WHAT are the economic benefits of being in the European Union, and what does it cost us? How do the costs and benefits compare? This basic question is often ignored when Europe is debated.
Our main reason for joining in 1973 was so that British industry could benefit from the Common Market. In the past 23 years the EEC has changed into the European Union: a body with political powers and ambitions extending well beyond the old Common Market. At the same time, the world outside has changed. World trade is generally freer, tariffs are lower and the Uruguay Round of Gatt has created new machinery for policing free-trade rules.
It is time for another careful look at what, today, are the actual benefits and costs of belonging to the European Union. To find that out, we need to ask what is the alternative to being in the EU. All its neighbours have special trading arrangements with it. In reality, if Britain wasn't in the union, it would probably be able to negotiate similar arrangements because Europe benefits from its trade with Britain. But we start by asking what would happen if Britain left altogether, without negotiating special arrangements - the worst case for the costs of withdrawal.
The main benefit we would lose is that our exporters would no longer be inside the European single market. This does not mean that our trade with Europe would stop. But our exports to Europe - roughly half our total exports-would face the same barriers as the half that goes to the rest of the world.
British exporters would have to pay tariffs on goods exported to the Europe. We estimate they would face an average tariff of about 6pc, based on present trade patterns. The cost to the British economy would be about £4 billion but would fall as trade patterns adapted. Against that, we would escape from the costly Common Agricultural Policy, yielding a net benefit of £6.4 billion.
The single market is designed to reduce non-tariff barriers to trade. If we left it, British exporters would face EU non-tariff measures. Goods would face customs formalities. In many cases they would lose the benefit of "home country certification" under EU product standards.
British exporters of services would no longer enjoy rights of establishment under single market rules. In some fields they would lose the mutual recognition of professional qualifications, or the right to provide services direct from offices in Britain on the basis of home country regulation.
These costs are real, although extremely difficult to measure and quantify. But offsetting gains would arise from leaving. British industry would no longer be subject to excessive or unnecessary costs of European regulations in the domestic market.
The price that British industry pays for easier access to the EU market is being subject to a vast range of Euro-regulation. Examples are product safety standards, capital adequacy in the financial services sector and such things as environmental controls on packaging.
It is difficult to work out whether the game - easier access to the single market - is worth the candle of the cost of the regulations. A simple point makes it doubtful whether it is.
About 12pc of the British economy comprises the export of goods to the EU and another 2pc consists of exports of services there. This sector of the economy derives benefit from access to the single market. On the other hand, the cost of EU regulations falls on up to 100pc of the British economy.
There are other unquantifiable but very real economic costs of belonging to the EU. Costs are imposed on the British economy by European social laws, by the fact that the part of the EU budget spent inside Britain is not spent in accordance with our own national priorities and from other European areas of policy such as environmental regulations. These costs all seem to be growing.
How would foreign investment be affected if Britain left Europe? Tariffs on British exports there would obviously make Britain less attractive. But other counterbalancing effects would make us more attractive to foreign investors.
Labour costs could be lower, thanks to a policy of cheaper food outside the CAP; employers' costs could fall thanks to the ending of "social" laws and other regulations; and tax levels could be lower. The effect on foreign investment would depend on how these factors worked out; but it cannot be assumed that Britain would overall be a less attractive site for investment outside Europe.
So far we have talked about the "zero-option" of total British withdrawal from the European Union. But there are other realistic alternatives. We might seek to join the European Economic Area like Norway, or to negotiate a free trade agreement with the EU , like Switzerland. Or we might seek to negotiate some form of outer tier EC membership based on widened opt-outs. Any of these arrangements would retain much or all of Britain's access to the European single market and are economically better than the zero option.
Our study rejects the conclusion that even full departure from the union would have horrific economic consequences. There are so many offsetting benefits and costs that it is hard to tell whether leaving "cold turkey" would make Britain better or worse off. Alternative arrangements with the EU would almost certainly benefit Britain, compared with existing arrangements.
Membership is about politics as well as economics. If being in costs Britain something, that does not mean that Britain should withdraw: if membership yields economic benefits, that does not mean that Britain should stay. No rational decision to stay or to leave can be made without assessing the value of the other elements but decisions made in ignorance of the economic costs and benefits are unlikely to be very sensible either.
There is no foundation for the idea that dire economic consequences would make departure unthinkable. If it develops along lines that the UK finds unacceptable on fundamental political grounds, fear of adverse economic consequences should not deter us from seeking to change our relationship with the union or, in the last resort, from leaving it.
Brian Hindley is reader in trade policy at the London School of Economics. Martin Howe QC practises and writes on EC law. Their paper, Better Off Out? The Benefits or Costs of EU Membership, is published next Friday by the Institute of Economic Affairs, £7.
