Foreign Affairs Committee - Minutes of EvidenceHC 87

Back to Report

Oral Evidence

Taken before the Foreign Affairs Committee

on Tuesday 11 September 2012

Members present:

Richard Ottaway (Chair)

Mr Bob Ainsworth

Mr John Baron

Sir Menzies Campbell

Ann Clwyd

Mr Frank Roy

Sir John Stanley

Rory Stewart

________________

Examination of Witness

Witness: Professor Patrick Minford CBE, Professor of Applied Economics, Cardiff Business School, gave evidence.

Q107 Chair: I welcome members of the public to this third evidence session for the Committee’s inquiry into the Future of the European Union: UK Government policy. It will allow the Committee to question one of the most prominent economists advocating British withdrawal from the EU. Professor Minford, welcome. I hope that that does not pre-empt anything that you were going to say. Your position on this is well known and long standing, and you have argued it many times, so to ask you the question "What should happen?" will perhaps not take us much further, but what do you think will happen? How do you see this playing out over the next months and years?

Professor Minford: The first point I would make is that a lot of people commenting from here on what is going on in Europe have a different viewpoint from the people in Europe who are participating in the whole process. We here tend to overestimate the chances of the euro breaking up. The countries that are most likely to leave in the first instance-say, Greece or Portugal-are absolutely determined to stay in for political reasons. They see a leaving of the euro as effectively putting them at risk of leaving Europe, so they are determined not to leave. At the same time, the other members of the eurozone are extremely keen to keep the euro together because of the unpredictable nature of the effects of a country leaving, in terms of the general chaos of the break-up and the contamination that could result from one country leaving, in terms of risks of other countries leaving and the effects on government bond markets.

So I think that the first point I would like to make is that the eurozone is very likely, barring a complete shift in German opinion-essentially, whether Germans decide that enough is enough and they leave, which I think is quite unlikely-to continue, and the crisis will continue with it in an ongoing way as the new institutions that they will need to make the eurozone work better in future are put into place. That could take five years or it could take 10 years to happen. Meanwhile, the European Central Bank has made it clear that they are going to buy bonds whenever crisis threatens, and I think that will happen. I think that is the basic background to the situation; this is not going to go away as an issue for us, in terms of going back to some status quo ante where there was not a euro or where there was a much smaller eurozone. This is going to be a continuing process in the eurozone, and that is the background to our policy actions.

Q108 Chair: Do you think anyone has got a plan? Is there anyone out there at the moment with vision who can see the way through, or are we stumbling through from meeting to meeting?

Professor Minford: I think the vision is to have institutions in place that will make the eurozone function better. As everybody knows, to make a currency union work, you really need to be part of a fiscal union where there are sufficient shock absorbers in place to keep the currency working in the face of quite sharp shocks. So they have to construct a fiscal union, effectively, in order to make the currency union work. That will require a lot of institutions in place to make it work as if it were a nation state run by a fiscal union. That will take time.

Q109 Mr Ainsworth: When the Prime Minister cast his veto in December, were you cheering? What do you think it achieved?

Professor Minford: I don’t think it achieved anything in objective concrete terms, but it gave a signal that we had a position and were not necessarily going to go along with things that would be against our interests. It achieved something in that sense. It communicated something, but I don’t think that it achieved anything in concrete terms of institutional change. It gave out a signal and it started a process of debate, particularly here, and it perhaps also created a little awareness on the continent that we do have interests at stake here.

Q110 Mr Ainsworth: I think you are right. It has exposed a position. We were pursuing a position of preventing the deepening of the institutions of the European Union, because we were uncomfortable with many of the consequences of that. We now appear to have acquiesced to other people, because of the financial crisis, deepening those institutions towards fiscal union with us on the outside. Therefore, people like you who believe that we should leave the European Union surely ought to be very happy with the fact that we effectively marginalised ourselves. Are you not?

Professor Minford: Yes, I was happy with David Cameron’s statement, because it registered the fact that we are unhappy about changes that might undermine our concept of Europe and our participation in Europe, which has always been on the basis that there would be competition and a single market, that it would be an outward-looking Europe and that it would not be a Europe that was highly centralised and regulated.

