Should Britain leave the EU?

Trouble in the eurozone has led to fresh demands for a referendum on Britain’s European Union membership. But is leaving the EU a realistic option? Matthew Partridge investigates.

Trouble in the eurozone has led to fresh demands for a referendum on Britain's European Union membership. But is leaving the EU a realistic option?

What's the issue?

The eurozone turmoil has brought the question of Britain's position within the European Union (EU) to a head once more. "A referendum on the future of Europe is inevitable at some point between 2013 and 2016," argued former Labour foreign secretary Lord Owen in The Times last week.

The idea is certainly popular. A poll conducted by Populus for The Times found that half of the population wants an immediate say on the matter, with a further third looking for one within "the next few years". The official line from the government remains that as long as there are no further transfers of power from Westminster to the EU, there need be no referendum.

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But as Mary Ann Sieghart notes in The Independent, politics may force the issue: "Conservative members are defecting to UKIP in droves and the Tories will surely have to promise a referendum in time for the 2014 European elections."

What are the arguments for leaving?

Last year, Conservative MEP David Campbell Bannerman published a pamphlet laying out the case for withdrawal. His key argument is that membership has led to higher costs for the British economy in terms of direct contributions to the EU budget and the indirect cost of higher levels of regulation. Figures derived from a 2005 Treasury report suggest "that the likely EU cost was around 7% of UK GDP or £98bn at 2009 prices", while other studies put the cost as high as 10%.

Are there any benefits to membership?

In a recent report, the eurosceptic Open Europe think tank acknowledges that "membership of the EU customs union, and the free movement of goods with the absence of tariffs and rules of origin, remains a benefit to UK firms exporting to the EU". The EU accounts for 54% of Britain's goods exports, making it "by far the biggest destination for UK trade".

The problem for anyone seeking an alternative to full EU membership is that the models used by others in this position "come with major drawbacks and would all, except for the WTO option' [see below], require negotiation with and the agreement of the other member states, which would come with unpredictable political and economic risks".

What are these alternatives?

The report looks at four: European Economic Area (EEA) membership, used by Norway; a bilateral free trade agreement, as with Switzerland; Turkey's limited customs union; and the access enjoyed by all World Trade Organisation (WTO) members. All four have significant drawbacks.

EEA membership gives Norway full access to EU markets, but it still has to contribute to the EU budget, yet has little influence on the development of new rules. A free trade agreement would limit the service sector's access to EU markets, which would damage our financial services industry. A Turkish-style customs union would only cover physical goods and so give even less access to the EU services markets. Simply relying on the rights enjoyed by all WTO members would give Britain the most freedom in terms of regulations and external trade deals, but would also mean tariffs on many goods, such as cars.

Is there room for a compromise?

In The Guardian, Conservative MP George Eustice says that rather than "an in-or-out referendum", Britain should "map out an alternative vision for the future of the EU". There would be "an inner core the single market in goods and services that all member states sign up to because they benefit from it", while other policy areas should be "far more optional".

Both Lord Owen and Open Europe advocate similar solutions, with the creation of a two-tier Europe. This, says Open Europe, would cut "the non-trade costs of EU membership while allowing the UK to remain at the heart of the EU's cross-border trade".

Are these solutions realistic?

George Eustice's proposal "sounds quite close to what most British people would want", says Jackie Ashley in The Guardian. However, "for the time being, it isn't on offer". In her view, "a messy euro break-up" would just result in a "defensive German-dominated inner core and a floundering, desperate group of expellees". But even if the euro is successfully defended, the inner core' of states who succeed in salvaging the currency "is unlikely to want to accommodate London".

However, Open Europe notes that recent constitutional changes have made it easier to create a two-track' model. "The Lisbon Treaty's enhanced cooperation' procedure [whereby some members can pursue advanced integration in certain areas without others being involved] has already set an institutional precedent for this." One option would be for member states in the Council or their MEPs in the European Parliament not to vote "on policies to which they are not party".

Forget Europe trade with the Commonwealth

Writing in The Daily Telegraph, eurosceptic MEP Daniel Hannan argues that Britain should stop worrying about Europe altogether and instead align itself with its historic trading partners in the Commonwealth (which include India, South Africa and Australia, among others).

International Monetary Fund figures suggest that the eurozone countries "will grow at an average of 2.7% over the next five years which strikes me as optimistic while the Commonwealth surges ahead at 7.3%", says Hannan. "It never made much sense to join a customs union with similar industrialised economies at the expense of the raw producers of the Commonwealth: the whole point of a market, after all, is to swap on the back of differences."

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri