Foreign Affairs CommitteeWritten evidence from Business for New Europe (BNE)

Business for New Europe (BNE) welcomes the opportunity to make a submission as part of the consideration by the Foreign Affairs Select Committee for their Inquiry into “The Future of the EU: UK Government Policy”. This evidence outlines what BNE views as the key priorities.

1. Executive Summary

The UK government should seek the following goals for the UK’s relationship with the European Union:

Seek to retain the UK’s seat at the EU table and have a voice in all negotiations.

Boost jobs and strengthen growth by pushing for reform at the EU-level.

Recognise and advocate the benefits of UK’s full access to the single market more clearly.

Push for greater liberalisation and completion of the single market.

Prioritise digital and energy markets in the pursuit of a more liberal European market.

Foster and encourage EU external trade policy.

Push for Common Agricultural Policy reform.

Support measures to solve eurozone crisis and protect the UK’s financial services sector.

Continue to fight against a rise in the EU budget for 2014–20.

Proactively address the diminishing UK numbers in the EU institutions at both UK and EU levels.

2. Introductory Comments

2.1 BNE is an independent coalition of business leaders advocating a positive case for reform in Europe. We are an independent not-for-profit organisation funded by donations from the private sector with offices in London and Brussels.

2.2 Our Advisory Council consists of Chairmen and CEOs of FTSE 100 companies and our Executive consists of experts in foreign and economic policy.

2.3 We are involved in a wide range of advocacy activities to provide a platform for debate on European issues to business leaders and policy makers. We publish research, hold seminars and conferences, and contribute in the media. We seek to ensure that a reasoned, pro-European voice is heard in the UK.

2.4 The author of this evidence, Ariane Poulain, Head of Research at BNE, specialises in quantitative and qualitative analysis, EU and UK affairs, immigration, international development and economics. The editor of this evidence, Phillip Souta, Director of BNE, is an expert on the eurozone, international trade, Britain’s relationship with the EU, European foreign affairs and comments on these issues regularly in the media. Phillip Souta would be happy to appear before the Select Committee and provide oral evidence on this submission.

2.5 BNE appreciates the opportunity to put forward evidence and will focus on advocating: (a) positive and engaged approach to the UK government’s relationship with the EU; (b) specific policy areas that the UK government should prioritise as critical to the future of the EU: the Single Market, EU external trade policy, reform of the Common Agricultural Policy, the Multiannual Financial Framework 2014–20 and financial services; and (c) British representation in the EU institutions.

3. Recommendations

3.1 The UK should pursue a realistic, pragmatic and positive approach to the EU. We advocate that the UK government’s approach to its future relationship with the EU should be characterised, overall, by the following two prerogatives

3.1.1 The importance of the UK having a seat at the negotiating table must not be underestimated.

Britain must remain engaged across all relevant policy areas. The view that the UK would be in a better position if it left the EU and instead took part in an EEA-style agreement, similar to that of Norway, is not in the UK’s best interests.

A January 2012 report commissioned by the Norwegian government1 highlighted major drawbacks of their agreement with the EU stemming from not having a seat at the table during negotiations. Norway is “bound to adopt EU policies and rules on a broad range of issues without being a member and without voting rights” and as a result, for example, has actually implemented more EU regulations than the UK.

Norway’s “association without membership” relationship with the EU provides access to the single market but at the cost of contributing to the EU budget and not having a voice at the negotiating table. An EEA-style arrangement, if it were even available to Britain on equivalent terms to Norway, would in practice do little to enhance British sovereignty, and would mean that the UK would be obliged to implement EU legislation without having any say in its formation.

3.1.2 The pursuit of opt outs is a red herring and the UK government must shift the current debate towards a more constructive agenda, primarily focused on achieving better growth.

According to the Office for National Statistics, the UK’s real GDP has stagnated for nearly two years and is currently in a “double dip” recession with a second successive quarter of economic contraction—real GDP declined by 0.3% in Q1 2012.

