EU Immigration – False figures make for false policy

This article can also be downloaded as a pdf here.

The survey of voting motivation in the EU Referendum of 2016 carried out by Lord Ashcroft on 24th June 2016, showed that the principal motivation of 62% of Leave voters was the return of democracy to the UK, ‘The principle that decisions about the UK should be taken in the UK’, or about ‘How the EU expanded its membership or its powers in the years ahead’.

An important number (33% of Leavers) voted primarily for leaving as it ‘… offered the best chance for the UK to regain control over immigration and its own borders’.  Only 6% said their main motivation was that ‘When it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it’.

It is fair to say that trade and economy issues have dominated politics since the referendum although this was a minor motivation for Leave voters.

The sheer magnitude and impact of migration from the EU27 to the UK has not been understood by the British political and media class, who have regarded those who were concerned by the impact as ignorant and racist.

In fact, the EU27 migration to the UK has a 50 times greater impact on the UK labour market and wages than the migration of British nationals to the EU27 has on the EU27.

 

‘Rights’ of Migrants

While control of migration has frequently been emphasized by the current Prime Minister, the actual negotiations between the EU and the UK on migration have revolved around ‘rights’.

The Joint Report from the Negotiators of the European Union and the United Kingdom government in December 2017 emphasised this when it recorded:

“Both parties have reached agreement in principle … on protecting the rights of Union citizens in the UK and UK citizens in the Union”

The Labour Market

While the matter of citizens’ ‘rights’ affects all UK citizens living in the UE27, and vice-versa, whether working or not, the labour market effects are quite different.

The arrival of non-working pensioners in a country means that the labour supply is not affected and, indeed, extra demand is likely to pull up wage rates.

Despite the fact that the UK labour force is just under 15.6% of the EU27, total worker migration between the UK and the EU is heavily skewed so that worker migration is many times greater from the EU into the UK than vice-versa.

When the total size of the workforce is considered (the EU27 being 211 million and the UK 33 million) this skewed migration becomes overwhelmingly one-sided with EU27 migration having some 50 times the impact on the labour force and the UK economy than UK migration has on the EU27 labour force and economy.

What were voters concerned about

Best calculations (and all subsequent figures are only best estimates) show that about 320,000 UK nationals work in the EU27 which has a labour force of 211 million, therefore, adding 0.15% to the EU27 labour supply.  Simultaneously, 2.3 million EU27 workers work in the UK which had a previous workforce of 30.8 million, adding 7.46% to the UK labour force, an impact about 50 times as great.

It is hardly surprising that the motivation to leave the EU, defined as ‘To regain control over immigration and its own borders’ was so widespread while, at the same time, the EU leaders, not facing in general (although some EU labour markets had sizeable immigration) the same scale of migration, simply continued to make a red line out of freedom of movement.

What is baffling is why UK politicians did not seem to understand the different scale of migration into the UK and into the EU27 and through their pre-occupation with ‘rights’ they seemed not to understand the arithmetic.

It should be noted that EU free movement rules are based on citizenship and residence, not where you were born.

Why did the politicians (British and EU) emphasize ‘rights’?

The one-sided relative level of migration (50-1) has been masked for a long time by the issuance of false totals on UK nationals living in the EU.  These have been reported on numerous occasions by the UK government and the media.

These gross errors can be traced back to a report by the IPPR think-tank in 2010 (entitled ‘Global Brit’) based on an earlier report in 2008.  In 2008 the IPPR estimated that 1.8 million UK nationals were living in the other EU countries (2.2 million for part of the year).  This wildly inaccurate estimate was recycled in a House of Lords’ answer by Baroness Warsi on 4th February 2014, who admitted her figures (for 2010) from the Foreign Office were compiled by the IPPR.

Nevertheless, the theme of 2 million UK nationals living in the EU27 continued.  It was quoted by Dominic Grieve in March 2015 and it reappeared from the depths in HM government’s paper of February 2016, ‘The process for withdrawing from the European Union’, “This [negotiation] would include the status and entitlements of the approximately 2 million UK citizens living, working and [bizarre] travelling in the other 27 member states of the EU.”

Meanwhile some journalistic sources muddied matters further by reducing the number of EU27 citizens in the UK.  For one example, on 10th February 2014 euobserver.com stated, “British figures indicate that just as many UK citizens live in the EU as vice-versa, despite popular perceptions”.  Lord Oakeshott’s contribution in The Times, 10th February 2014 was “scaremongering … could poison the atmosphere for 2 million of our fellow countrymen in the rest of Europe [sic]”.

However, a page was turned on 11th January 2018 when the House of Commons issued new figures for migration between the EU and the UK which quoted Office for National Statistics estimates for 2011 which concluded that there were only 890,000 British nationals living in other EU countries in 2011.  80% were in five countries: Spain (309,000), France (157,000), Ireland (112,000), Germany (96,000) and Netherlands (41,000).

In other words, the UK government had been employing and propagating figures for UK nationals living in the EU 27 which were of the order of a 125% plus error.

This error inevitably had an impact on the Brexit negotiations and the lack of UK response to EU pressure to maintain migrant rights.  It also explains the relative insouciance with which British politicians approached the immigration issue.  This was in part based on the comforting, but absurdly wrong, notion that UK nationals were working in the EU27 on the same scale as EU27 nationals were working in the UK.  Not only were the absolute totals of UK migrants wrong but the relative totals of EU27 and UK migrants to each other were of a completely different scale.

It should be noted that the IPPR has withdrawn the figures in its 2008 and 2010 reports.

 Pensioners

On looking at Baroness Warsi’s reply to Lord Oakeshott on 4th February 2014 (where the IPPR role is clearly set out) which estimated the figure of UK citizens living in other EU countries at 2.2 million, there was also supplied to Lord Oakeshott the number of UK citizens claiming a UK pension within the 2.2 million.  These were listed country by country and totalled 395,450.  Baroness Warsi stated that this did not include UK citizens not drawing a UK pension, for example, certain categories of widows, persons who worked entirely abroad, etc. [omitted from the following calculations]  and also, vice-versa, persons drawing a UK pension, but not of British nationality, would be included [also omitted from the following calculations].

The estimate for UK pensioners, according to Baroness Warsi, was based on information available from UK government sources.  Presumably the UK government is readily able to count how many pensions are paid to British pensioners to each EU27 country.  These were reasonably hard figures compared with the IPPR’s estimates.

EU Citizens in the UK

The House of Commons’ study (based on the ONS statistics) stated that “the available data suggests” there were around 3.6 million EU27 nationals living in the UK in 2016.  It also quotes the ONS figures for employment, that around 2.3 million EU27 nationals are in work (64% of total).

From the figures quoted elsewhere in this study it can be seen that the economically active percentage rate of the total population in the EU is 47%.  Bearing in mind that the pensioner population (defined as those over 65) in the EU is around 19% of the total population, and few pensioners retire from the EU27 to the UK (UK government figures show about 100,000 EU27 citizens in the UK receive EU27 pensions), these figures seem coherent.

It should be noted that not all EU27 nationals come to work, some are students, some, of course, are married women and children, some are spouses of UK citizens.  Some of these join the workforce.

The calculations on the impact of migration on the Labour Market

Eurostat’s estimate is that the populations of the EU in 2016 was 510 million and the labour force (including unemployed) was 245 million (47% of population).  For the UK the population (ONS for 2014) was 65.5 million and the labour force 33 million.

The EU27 totals are, therefore, EU totals minus UK totals which amounts to EU27 population 445 million, labour force 212 million.

The pensioner (over 65) population in the EU27 and the UK was almost the same level – at 19%.

According to the UK government approximately 100,000 EU citizens in the UK receive EU27 pensions.

 The situation of EU27 citizens in the UK is as follows:

3.6 million EU27 nationals living in the UK (ONS, House of Commons)

2.3 million are workers, 64% of total and 7.46% of the UK labour force, which is 30.8 million (2017) exclusive of EU27 workers.

The 100,000 EU27 pensioners have been omitted since the number of EU non-pensioners has risen by more than 100,000 in the last year.

 The situation of British citizens in the EU27 is as follows:

ONS, House of Commons’ total (2011)                                                            890,000

Pensioners per Baroness Warsi’s country-by-country breakdown            395,450

Workers, dependants, etc.                                                                                   494,550

[Assumed 64% of these are workers, as with EU27 workers (excluding Pensioners) in the UK]

Therefore, British nationals working (primary purpose)                             316,000

Rounded up to                                                                                                      320,000

This totals 0.15% of the EU27 labour force which is 212 million.