Of course, the sort of fiscal union institution building that is going to happen is going to be threatening to those concepts. It is going to be quite interventionist in a variety of ways that are very hard to predict. There is obviously going to be a lot of work targeting financial institutions that might be quite uncomfortable for us as a major financial centre, and there could be a lot of protectionism, because of the need to make the peripheral countries that are struggling with the recession recover. That will lead towards more protectionist action. That is all very uncomfortable for us and it was important for us to give a signal that we have considerable discomfort with a lot of these things if we cannot be involved in them. In fact, if they do spill over into affecting the single market in those ways, it is obviously going to be a big problem for us.

Q111 Mr Ainsworth: Yes, and we surely cannot remain the pre-eminent financial centre of Europe within a more fiscally integrated eurozone with which we want nothing to do.

Professor Minford: We are not really a financial centre of Europe; we are a financial centre globally. We are the pre-eminent global financial centre, and our main competitor is, of course, New York. I do not know how much business is actually dependent on our being in the European Union-probably not a great deal, but it is very hard to quantify. The most important thing for us to be successful as a financial centre is to be well regulated as such. Clearly, if we are inside an increasingly interfering European Union-it is difficult to make a distinction between what the eurozone does and what will happen in Europe, because under the single market there is qualified majority voting. So if things are brought in for the majority of members in the eurozone and it is then argued that they are not applying to us inside the wider European Union, there will be a strong argument for the single market to bring through those eurozone regulations, so that we are not out of line with the rest of the European market. It is very hard to keep what will happen in the eurozone apart from what is going to happen in the European Union, because the single market-largely because of Mrs Thatcher’s prosecution of that case-was brought in with qualified majority voting, which puts us in a very weak position if we are in a minority.

Q112 Mr Ainsworth: So we are on the way out?

Professor Minford: I think this is really the logic of what I have been trying to say; I think we are in a very difficult position. First of all, the way in which the European Union has developed economically has not been according to the concept that we had in mind when we pressed the single market on everybody. In fact, the organisation of Europe has become rather protectionist and not very competitive. It is much more a zone in which regulation was put in place that was in the interests of the dominant countries. It has not been what you would call a very free market environment at all.

That has led to some quite considerable costs for us, anyway, being inside the European Union, which was the subject of my research some years back for the book on the trade arrangements, the regulatory arrangements and other issues of organisation in Europe. From my calculations, there was a very large cost-benefit deficit from being in the European Union, even before the recent developments. So yes, I think I agree with you that if these developments lead to even more protectionism, more interference and more regulation of areas that are inimical to our interests, we are in fact logically on the way out.

Q113 Mr Ainsworth: I don’t agree with you; I was just asking the question.

Professor Minford: No, I don’t suppose you do agree, but I am perfectly happy to answer your question. Lots of people don’t agree with me.

Chair: To one who might-John Baron.

Q114 Mr Baron: I happen to be one of those who would certainly sympathise with your view. Can I develop your thinking with regard to the operation of the single market? I forget how many conferences and summits we have had to try to save the euro, but we must be heading towards 20 now. I think there is growing consensus that you do not solve a debt crisis by piling on more debt, and all that seems to be happening is that the eurozone leaders seem to be shifting the debt around the system-between the bank and government and back again.

We all know that growth is the best way of reducing deficits. We are told by our own Government-when we point this out to our own Front Bench and Government we are told that they are encouraged by what they see-that there is a lot of deregulation coming through, the penny has dropped and there is going to be greater competitiveness. I sense from what you are saying that you obviously disagree with that. If anything, you are saying that there is a danger of even greater regulation, which completely contradicts what the Government is telling us in the House of Commons. What would you say to that?

Professor Minford: I think one has to make a distinction between what the Government is now saying it would like to do in terms of national policy and the regulation coming from Europe. That is a clear distinction. My fear is that we are going to see a lot more regulation coming from Europe, particularly in financial affairs. One of the things that I think is really needed domestically is to create once again a competitive banking system that is not over-regulated and prevented from lending. One thing that is holding back our recovery is the lack of lending, as everyone can see. The lack of response to quantitative easing in the form of extra money being created by banks-that is the big thing that is missing. That is coming, I think, from a big overreaction to the crisis in the form of massive re-regulation of the banking system. I think that the penny is beginning to drop here that we need to get banking going. We need to ease up on the regulative thrust of the banks in the interests of getting banks into the credit business vigorously again. The new proposal to have the lending programme, with the cutting of the costs of lending by the bank and the Government, is the first effort to roll back the freezing up of credit in this country. The big worry is that one of the things that will come out of the European move will be a lot of very heavy regulation of the financial system.

