, Barclays Bank Sir Andrew Cahn, Vice Chairman, Public Policy, EMEA Nomura International Miles Celic, Director of Group Strategic Communications, Prudential Robert Elliott, Chairman and Senior Partner, Linklaters Alan Keir, Chief Executive Officer and Group Managing Director, HSBC Bank George Kessler, Joint MD, Kesslers International Michael Pritchard, Director, EMC John Studzinski, Senior Managing Director, Global Head, Blackstone Group

EXPERT WITNESSES Jacqueline Minor, Head of Representation UK, European Commission Dr Andrew Lang, Associate Professor, London School of Economics Lord Liddle, Former Special Adviser on European matters to the Prime Minister and the President of the European Commission

We would like to thank the members of our working group and expert witnesses for their contribution. The analysis and conclusions contained in this report are those of London First and no endorsement should be inferred from any one individual or organisation referred to above.

19

Economics, December 2011 European Policy Center. ‘The Economic Impact of a European Digital Single Market’ Copenhagen Economics, March 2010 21 House of Lords European Union Committee. ‘Re-launching the Single Market’ 15th Report, London, April 2011 22 The Services Directive (2006) was designed to liberalize market access for cross border service provides but it did not adopt mutual recognition of rules, rather the directive provided for free access which allows governments to impose restrictions for reason relating to protection of consumers, environments public safety and health. 23 European Commission. ‘Towards a better functioning Single Market for services—building on the results of the mutual evaluation process of the Services Directive’, European Commission, COM (2011) 20 final, 27 January 2011 24 See European Commission. ‘Digital Agenda for Europe’ http:// ec.europa.eu/digitalagenda/ digital-agenda-europe 25 BBC News. ‘Thatcher and her tussles with Europe’, 13th April 2013. 26 J. Barr and F. Passarelli (2009), “Who has the power in the EU?,” in Mathematical Social Sciences, 3/2009, pp. 339–66.https:// ip-journal.dgap.org/en/ip-journal/ topics/state-powerwithin-european-integration 27 Dustmann and Frattini (2013), The Fiscal Effects of Immigration to the UK, Discussion Paper Series CDP No 22/13, Centre for Research and Analysis of Migration, UCL,November 2013 28 Home Office/ Department for Work and Pensions. ‘Review of the Balance of Competencies: Internal Market – Free Movement of Persons‘, Call for Evidence, May 2013. Available at https:// www.gov.uk/government/uploads/system/uploads/attachment_data/file/200497/ Free_Movement_of_Persons_-_ Call_for_Evidence.pdf 29 AT Kearney. Press Release. ‘New York, London, and Paris are Top Global Cities, with Beijing Making the Top 10 for the First Time in 2014 A.T. Kearney Global Cities Index, 15th April 2014. Available at http://www. atkearney.com/news-media/ news-releases/newsrelease/-/ asset_publisher/00OIL7Jc67KL/ content/new-york-london-andparis-are-top-globalcitieswith-beijing-making-thetop-10-for-the-first-time-in2014-a-t-kearney-globalcitiesindex/10192#sthash. GeWZmD3x.dpuf 30 Home Office/ Department for Work and Pensions. ‘Review of the Balance of Competencies: Internal Market – Free Movement of Persons‘, Call for Evidence, May 2013. Available at https:// www.gov.uk/government/uploads/system/uploads/attachment_data/file/200497/ Free_Movement_of_Persons_-_ Call_for_Evidence.pdf 31 The Deloitte study finds that London is substantially the biggest global hub for high-skill knowledge-based sectors. These currently employ 1.5 million people in London, compared to 1.2 million in New York, 784,000 in Los Angeles, 630,000 in Hong Kong and 425,000 in Boston. 32 Deloitte. ‘London Futures: Globaltown: winning London’s crucial battle for talent’, Deloitte, 2013 33 Migration Advisory Committee Report. ‘The labour market 20