As with EU27 citizens in the UK, not all UK nationals go to the EU27 to work.  Some are students, some are dependants.  Some of these join the EU27 workforce.

The comparatives, therefore, when considering the labour market impact on the UK and EU27 labour force, are that 7.46% is approximately 50 times greater than 0.15%.

Perspectives

The relevant rate of migration of workers between the EU27 and the UK has a different impact on the two entities, namely 7.94% of the UK workforce and 0.15% of the EU27 workforce.

In order to understand the difference in impact, it is worth estimating:

  • What the EU27 migrant worker total in the UK would be if it was the same size relatively as the UK migrant workforce in the EU27.

        The calculation is 0.15% x 30.8 million = 46,250 instead of 2.3 million

  •  What the UK migrant worker total in the EU27 would be if it was the same size relatively as the EU27 migrant force in the UK.

 The calculation is 7.46% x 212 million = 15.81 million or approximately half the UK labour force

In other words, it is necessary for the EU27 and British politicians and business and workers and electorate to understand that the UK position on restricting migration is conditioned by an impact of the same magnitude as if 15.81 million British workers arrived to work in the EU27.

At present there is no sign that most British or EU leaders appreciate the size of the issue.  What is more tragic is that British politicians have continually issued false figures and played down the magnitude.  There is a lot of talk about ‘rights’ but none about the real impact on wages and constant political bewilderment about poor wage rates and inequality.

The financial settlement – it will be a long-term gain

THE FINANCIAL SETTLEMENT

The Prime Minister has stated that the financial settlement and any payment thereof would depend on a satisfactory overall agreement which meets the objectives of the Florence Speech, including a trade arrangement.

THE PRESENT POSITION

When going into negotiations with the EU for a ‘single financial settlement’ it is necessary to consider the current established financial relationships between the UK and the EU.

These come in two parts:

The UK’s EU budget contribution (after rebate) amounts to around £13.5 billion per annum.  That is about 20% of the total net savings of the UK economy.  It is also a legal obligation of EU membership and exists in perpetuity.  Any sum spent by the EU in the UK is not an obligation but is a matter of EU policy.  Since 1973 the total net UK contribution to the EU budget at 2017 prices is about £500 billion and, at present, the perpetual obligation adds to this every year.  (The last time it was fully worked out was for the period 1973-2010 when it amounted to £379 billion at 2010 values.)

The second part of the current relationship is that there is UK exposure to the liabilities of the EU and its entities such as the ECB (European Central Bank), EIB (European Investment Bank), etc.  There is no corresponding EU exposure to UK liabilities such as those of the Bank of England.  The UK also has ‘joint and several’ liability for all EU debts.

In comparison with the UK situation, non-EU EEA countries, such as Norway, have no exposure to EU liabilities nor do they contribute to the EU general budget (contrary to what is often asserted).

It should be noted that this study addresses only financial and fiscal matters.  There are other costly economic effects of the UK-EU relationship, such as food costs, migration costs, etc. which are not referred to here.  There are also some benefits in the internal market relationship.

The present financial situation is described more precisely in a pre-referendum study:

UK Membership of the EU – The Threat to the Balance Sheet.

THE UK’S NECESSARY FINANCIAL ASPIRATION

It is, therefore, prudent and a financial necessity that the UK ceases to hand over 20% of its net savings to the EU in perpetuity with virtually no influence of how these savings are spent (only a tiny fraction is spent on investment in the UK).

It is also urgent for the UK to extract itself from the partly one-sided exposure to the liabilities and contingent liabilities of the EU as soon as possible.  Adopting the position of the EFTA/EEA states which have no responsibility for EU liabilities would be prudent finance.

THE ‘FINANCIAL SETTLEMENT’ AS AT DECEMBER 2017

The fundamental two aims of stopping EU budget contributions with the consequent erosion of UK savings/investment and extracting the UK from EU liabilities are on the table and in the Joint Report of 8th December 2017.

These are the two core financial benefits of departure.