Q115 Mr Baron: Can I suggest to you that although the penny may be dropping here and that is very welcome, the Government also seem to be saying that they are encouraged by what they see on the continent-that they do believe that the penny has dropped with the eurozone leaders themselves, that they realise that greater competitiveness, and therefore growth, and being able better to compete with regions outside the EU, is very much on the agenda? What you’re saying is that that is completely wrong, and if anything, it’s going the other way. Are the Government seeing something you’re not, or vice versa?

Professor Minford: What I was talking about specifically just now was the financial-

Mr Baron: Can we pull it down to regulation?

Professor Minford: Talking about the other areas of regulation, I think you’re right: there is a desire to do reforms, as they’re called on the continent, of the labour market and to try to get more flexibility into the economies and so forth. But as we see, it’s a very painful, long and drawn-out process, and it is not making very rapid progress. There was quite a lot of reform in Germany-the so-called Hartz reforms of the labour market-which did lead to greater labour market flexibility in Germany. But in these other countries there is not much sign of these reforms, although Germany is backing them, actually happening on the ground. Mr Monti is having a lot of trouble in Italy, there are a lot of difficulties in Spain with temporary contracts, and there is mass unemployment. All these things have for a long time in Europe been given lip service-the idea that you are going to make labour markets more flexible; that you are going to deregulate them and have more competition. But they never seem to happen in the end, because there are strong vested interests in all these countries opposing them; not least the union movement, but also business. A lot of businesses have very strong vested interests in the status quo, and they oppose these moves because they undermine their own position. So one shouldn’t think that because there is a lot of talk of this sort, suddenly, Europe is going to change. It isn’t.

Q116 Mr Baron: You mentioned in your opening answers that you thought we’re in a very difficult situation; that, in your view, it reinforces the case that we are heading towards the door, in many respects, from the EU. Many would be concerned, if a question was put as to whether we should remain within the EU, about the cost to jobs and all the rest of it, and that we would suffer economically. Why do you think that’s not the case?

Professor Minford: I think it is the opposite of the case. We are suffering economically from being inside the EU because it is a protectionist organisation. A lot of people do not understand this: they think that somehow when you join the single market, this is a pro-free trade action. In fact, what happens is that we are joining a customs union. A customs union raises prices inside the tariff wall of the European Union and raises the prices of certain traded goods that it wishes essentially to protect, and it keeps out competition from the rest of the world. Of course, if you are a dominant producer of the things that are protected, you do get a gain, because your fellow members inside the European tariff wall have to buy from you at inflated prices. Now unfortunately, we don’t get any gain from that because we are not a dominant producer of these goods. So there is a general loss to everybody from the fact that prices are out of line with world prices. Consumers are paying too much; producers are producing the wrong things that are protected. You can, if you are a dominant producer inside this tariff wall, make a bit of a killing at the expense of your partners, but we are not in that position. We also lose out from that because we are not dominant producers.

All round, not only do European citizens lose from this protectionism generally, but we lose in particular quite substantially. I spent a lot of time in my book on the whole issue trying to quantify that. Of course, it is true that if you leave your protectionist organisation, the prices of the protected things fall. Consumers gain and certain producers lose. Of course, other producers gain, because they then get better profits at the expense of the sitting producers, who are protected. Jobs are not lost; jobs are created overall, because you become a more competitive economy, producing the things that you are better at. Your consumers are better off, so there are generally good incentives to work and so forth as a result of this move towards free prices. The jobs that are lost in the protected sectors are offset by jobs that are created in other sectors. There are more of them, in fact, because you are a more competitive economy. The point about being inside the European Union is exactly the opposite of what its defenders say. We lose from being in a protectionist organisation that distorts prices away from world prices.

Q117 Mr Baron: If we were eventually to come to the decision to leave the EU, by whatever means that decision was taken, do you think there is scope to establish a free trade arrangement with the EU? One obviously wants good neighbourly relations. What is there scope to do? You have obviously examined the Swiss and Norwegian models. We are about to undertake visits to both countries as part of our inquiry and report. What would you advise us to look for in this regard?