At present, the EU has not implemented the necessary reforms sufficient to boost jobs and growth—this is damaging the EU and in the process, the UK.

Thus, the UK’s future relationship with the EU must be based upon pushing for reform that is in the UK’s interests. With this in mind, the future of UK government policy on our membership of the EU should not be about renegotiation, it should be about reform.

As 3.2 notes in greater detail, the EU is the UK’s largest trading partner and the single market adds over €600 billion to the UK economy annually. It is in the UK’s best interests that the EU overcomes the crisis and regains competitiveness in the global economy.

3.2 The European single market is vital to the UK economy and plays a major role in the importance of the UK’s relationship with the EU. We advocate that the UK government should build a stronger agenda on the following

3.2.1 Seek to more clearly recognize and build upon the key benefits of the European single market. The following identifies why—despite the current financial crisis—the UK’s full access to the EU single market remains highly attractive and lucrative in the global political economy.

3.2.1.1The single market is the world’s largest trading area with almost 500 million consumers and worth €12.6 trillion, compared to €12 trillion and €3.5 trillion in the US and Japan respectively.

3.2.1.2Over 50% of foreign direct investment to the UK comes from EU member states; the UK attracts global FDI primarily because of its full access to the EU single market. An example of this is the recent decision by the leading Japanese pharmaceuticals giant, Shionogi, which is currently rolling out a five-year global expansion plan. In July 2012, Shionogi announced that they would set up their European headquarters in London because of London’s strong infrastructure, outstanding talent and “easy access to the rest of Europe”; this creates 50 new jobs and Shionogi are now also considering moving part of their manufacturing operations to the UK.

3.2.1.3The single market adds €600 billion a year to the UK economy, accounts for over 50% of all UK trade in goods and services, and three million jobs are directly or indirectly linked to it.

3.2.2 Full completion would add a further €200 billion to the EU’s GDP. We advocate that the UK government prioritise the following two policy areas in the push for greater liberalisation and completion of the European single market: the digital single market and the energy market.

3.2.2.1The Digital Single Market

The failure to complete a digital single market in the EU has the potential—under cautious assumptions—to cost Europe at least 4.1% of GDP by 2020 due to the lack of coherence and fragmentation across EU member states which present significant barriers to growth in a swiftly growing market.

In the UK alone, it is estimated that the digital market will grow by 10% in 2012 and by the end of 2015, the Minister for Media, Culture and Communication, Ed Vaizey, predicts that it will represent 20% of the UK’s total GDP.

We strongly encourage the UK government to fully support the goals of the “Digital Agenda for Europe”, 2 from improving cross-border online transactions to the implementation of pan-European licensing for online content such as music, photography and film.

3.2.2.2The Energy Market

Like the digital market, the EU’s member states are operating in a highly fragmented European energy market and at present, EU 2020 targets in the area of energy will not be achieved. For example, in energy efficiency alone, the EU is forecasted to improve its energy efficiency by 9% which is less than half of the EU 2020 target.

In May 2012, European Commission president, Jose Manuel Barroso, stated that the EU energy market was worth €620 billion in itself.3 This clearly underlines the importance of the Commission’s communication “Energy 2020: A Strategy for Competitive, Sustainable and Secure Energy” goals which comprehensively set out the requirements for a stronger and more productive EU energy market, such as energy efficiency and infrastructure.

We strongly encourage the UK government to actively support and push forward the EU 2020 goals in energy for the benefit of the wider EU economy as well as domestically. Furthermore, the UK does not have the capacity to independently meet national energy demands and is currently falling behind other EU countries in its ability to maintain important environmental priorities such as reducing greenhouse gas emissions and increasing the amount of energy produced from renewables.

3.3 As a member of the EU, the UK trade sector is in a much stronger position and it is in the UK’s best interest to foster and encourage the EU’s external trade policy

3.3.1 The EU is a significant force multiplier for UK trade. There are three main reasons for this:

3.3.1.1The UK trade sector has the support of the EU if external trade partners contravene WTO rules.