It is important to understand that the EU referendum was about the long-term future and not about the details of departure, not all of which are favourable.  Further, if the referendum had been won by Remain, both the half-a-trillion pound hit to UK savings would have increased every year by some 2 or 3%, and the UK would still have been responsible for its share of EU liabilities.

These will cease over the next five years, although in a somewhat unsatisfactory and messy settlement.

THE FINANCIAL SETTLEMENT – THE QUANTUM

Michel Barnier is quoted in The Guardian (19/12/2017): “He [Barnier] would not confirm British estimates that the final Brexit bill – the UK’s outstanding obligations to the EU – would be no more than Euro 45 billion (£39 billion).”

This was hardly unreasonable of Barnier because at least two of the principal subjects of financial discussion, the UK’s stake in the EIB and EU pensions seem to have been left as ongoing yearly matters and, therefore, it is difficult to form capitalized totals thereof in any meaningful way.  Pensions will be paid when this amount falls due.  This means the UK could still be paying pensions up to 2100 although the amounts will be insignificant by then.

It has also been agreed that the UK will continue its normal financial relationship with the EU until the end of 2020, that is, making budget contributions and collecting the rebate.

Some questions arise over the following (the references are to the Joint UK EU Report of 8/12/17):

  • It is not stated that the UK will receive its rebate for the year 2020 (it is normally repaid one year in arrear).
  • Item 61, “The UK will contribute its share of the financing of the budgetary commitments outstanding at 31st December 2020 (RAL).” The ‘rebate’ is not mentioned but even if the UK agrees to pay its share of RAL then this should be subject to the rebate (paying a share of the RAL is a political concession by the UK).  The whole point of the RAL is that money has been spent or authorized above the EU budget although Item 67(b) appears to negate the rebate in RAL matters.
  • Then there is ambiguous phraseology over the balance sheet. “The UK will contribute (para 62) its share of the financing of the Union’s liabilities incurred before December 2020 except for liabilities with corresponding assets and assets and liabilities which are related to the operation of the budget and the Own Resources division.”  The English is poor and obscurantist.  The clear fair method is for the UK to establish its share of the EU balance sheet (assets and liabilities) and pay its share of the net amount if there is an excess of liabilities over assets.  This is the method recommended by the Institute of Chartered Accountants. (some of the net may be subject to the rebate).
  • The European Investment Bank (EIB): The UK has agreed (item 74 onwards) that it will not receive any profit from the activities of the EIB but will participate in a share of any losses entailing Extra Capital calls.  This is a poor negotiating decision.

A revised estimate – the financial settlement with the EU

Since we published Anthony Scholefield’s Futurus Briefing paper on the financial settlement with the EU, the author has undertaken some further research which has resulted in a revision to the original document. The revised version can be downloaded here.

It should be pointed out that the headline figures, suggesting that the EU owes us a refund, have not been revised, but  extra background information, such as our realistic future pension liabilities, has been added.

New research paper by Futurus – The negotiations will fail

The title of this latest publication from Futurus may appear provocative but the prospect of concluding a jointly agreed leaving process and a future relationship so it can come into effect, possibly with a transition period, by March 2019 seems very remote.

There have been faults on both sides and the UK government’s failure to set out what exactly it wants the outcome to be has been a particular problem.

The UK government need not have agreed to the EU’s proposed sequence of events – the settlement of the Irish border issue and the exit fee – before discussing trading arrangements. Under Article 50, it need not have done so.

A mutually-agreed pause in the negotiations looks likely or else failure looks highly probable.

The full paper can be downloaded here. PLEASE NOTE: The paper has been revised since this article  was first published.

How to negotiate Brexit

Now the UK has triggered Article 50 and is entering negotiations with the rest of the EU, it is worth taking a rough look at what the government should do in the negotiating process.

The Position in 1975

The NO Campaign in 1975 stated “If we withdrew from the Market, we could and should remain members of the wider Free Trade area which now exists between the Common Market and the countries of the European Free Trade Association.”

That position was supported by Enoch Powell and Tony Benn and the NO Campaign in 1975 simply because they recognised that this Free Trade area was a trading association without any political implications.

The EEA [European Economic Area], although considerably modified, is essentially the successor to “the wider Free Trade area”.

Clear Aim and Clear Plan

At present it is unclear whether the government has either a clear aim or a clear plan.