Professor Minford: One has to distinguish a situation where you become an independent country in the world trading environment and operate under world prices, in which case you sell anywhere at world prices, including the EU. Of course, what you lose is protective prices for particular products-in the car industry for example. If we left the EU, we would immediately join the world market in cars. One can see that you need some transitional arrangements for the car industry, because there would be quite a big transition from the protected status to the unprotected status where you were competing with cars from all over the world and the prices would drop. I think, for practical reasons, transitional arrangements have to be considered. I imagine that there would be a particular arrangement for cars and other particularly protected industries that would suffer a big transitional loss. It is standard when you do reforms that have long-run consequences that are good that you have to have transitional arrangements. That would be the sort of thing to look at-particular interests that would suffer from loss of protection.

A lot of people say that the Norwegian and Swiss options are terrible, because you do not have any influence over the regulations of the countries of the European Union, but I always think that is a very odd argument, because for any country you export to you have no influence over their regulations or the particular things that they want you to embody in your product if you sell it to them. That would be true of any market we sold to. If we left the European Union, we would have to sell to them on their terms, but it would be something that we routinely do.

Q118 Rory Stewart: Maybe this is a slightly unfair question, but what is your sense of why liberalisation in services in particular has not gone further in the single market system? Why has the UK not been able to achieve its objectives?

Professor Minford: When you do liberalisation-for example when the UK liberalised its economy in the ’80s-you need a lot of ability to buy off losers. A good example is the housing market in 1988 when the housing reform Act effectively abolished the rent Acts, but sitting tenants were given the ability to carry on as sitting tenants with their privileges until they left or died. That was an example of how to make some compensation to losers; you can get some transitional arrangement where people who lose are willing to buy into the reforms. Similarly with privatisation, British Telecom workers were given share issues. You need to be able to compensate losers.

One of the big problems in the EU is that you cannot compensate losers, because the budget is so rigidly allocated to different areas that there is no flexibility in the budget. For example, if China suddenly produces a new product that undermines the Italian textile industry-the making of suits-there is no way of compensating the suit-makers of Italy.

What happens is that they come to the Council and say there has to be an anti-dumping measure taken against the Chinese producers of suits. The more sensible outcome would be to have some transitional assistance to the Italian suit industry. The EU is very unable to do the sorts of things you need to be liberalising.

Q119 Rory Stewart: Could you also speculate on or analyse the UK’s ability to control the EU budget? How much influence has it had in Britain? What is going to happen going forward?

Professor Minford: I don’t think we have much control over it. We are one member among many. As we have seen recently, we tried to stop it but we haven’t had an awful lot of allies. There has been very little effectiveness in stopping it expanding.

Q120 Rory Stewart: What relationship would you like the UK to have with the European Union? What sort of model are you looking at? What seems plausible and what would be in the United Kingdom’s interests?

Professor Minford: I think it was a mistake to join, and I think we should just leave. It is very straightforward. I am perfectly sympathetic to the idea of renegotiation. One could make a great laundry list of things you would like to change in your relationship, but you go to your partners and say, "I’ve got this laundry list of renegotiation demands," and they say, "Sorry, we are not going to co-operate. Why should we? Why would it be in our interests to co-operate in a set of renegotiation demands?"

People say we could threaten to stop the institutional changes that are going on as a result of the eurozone crisis. Of course, we can’t, because they could always do it inside the eurozone as a separate arrangement. Then we cannot do anything about it, but we also cannot do anything about any consequential effects through qualified majority voting in the single market.

I think we are powerless to use any leverage. We do not have any leverage over this that would give us the scope to renegotiate. I don’t think the renegotiation agenda is logical; it has no force. You cannot in practice get a renegotiation. I think you have to say, "We’re leaving." At which point, if you leave, you simply repeal that treaty-the 1973 treaty; it is a one-line repeal, and you start again. You renegotiate effectively, or negotiate, a completely fresh set of relationships that are suitable.

That seems to me the logical way forward. We leave, we get a clean sheet of paper and we do things that are in our mutual interests, which we are free to do anyway as an independent nation and should have done all along.