3.3.1.2As part of the EU27, the UK is in a more influential and attractive position to secure Free Trade Agreements (FTAs). The following examples demonstrate a benefit already achieved and the potential for future UK opportunities in EU external trade policy:

3.3.1.2.1In July 2011, an FTA between the EU and South Korea came into force. The deal is estimated to eliminate over 99% of duties on EU goods and in the UK specifically, the Department for Business, Innovation and Skills estimates that the deal will bring £500 million of annual benefits to the UK and create an additional £2 billion in export opportunities for UK business.

3.3.1.2.2We advocate that the UK should continue to encourage the EU’s external trade policy because of the vast potential opportunities for the UK trade sector. According to the European Commission’s comprehensive sustainability impact assessments for FTAs, the following benefits to the UK of completed EU FTAs would be, for example:

EU/Canada: Around £423 million per annum in the short term.

EU/ASEAN: Up to £3 billion per annum in the long term.

EU/India: Approximately £2 billion over 10 years.

3.3.1.3The UK’s EU membership places the UK in the strongest position to push for a more liberal trade agenda at the global level. This influence is two-fold. Firstly, the UK has a significant role to play in shaping the EU trade policy agenda which—considering that the EU is the world’s largest trading area—allows the UK to push forward its open market philosophy and encourage greater liberalisation in the single market. Secondly, as an individual voice on the global level the UK is more powerful as part of the EU27; if the UK was outside of the EU, for example, it would have little ability to influence and shape the WTO agenda.

3.4 The UK government should call for reform of the Common Agricultural Policy (CAP) to ensure CAP spending is conducive to long-term growth and better aligned with the UK’s best interests alongside providing more effective support to the EU’s agricultural sectors

3.4.1 The main issues surrounding negative CAP spending are:

3.4.1.1The allocation of direct payments are highly unequal: (a) over 50% of CAP goes to the top 16% of farmers; (b) direct payments per hectare vary significantly across EU member states, from €462 to €190; this primarily disadvantages the Central and East European (CEE) member states and the CEEs are most in need of support to strengthen their agricultural sectors.

3.4.1.2Subsidising the EU agricultural sector goes against the values of the single market: it is (a) highly protectionist, and (b) distorts regional and global markets.

3.4.1.3CAP is currently allocated over 40% of total MFF spending and of this amount, only 25% goes towards rural development. Rural development spending is more sustainable and effective than direct payments in the long-term.

3.4.2 We consider that the above issues should be addressed in the next MFF and as a result, an 8% reduction would be made to overall CAP spending but alongside efficiency gains and an increase in positive spending. We advocate that the UK government should consider the following reforms to CAP:

3.4.2.1Introduction of means testing for individual beneficiaries of CAP.

3.4.2.2A 50% reduction in direct payments to the top 11 EU member states with a GDP above the EU average, with the aim to phase out post-2020.

3.4.2.3Increase direct payments by 26% to the four EU member states with the lowest GDP below the EU average.

3.4.2.4An increase in rural development spending by over €4 billion.

3.5 The euro area summit conclusions dated 29 June 2012 provide for the creation of a “single supervisory mechanism” by the end of 2012. This mechanism will be vested in the European Central Bank (ECB) and once established will allow for the European Stability Mechanism (ESM) to recapitalise banks directly. It is in the UK’s interests that the eurozone crisis be resolved. It is reasonable to talk about common resolution, depositor protection at a eurozone or EU level. We submit that the UK government should strongly support the creation of such a “European Banking Union,” whilst bearing in mind the following

3.5.1 Financial services are of considerable importance to the UK economy, accounting for 9% of UK GDP, and £63 billion in UK tax revenues in 2010–11 accounting for 12% of total UK tax receipts. Financial services employ two million people in the UK—7% of UK employment.

3.5.2 The UK accounts for 36% of the EU’s wholesale finance industry and 75% of European financial transactions take place in London.