While it is true that the Prime Minister has ruled out the UK remaining in the ‘Single Market’, she has not specifically ruled out retaining EEA membership.

Of course, it would be best to stick with the EEA for at least some years in order to reduce the magnitude of the task of leaving the EU.  More important, any losses in trade from leaving the EEA would be sudden and might affect large amounts of exports, especially goods.  The bright picture of extra trade globally is just that – a bright picture which could take years to bring about.  So there is a major temporal dislocation which must be factored in to future calculations.

If the UK becomes a third country vis-à-vis the EU, there is likely to be a trade in goods exports drop off because of customs and regulatory complexity.

Whether the UK opts for an EEA solution or not, the details of the financial divorce, organising trade relations with other countries on succession to EU trade arrangements, setting up greatly expanded and separate UK customs for the UK, etc., would be necessary.  It is just simpler to do this while UK/EU trade is relatively undisturbed.

How much would the ‘hit’ be?

It is worth looking at the quantities and types of goods exported by the UK to the EU.  Excluding agriculture and fish, whose regulating régimes are specific, goods exports to the EU were about £140 billion per annum in the period 2012-14.

It would seem that about 30% of exports would be relatively unaffected (except possibly by tariffs):

  • Basic materials
  • Coal, gas, etc.
  • Gold and precious stones
  • Motor cars via dedicated export points
  • Ships and aircraft
  • Oil – crude and products

So the ‘at risk’ total is about £95 billion.

The ‘hit’ on this could be estimated quite speculatively at 10-20%, so a loss of trade in goods of £10-20 billion.

This ‘lost trade’ would not necessarily be the same as a financial loss.

Most exported goods contain raw materials and components so there is a ‘netting off’ process.

Trade statistics exaggerate the importance of trade in an economy, and globalised supply chains distort trade statistics even more because of double, triple and more percentage counting.

The actual financial loss to the UK might only be the ‘profit margin’ if the displaced labour and capital could find alternative employment or returned to their country of origin but it would be prudent to assume the net ‘hit’ would be in the £5-10 billion range.

More important would be the disturbance to the structure of the exporting firms and the labour market, with considerable shedding of labour – in manufacturing, a most unfavourable outcome.

Trading under WTO rules

It has been conclusively shown by eureferendum.com that few countries trade purely under WTO rules.  There are numerous trade treaties (not free trade agreements) which govern the trade between the EU and third countries.  These have often taken many years to establish.

The government has said it wishes to establish a Free Trade Agreement with the EU but many hard Brexiteers state that, if a favourable FTA cannot be agreed, the UK would fall back on the WTO rules, but this would be a massive disturbance to existing UK exports to the EU.

There are some quite weak safeguard clauses in the WTO rules.  These were not incorporated in the WTO agreement in anticipation of such a massive and sudden change in trading relationships but, rather, refer to sectoral problems.

However, a scenario where UK goods exports to the EU fall drastically, while EU exports to the UK carry on as normal, is so disturbing and unsustainable that invocation of safeguard clauses might be necessary.

The final fallback position for the UK government in this scenario is trading with the EU under some emergency system such as an Exchange Equalisation Fund.

This, of course, would be a breach of WTO rules but would be the only alternative to financial disaster.  It would, of course, be presented as a temporary measure.

As a matter of political realism, EU Treaty rules and WTO rules are servants to national governments who retain responsibility for the prosperity of their peoples.

Breaching of EU rules have been quite common:

  • Breaches of the budget overspending rules of the EU Stability and Growth Pact by France, Germany and others.
  • Breaches of the Maastricht Treaty on no bail-out clauses for EU member states.
  • Breaches of the Dublin Convention on asylum seekers by Germany and others.

Additionally, many NATO-EU governments have breached NATO agreements on defence spending.

EU rules and treaties have been breached by EU member states and condoned by the EU because they believed, correctly or not, that the prosperity of their peoples required such breaches.

Breaches of the WTO rules fall under the same rubric.  If adherence to WTO rules threatens financial stability and prosperity, they must be considered.

The ‘money’

Whether the UK remains in the EEA or whether it does not, there will be a financial divorce on the UK leaving the EU.