Q121 Sir John Stanley: I am not clear why you believe it is such a hopeless task for the UK Government to freeze or possibly even cut the EU budget. There are quite a significant number of net contributor countries, including big countries such as Germany, all of whom are facing very serious budgetary restraints. Is it not a lack of determination, and will in part, by the British Government that it has not been able to mobilise sufficient power in Brussels with potential allies in this area to get the EU budget down?

Professor Minford: I agree with what you said, that in principle it might seem so. Unfortunately, they are facing a eurozone crisis. If you are in a crisis, the last thing you want to do is cut back all the people who are coping with the crisis. The European Commission is heavily involved in trying to get this crisis resolved. It is quite a small outfit, actually. People often talk about how enormous the European Commission is; it is really very small, considering its huge responsibilities. Of course it delegates as much as it can, but when you are in a crisis and you are institution building, they are going to say, "How can we resolve your crisis? You really have to pay for civil servants." It is a pretty difficult argument to answer. The other countries involved, particularly as they are the ones that are in a crisis, are going to say, "Okay, we need another Sir Humphrey and we need people to work for him, because otherwise we are not going to be able to resolve the crisis."

Q122 Sir John Stanley: But expenditure in the EU is not largely on the Commission. It is largely on all the other items-the common agricultural policy and so on. That is where the great majority of the budget expenditure goes. Why is it not possible for the British Government to mobilise those who are the net contributors and produce a situation where we get a much more sensible budgetary outcome?

Professor Minford: The budgetary actions are all subject to unanimity; it is not a single market thing. If you think about it, the French would veto any attempt to change the common agricultural policy; Portugal and Spain would veto any attempt to change the regional policy, and so you go down the list. Everybody has red lines that would lead to a veto, so you get to an impossibility situation with these things. Obviously, everyone would like to make economies, but everyone has their red line-their own particular vested interest that is untouchable-and unanimity has to prevail. I do not think you have a process there that can easily yield to the sorts of things that you are talking about.

Q123 Sir Menzies Campbell: We have identified British manufactured cars and Italian manufactured suits as requiring transitional assistance. Is there any way of estimating what the transitional costs would be if the United Kingdom were to follow your approach and withdraw from Europe?

Professor Minford: The point is that whenever you do reforms that have long-run benefits, which are what I have most focused on calculating, and which are substantial in the case of leaving a protectionist organisation, something of the order of 3% of GDP is the sort of gain from moving to free trade. But of course you are right; there are transitional dislocations. Those are not exactly costs; they are simply transfers that have to be made. When an industry contracts and another industry expands, there is a gain overall. There is a gain to the consumer.

Q124 Sir Menzies Campbell: But that doesn’t happen overnight, as I think you will acknowledge.

Professor Minford: It doesn’t happen overnight, but the fact that it does not happen overnight just means that you don’t get the gain overnight. But there are more gainers than losers. The point about transition costs is that they are essentially compensation costs. They are not costs to the economy. You have to compensate the losers in order to not create social dislocation.

Q125 Sir Menzies Campbell: That comes from the Government. That is public expenditure.

Professor Minford: It can come by simply having transitional arrangements so that these things take place over a period of time. That would be how you would manage it.

Q126 Sir Menzies Campbell: Which takes me logically-at least I hope logically-to my next question. How long would that transitional period take in the event that the United Kingdom were to follow your approach and withdraw?

Professor Minford: For most transitional arrangements you need a decade. Something like a decade is the sort of way in which you could handle this sort of change. I would not put it any less than that. It could be even more. But the point is that it is moving our economy in the direction that it gains from. Obviously, you cannot do it too rapidly, because there is too much dislocation.

Q127 Sir Menzies Campbell: I have one more rather more specific example. You mentioned the support provided by the common agricultural policy. How far do questions of food security enter into calculations as to whether it would be better for agriculture to cease to enjoy the kind of support that it receives in this country and elsewhere in the EU?

Professor Minford: Obviously, people have raised food security from time to time. If there genuinely is a security worry about supplies coming from unreliable places and so forth, you can put in ad hoc controls, quotas, or thresholds that protect you in those security dimensions. Those are much less expensive than the whole common agricultural policy. That would be the point I would make. If you have security issues, it is always better to pinpoint them and deal with them ad hoc-item by item. The food security issue is probably quite a narrow one. I do not know how big it is at all, but I am sure that you could identify the things where you thought there was a food security issue and take much less expensive action to deal with it.