3.5.3 The European Council conclusions dated 29 July 2012 state that proposals to be prepared on a European Banking Union, “will include concrete proposals on preserving the unity and integrity of the Single Market in financial services and which will take account of the Euro Area statement and, inter alia, of the intention of the Commission to bring forward proposals […]”.

3.5.4 It should be remembered that the proposals referred to in 3.5.3, above, will not change fundamental treaty freedoms. At this stage, it is also impossible to give a detailed analysis as there is no detail on the proposals.

3.5.5 In order for the Single Market in financial services to be properly maintained and protected, the government should maintain that:

Regulation of eurozone banks should remain fully within the scope of the EU’s existing EU treaty structure, where both the European Commission and the European Court of Justice are bound to maintain a level playing field.

The UK should remain fully engaged in the operation of the European Banking Authority, which works with the national regulators of all the EU’s 27 member states to prevent regulatory arbitrage and help maintain a level playing field.

The UK should seek to establish whether there is any risk of a European Banking Union creating barriers to eurozone banks which currently have operations in the UK.

3.6 Negotiations on the next long-term EU budget “The Multiannual Financial Framework 2014–2020 (MFF)” are ongoing. We encourage the UK government to push for the EU to avoid raising the size of the MFF to reflect the impact of the current fiscal pressures on member states

This submission recognizes that areas such as energy, the digital agenda, innovation and research play a significant role in the success of productivity, growth and unemployment levels in the EU and individual member states alike.

However, future EU spending must offset the current times of austerity and policies, such as CAP, that are not conducive to long-term prosperity should be reduced.

3.7 In order to pursue this realistic, pragmatic and positive approach to the UK’s membership in the EU, British influence towards and within the EU institutions is paramount. We strongly encourage the Government to proactively push for greater UK representation at the EU level alongside building a better platform to encourage the importance of this domestically

3.7.1 Whilst a European Commission official is of course required to act on behalf of the interest of the EU as a whole, rather than that of his/her member state, the official naturally reflects his/her national perspective and culture in his/her daily interactions. Without national perspectives represented in each institution, the institution would not act on behalf of the Union as a whole. Regrettably, the number of British officials within the institutions, namely the European Commission, is dwindling at an astonishing pace.

The UK represents 12% of the population of the EU but holds only 5% of posts within the institutions.

These figures are only deteriorating and UK representation in new EU institutions, namely the European Financial Supervisory Authorities, is also a worry to the British business community.

3.7.2 The main issues behind this lack of overall representation include the following and all of these reasons fall on a background of an overall national negative perception of the EU:

3.7.2.1The 1972 intake of British citizens is close to retirement.

3.7.2.2The Concours examination must be taken in French or German.

3.7.2.3The awareness of career opportunities at universities is poor and secondments within the Civil Service to Brussels are not encouraged.

3.7.3 BNE has worked with the UK Government, both in London and Brussels, on this issue for the past two years. We will continue to push this agenda and encourage continued government support.

We applaud the Foreign and Commonwealth Office and the UK Permanent Representation to the EU in placing such a priority and resources to achieving the objective of greater UK representation in the EU.

Following representations made by our members, we welcome the introduction of mandatory foreign language learning in the English Baccalaureate and we support the government’s drive to work with universities, including the College of Europe, to create awareness of the many EU career possibilities open to UK graduates.

We also welcome the support given in the establishment of the British Brussels Network. This network seeks to provide a platform for debate on EU issues from a British perspective in Brussels and has been successful in doing so over the past year.

3.7.4 Whilst the Foreign and Commonwealth Office has made noticeable progress in highlighting the need to address this subject, BNE seeks to ensure that this priority is heard across Government. We strongly recommend that further action be taken as follows:

3.7.4.1The Civil Service should explore the possibility of requiring civil servants to work on EU issues at some point during his/her career development, whether it is through secondment or training. 

3.7.4.2The Government must seek to ensure that the new financial supervisory authorities are staffed appropriately. This is of upmost importance because without the continuation and strengthening of this drive, British influence within Europe is bound to diminish.

10 July 2012