impact of relaxing restrictions on employment in the UK of nationals of Bulgarian and Romanian EU member states’, December 2008 34 Annual Population Survey (2012) 35 BRIEFING Oxford University. ‘Labour market effects of immigration’, Migration Observatory, March 2014. 36 Migration Advisory Committee Report. ‘The labour market impact of relaxing restrictions on employment in the UK of nationals of Bulgarian and Romanian EU member states’, December 2008 37 Official Jounral of the European Union. DIRECTIVE 2004/ 38/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL, 29 April 2004 38 Financial Times. ‘Swiss clash with EU foreshadows tensions if UK votes to leave’, 9th February 2014 39 Financial Times. ‘William Hague pours cold water on Tory EU rebellion’, 12th January 2014 40 CityUK. ‘The UK and EU: A mutually beneficial relationship’, December 2013 41 GLA Economics. ‘London and Foreign Direct Inward Investment: Case for London’, Technical Report 2, November 2004 42 Deloitte. ‘London Futures: London Crowned Business Capital of Europe’, Deloitte, 2014 43 Deloitte. ‘London Futures: London Crowned Business Capital of Europe’, Deloitte, 2014 44 Deloitte. ‘London Futures: Globaltown: winning London’s crucial battle for talent’, Deloitte, 2013 45 Global Finance. ‘The World’s GDP Growth per Region’. Available at http://www. gfmag.com/component/ content/article/119-economicdata/12376-economicdataworlds-gdp-growth-by-regionhtml.html#ixzz30ZMVACwZ 46 Congressional Research Service. ‘Mexico’s Free Trade Agreement’, July 2012 47 European Commission. ‘Towards a better functioning Single Market for services—building on the results of the mutual evaluation process of the Services Directive’, European Commission, COM (2011) 20 final, 27 January 2011 48 –European Commission. ‘Blueprint for a Deep and Geniune Economic and Montary Union’, http://ec.europa.eu/commission_2010-2014/president/news/ archives/2013/04/20130430_1_ en.htm 49 Financial Times. ‘Schäuble warns EU bank rescue agency needs treaty changes’ Financial Times, 12.05.2013 50 The European Banking Authority (EBA) is an independent EU Authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector. Its overall objectives are to maintain financial stability in the EU and to safeguard the integrity, efficiency and orderly functioning of the banking sector.

Design David Carroll & Co

GLA Analysis of London’s Exports, Working Paper 50, GLA Economics, December 2011 2 GLA Economics. ‘London and Foreign Direct Inward Investment: Case for London’, Technical Report 2, November 2004 3 Deloitte. ‘London Futures: London Crowned Business Capital of Europe’, Deloitte, 2014 4 European Policy Center. ‘The Economic Impact of a European Digital Single Market’ Copenhagen Economics, March 2010 5 TheCityUK (2014), Analysing the Case for EU Membership: How does the economic evidence stack up?, Analytically Driven, April 2014 6 J. Barr and F.Passarelli (2009), “Who has the power in the EU?,” Mathematical Social Sciences, 3/2009, pp. 339–66. 7 European Commission. ‘A Single Market for Goods’. 26th February 2014. Available at http:// ec.europa.eu/internal_market/ top_layer/goods/index_en.htm 8 TheCityUK (2014), Analysing the Case for EU Membership: How does the economic evidence stack up?, Analytically Driven, April 2014 9 House of Commons Library. ‘Leaving the EU’, RESEARCH PAPER 13/42 1 July 2013 10 HM Government. ‘Review of the Balance of Competencies between the United Kingdom and European Union: Single Market, 2013 11 TheCityUK (2014), Analysing the Case for EU Membership: How does the economic evidence stack up?, Analytically Driven, April 2014 12 Nick Clegg speech. ‘Richer, stronger, safer and greener Europe’, 08.10.2013. Available at http://www.libdems. org.uk/speeches_detail. aspx?title=Nick_Clegg_speech_ on_a_richer%2C_stronger%2C_ safer_%26_greener_ Europe_&pPK=99b7871a-4d464721-9315-10468f985813 13 Based on research by South Bank University and the National Institute of Economic and Social Research (NIESR). South Bank reported in 2000 that around 3.5 million jobs depend on exports to the EU and - in NIESR’s report - that “up to 3.2 million are associated directly with exports of goods and services to other EU countries.”* However, these estimates refer to As NIESR explicitly acknowledged in its report, “there is no a priori reason to suppose that many of these [jobs], if any, would be lost permanently if Britain were to leave the EU.” 14 UKIP - How much does the European Union cost Britain? Available at http://www. ukipmeps.org/uploads/file/ Cost_of_the_EU_25_5_11.pdf 15 CBI. Press Release. ‘In with reform or out with no influence’. Available at http://www.cbi.org. uk/media-centre/press-releases/2013/11/in-with-reform-ourout-with-noinfluence-cbi-chiefmakes-case-for-eu-membership/ 16 GLA Analysis of London’s Exports, Working Paper 50, GLA Economics, December 2011 17 GLA Analysis of London’s Exports, Working Paper 50, GLA Economics, December 2011 18 British Chambers of Commerce. ‘Market barriers stifle opposition’. 2012. Available at http://www. britishchambers.org.uk/ assets/downloads/policy_reports_2012/12-04-05%20 FACTSHEET%20-Trade%20 Barriers%20and%20ops%20 FINAL.pdf 19 GLA Analysis of London’s Exports, Working Paper 50, GLA 1

Contact us London First, 3 Whitcomb Street, London WC2H 7HA T +44 (0)20 7665 1500 E [email protected] londonfirst.co.uk