Q128 Mr Roy: Because of its EU membership, does the UK have less access to markets outside the EU than it would have by negotiating alone? If so, could you give examples?

Professor Minford: I am not sure that I am following you exactly.

Mr Roy: If we left the EU and wanted to negotiate alone in relation to trade-

Professor Minford: With the EU?

Mr Roy: No. Outwith the EU. What markets would be available to us?

Professor Minford: Oh, I see. Well, the world market. Those markets are already available to us. The point about the EU is that it creates trade diversion to the EU relatively, because obviously if the prices of certain products rise as a result of protection within the EU, you divert output to the customs union. A standard effect of customs unions is, of course, trade diversion. So if we left the EU, there would obviously be no trade diversion incentive to the EU and our products would move to other markets, because they would be relatively more attractive than the EU market. Of course, the point is that our trade is already moving towards other markets, because they are faster growing. Trade with the EU has dropped substantially over the last four or five years since the crisis, and trade with the rest of the world has expanded substantially as a result of relative growth in different markets.

Q129 Mr Roy: Would there be cases whereby if we negotiated as a single entity, we would get a better price, for example, than we would as a member of the EU?

Professor Minford: We don’t negotiate; we simply sell into markets. Markets are fundamentally-

Q130 Mr Roy: Surely you negotiate. Surely that is what selling is. It is a negotiation between buyer and seller.

Professor Minford: No, you don’t negotiate; you simply have most favoured nation treatment under the World Trade Organisation. One thing that has happened in the last 20 or 30 years is the growth of international institutions policing world trade. You do not go around negotiating; you simply go into a market and sell, as we already do all around the world. We do not sell only in the EU. We already have arrangements-

Q131 Mr Roy: But with respect, you don’t go into a new market and say, "Take it or leave it." You do negotiate. Surely, you negotiate. The United Kingdom would not go into another country and say, "There it is. Take it or leave it." Surely you are not saying that.

Professor Minford: These are all voluntary contracts. Are you saying that if we left the EU, there would somehow be a change in the commercial treatment of the UK compared with-

Mr Roy: That’s what I am asking.

Professor Minford: No, there wouldn’t be. Of course not. Why would there be? We are treated the same way as any other country in world trade would be if we left the EU. It would be against WTO regulations to do anything else. If a country levies tariffs against you unilaterally, that is illegal under WTO arrangements. That is one of the good things that have emerged out of the last 30-odd years of the building of the World Trade Organisation environment.

Q132 Mr Roy: Could I take you to the mirror image of that, which is the United Kingdom outside the European Union and the European economic area wishing to negotiate with the European Union? How do you think Britain would stand?

Professor Minford: As I say, I think there would be particular areas such as the car industry where there would be a transitional agreement, because it is such a hugely integrated industry inside Europe as a result of the way in which it has developed inside the customs union. I think there would be an agreement within the car industry that would be sanctioned by governments in effect to allow that to continue in some way for a length of time. That sort of industry would require a special arrangement.

Q133 Mr Frank Roy: Made by whom?

Professor Minford: Made, I think, as a result of the negotiations that follow withdrawal, because everybody has quite a large interest in that industry.

Q134 Ann Clwyd: Do you really think it is feasible economically or politically to try to unpick the single market in the way you are suggesting? I was particularly interested in some of the things you want to unpick, such as social legislation. Some of us think that social legislation is a good thing. I was an MEP when we had the big losses in the steel industry, for example. We were criticised for not having a social net to assist people who were going to lose their jobs by the thousands because of the demise of the steel and coal industries. Why do you particularly want to unpick social legislation?

Professor Minford: I think we gave a lot of help to the coal and steel industries that, as a matter of fact, had not got much to do with Europe-mainly through special grants to alleviate industrial problems. In Wales, for example, huge grants were made through the regional mechanisms.

I think, therefore, that our social safety net was quite a good one. We had a system of benefits. The unemployment benefit system was a little bit too unconditional at that time; it had to be tightened up, with Restart and so forth. Now we have the new unemployment benefit system, which is quite tightly monitored. We had systems of benefits to help people back to work, now called tax credits. In effect the system was quite a good one. It encouraged people to get back to work.