The reason is that the EFTA EEA states have little financial relationship with the EU, making only a small contribution to the workings of the EEA agreement.  Additionally, but outside the EU financial structure, are the Norway and EEA grants.

The EFTA EEA states do not pay anything into the EU budget or have any responsibility for the reste a liquider amounts of EU programmes (except for the EU programmes they have voluntarily joined, such as university research).

More importantly, these states have no liability, contingent liability, guarantees or ‘joint and several’ guarantees to any financial activities of the EU or its institutions, such as the ECB [European Central Bank] or EIB [European Investment Bank], the EFSM [European Financial Stabilisation Mechanism], the EU Balance of Payments programmes etc.  So, moving to EFTA/EEA status would still mean that a financial divorce of the UK from the EU would have to be negotiated.  It should be noted that the potential losses of the ECB and the EIB, which includes an unfunded, irresponsible lending programme begun by Juncker, are absolutely enormous.  One advantage for the UK is that the EU is hardly going to acknowledge these potential losses and include them in its demands.

Another background point before considering the financial divorce is defence costs.

At present the UK is increasing its defence and security presence and spending in Eastern Europe, whereas many NATO countries, as President Trump pointed out to Angela Merkel, do not adhere to NATO spending targets.

It is difficult to see how any financial package on the UK leaving the EU can be discussed when other EU-NATO countries are falling down on their obligations and have serious past shortfalls.

By now, the UK government should have to hand a schedule of what amounts are material to be considered by the UK and the EU on divorce:

  • Defence spending
  • Current budget
  • Reste a liquider amounts

Additionally, the UK should be targeting its extrication from all liabilities, contingent liabilities and guarantees, as well as totalling its contributions to EU assets.

The European Parliament

The divorce terms have to be approved by the European Parliament, which can easily sabotage any agreement in the last few weeks of the two-year negotiating period with or without the encouragement of EU leaders.

It seems obvious, therefore, that at the very beginning the two parties must agree that if the European Parliament rejects an agreement between the EU Council and the UK, the two-year time limit on negotiations must be extended indefinitely.  Otherwise the whole negotiation is at the mercy of an irresponsible actor.

A quick look at the Brexit White Paper

The government White Paper this week charts the course the government intends to take to achieve the second leg of Brexit following the referendum result.  This should be to provide a ‘safe and beneficial exit’.

In effect, the government is not attempting to reach a withdrawal and settlement of the new relationship with the EU within two years after triggering Article 50, but is aiming to reach a settlement of the ‘framework’ within two years and thus leaving all the details for many years in the future.

It seems the government is splitting the Brexit job into two parts.

Job One:   Leaving the EU is being interpreted as negotiating a ‘framework’ within which the detailed negotiations will sit.

Job Two:   Detailed negotiations after the UK formally leaves the EU with a ‘framework’ settled.

So the question is this – can the government negotiate the details after formally leaving the EU with a framework agreement but in which framework the details are that each ‘chapter’ of the interface comes up for negotiation maybe years later?

In a way, the government is agreeing with the basic plan offered by the Leave Alliance during the referendum campaign – that the job is too big and complicated to do in two years.  The Leave Alliance solution was to remain in the EEA for some years, thus parking trade and other issues.  The government’s solution is to agree a ‘framework’ within two years and carry out the detailed negotiations later.  In this way it can argue that the UK has left the EU within two years.

Of course the first problem is then that the EU may well reject the splitting of the negotiations into ‘framework’ and ‘details’ because this is a new concept and because the ‘details’ are to some extent the ‘framework’.

Will the electorate and the Conservative Party accept that the UK will for most purposes still be in the EU after two years and the full withdrawal will take many years?

Also, by proposing to leave the EEA single market the government has added to its negotiating burden as it will have to secure trade agreements with the EFTA countries.

What happens if this course is pursued?  It depends on how the EU reacts.  It may go along with this in order to get the UK out of the formal political structure.  It might also say that the idea of separating the ‘framework’ and the ‘details’ is not realistic and put forward a more radical programme of detachment.

The Leave Alliance proposal would have been more certain, quicker, more attractive to the EU and would have more electoral support in the UK.  It would rest on off-the-shelf proven solutions.  The government’s proposals are the opposite of all these sensible proposals, are far more risky and uncertain and will involve the UK in many EU activities for years to come.