There are problems about some of the social legislation that has come out of Europe as a result of us joining the social chapter. In 1997, when Labour came in they decided to join the social chapter. I think that was a big mistake because it has brought in a whole raft of very intrusive intervention in the labour market, which has not particularly helped steelworkers or coal miners or anybody else displaced to get back into work.

Q135 Ann Clwyd: There aren’t any more of those.

Professor Minford: No, fortunately, because that all came later, but looking at the analogue after 1997, if we had had those sorts of problems, it would have made it much more difficult to adjust in our labour market. If you look at the sort of problems that are occurring in places such as Spain and Portugal, with very high levels of unemployment particularly among the youth, it is not a good advertisement for social legislation in the EU.

Q136 Ann Clwyd: And the working time directive?

Professor Minford: I think the working time directive is extremely intrusive and we spend all our time avoiding it by one means or another. We have an interest in people working; people want to work. The idea that this is something that, on health and safety grounds, you can impose on people seems not a very serious idea. People have the chance to work. If they want to work, they can choose the hours they work and presumably can judge their own health and safety accordingly, subject to normal health and safety regulations.

Q137 Ann Clwyd: What sort of bargaining chip do you think we have, if we want to pick and mix in this way? We do not have very much influence in the European Union.

Professor Minford: I completely agree with you. I do not think that we have any influence. The so-called renegotiation agenda seems totally hollow because we have no bargaining power. That is why we should simply leave and start again.

Q138 Mr Ainsworth: The renegotiation agenda is useless because we have no bargaining power. Therefore, we should leave. Having left, we would be able to negotiate for the car industry, for example, 10-year transitional arrangements. How on earth will we be able to do that? Why would the German-dominated European Union agree to give us 10-year transitional arrangements for the car industry? You acknowledged that we could not do it quicker. The shock would be too great. What negotiating leverage would we have for such transitional arrangements?

Professor Minford: The car industry is highly integrated, so it would be in the interests of those German dominant manufacturers to negotiate an arrangement, since they have a lot of plants here. There is a huge cross-ownership within the industry because it has been built up inside a protective wall within the EU. Of course, if there were not a will to do that, we would obviously have to give some compensating payments ourselves to our end of the car industry. We could do that, because we would be gaining from the change in the structure of the economy.

If, for some reason, there were no willingness by the other countries’ car owners and governments to co-operate in this and there were a faster run-down of our car industry as a result of that lack of co-operation, we would have to compensate them in a way rather like the steel and coal industry. Those were not economic industries. That is a quite good parallel. If you have an industry that is not economic, it is your interests to run it down. Obviously, it would be nice if others would co-operate in parallel in the run-down so that it puts less of a cost on you but if, in the end, you have to do it yourself, you are still better off.

Q139 Mr Ainsworth: And we sell our goods in the rest of the world, because the rest of the world is a free market. Would we be able to sell agricultural products or defence equipment to the United States in the free market that exists in the rest of the world?

Professor Minford: I do not know the particular products you are talking about, but we generally specialise in services. There seems to be no lack of a market for our services. Indeed, the goods you are talking about are goods that we do not really specialise in producing. The ones that we do specialise in producing, we seem to have no trouble selling. In fact, as I said, our exports to the rest of the world have been very dynamic in the last few years in the context of the crisis. I do not recognise this great fear that somehow we cannot sell to the rest of the world. I do not recognise it in terms of the industries in this country, which seem to sell very successfully to the rest of the world.

Q140 Rory Stewart: I am still trying to understand the political implications of this talk of transitional arrangements. Is it not conceivable that what you are really talking about is the collapse of the entire UK car industry and that when we leave the European customs union and go directly into competition with Asian car manufacturers, this transitional arrangement is just a polite way of describing the wiping out of the manufacturing industry? How will that be explained to a public and a political class that are increasingly proud of our development in this kind of manufacturing industry in Britain?

Professor Minford: It is perfectly true that if you remove protection of the sort that has been given particularly to the car industry and other manufacturing industries inside the protective wall, you will have a change in the situation facing that industry, and you are going to have to run it down. It will be in your interests to do it, just as in the same way we ran down the coal and steel industries.

These things happen as evolution takes place in your economy. In the long run they are in your interest, but of course you have to deal with the compensation problems along the route. It won’t be a process that can be entertained without some form of compensation. As I said, reform always requires compensation. You can’t do anything that involves changing relative prices long term that doesn’t involve some form of compensation for political reasons.

Q141 Mr Baron: I suggest to you, and perhaps you would agree, that there is a real risk that the EU will continue to fall behind the rest of the world when it comes to market share, economic growth and so forth. I would suggest this is an EU overburdened with regulation and so forth. We talked about the social chapter and the 48 hours. Do you see, in countries where there is high unemployment particularly among the youth-the Mediterranean countries-any political will there to try to get to grips with the dead weight of regulation, in order to free up markets and make themselves more competitive? I come back to my original question. Our own Government are saying that there is plenty of evidence that the penny is dropping. I question that; what do you see?

Professor Minford: I question it, too. I’ve lived through the Lisbon agenda and umpteen agendas from Brussels. I’ve lost count of them all and all their names. I remember the Lisbon agenda way back, and I’m sure Ann Clwyd remembers, too. We were told there was going to be all this reform; there wasn’t. There is enormous obstructionism and it is all unfortunately buttressed by the social legislation in Europe. Europe is a great engine for creating entitlement, essentially, and strengthening vested interests, unfortunately.

I am very sceptical that there will be much. Germany is trying to enforce it through its austerity programme. It is basically saying, reform; austerity will continue and tighten if you do not reform. There is a sort of process going on institutionally inside the eurozone led by Germany to try to force the southern cone of the eurozone to reform in the way you talk about. Something will come out of that I should think, but I am not holding my breath.

These are very difficult markets to deal with because of the strength of vested interests and the way in which these have been strengthened by the joining of Europe. One of the ways in which these countries have benefited from joining Europe is in the strengthening of the support mechanisms that they have had at hand to prevent these sorts of reforms. I don’t see them changing any time soon.

Of course, the latest remarks by Mr Draghi, saying that he will save the euro anyway by buying all their bonds, whatever they do, as has been noted by people in Germany, are reducing the stick that is being waved at them by Germany to get them to reform. I would be very sceptical that there would be anything very dramatic coming out of it. Something will happen in the end. There has to be something, but I think it will be very slow and there won’t be very much of it. It will certainly take a long time.

Q142 Chair: Talking of sticks, you have argued this morning that we have no leverage when it comes to renegotiation. The fiscal compact expressly says that it hopes to be inserted into the EU treaties within five years. That is the request. Is there not a political trade-off there? Could we not say, "Look, you can have the fiscal compact incorporated into the EU treaty, but here is our shopping list of repatriated powers"?

Professor Minford: I’ve thought about that quite a bit and have heard that argument quite a lot. It is not very convincing. They can always turn around and say, "If you won’t co-operate we will do it in a separate treaty." There are obviously certain inconveniences in doing it in a separate treaty within the eurozone. However, as I understand it you can make use within the eurozone of the EU civil service and so forth and it would be possible to have a separate treaty. If we were to play that card, what are we saying: "We put you to the inconvenience of having a separate treaty, so please give us a whole shopping list of demands"?

Q143 Chair: It is quite an inconvenience to have two separate treaties running in parallel but separate.

Professor Minford: Yes. Well, there is an element of leverage there. How big it is I don’t know, because it depends how much is the inconvenience of a separate treaty.

Q144 Chair: This would be politics, wouldn’t it?

Professor Minford: This would be politics. I wouldn’t want to overplay it. For example, I don’t think it would make it easy for us to leave the social chapter. I don’t think it would make it possible for us to change the arrangements under the single market in which we get over-regulated. I don’t see where this renegotiation is going to go on really substantive things that are central to the structure of the EU. That is the problem I have. Once you mention the big areas that the EU is constructed on, I don’t see us getting out of them. Effectively, those are the ones where we are experiencing the massive costs: regulation, trade, social matters and so forth.

Chair: Professor Minford, I am sure these arguments will run and run and that we will be talking about this for several years to come. I thank you for your contribution this morning and for the robust and articulate way in which you have expressed your views.

Professor Minford: Thank you.