High Stakes for Brexit Gamble: Chapter 3
PUBLISHED: 09:00 23 May 2016
On 23 June we will be asked to cast our vote on whether the UK should remain within or leave the European Union. Simon Lewis, CEO at Partridge Muir & Warren Ltd, continues his exploration of the issues we need to consider before we make our choice about whether or not to go it alone.
My first two chapters (Chapter 1 | Chapter 2) focused on trade and immigration with the conclusion that from these perspectives, remaining within the EU was likely to offer greater opportunity for prosperity. In this chapter I want to look at how the EU spends its budget, consider if it is well spent and ascertain whether the UK derives appropriate value as a consequence of its membership.
What we pay to the EU
In 2015 Britain’s gross contribution to the EU budget was £17.8 billion but this amount was not actually paid because of an annual rebate, which amounted to £4.9 billion. If you take in to account the deduction of the £4.5 billion actually spent by the EU in Britain (on regional investment, development and subsidies) it gives a net cost of £8.5 billion for the year.
How the EU spends it
The EU currently has an annual expenditure budget equivalent to around £125 billion. In some ways this might not seem like a lot of money compared to, say, this year’s expenditure budget of £750 billion for the UK Government. However, almost 80% of the UK’s budget will be spent on state pensions, welfare, healthcare, education, defence, and interest payable on the national debt; none of which the EU is required to finance. Therefore, given its remit, £125 billion is quite a lot of money for the EU to spend each year.
Considering the EU budget in more detail; a whopping 40% is allocated to the Common Agricultural Policy (CAP), which hands out generous subsidies to farmers. A further 33% is spent on regional investment, while 6% is consumed by administration costs. This does not leave much money to deal with other issues, which perhaps partly explains the poor initial response to Europe’s refugee crisis.
Analysis of what individual countries receive in EU spending shows that the UK receives less money per head of population than the EU’s 27 other members. This is largely a consequence of CAP and explains why the rebate for the UK was negotiated. Unsurprisingly, France receives (due to CAP) roughly twice as much spending as the UK. The biggest beneficiary in absolute terms, receiving €17.5 billion in 2014, is Poland.
Maladministration or corruption?
Although it is disappointing that the UK appears to get a raw deal, what is more discouraging is that the annual audit of the EU’s financial accounts has never been signed off without qualification (doubt) during the last 21 years. The problem is insufficient evidence to prove that money handed out ultimately went to the right people and that a fair price was paid for the goods, assets or services paid for.
A good example of this is provided by the observation of the EU’s auditor that new roads paid for in Spain cost twice as much per kilometre as roads it paid for in Germany, with a comment that this difference could not be explained by differences in labour costs. Whether this type of occurrence is the result of corruption or inefficiency is uncertain. Nevertheless, research by the EU into the prevalence of corruption in procurement revealed that over half of companies that tender for EU financed projects believe corruption to be widespread at national and regional procurement authorities.
It seems clear that the EU needs to improve how it monitors its spending. This is underlined by the fact that the National Institute of Business in Spain determined that roughly 36,000 of the 228,000 or so businesses in receipt of an EU grant did not exist. There are many such examples in many member states.
Spending our money wisely
It is also important to scrutinise EU spending from the perspective of whether it makes sense. For example, the EU spent €72 million on a scheme to discourage smoking while in the same year handed out subsidies totalling €293 million to tobacco farmers in Europe.
Portugal has received over €60 billion in regional support funding from the EU since it joined and much of this was spent on a construction binge. As a consequence it now has 1,800 miles of motorway; four times more miles of motorway per inhabitant than Britain. The irony is that the Portuguese Government was forced to introduce motorway tolls as part of the country’s bailout package following the euro crisis, so these motorways are now only lightly used.
The revitalisation of Liverpool owes much to EU regional funding, so there are examples of success. Nevertheless, the regional funding project overall is littered with the corpses of many white elephants. It does seem that far too much money is allocated to failing and wasteful policy areas that are protected by national self interest.
Perhaps the greatest example of waste is provided by the fact that as well as being located in Brussels, the European Parliament moves to Strasbourg every month for one week and then returns. Strasbourg, the capital of Alsace, is a German speaking region of France and was chosen as the official seat of the European Parliament to symbolise the post-war reconciliation between Europe’s two great foes. Imagine the UK Parliament and its entourage travelling to Edinburgh every month to symbolise reconciliation between two age old adversaries! The perpetual movement of parliamentarians, their staff and all of their papers represents an enormous waste of time and money. The EU budget allocates over £1 billion for this relocation over its current seven year budget cycle. That’s a lot to spend on symbolism.
It is not only a waste of time and money but there is also a substantial environmental impact, which is not without irony given the volume of environmental legislation the EU has imposed. It has been calculated that each year this relocation exercise results in the emission of 19,000 tonnes of carbon dioxide. To get an idea of what this meant, I established that the average UK car registered in 2015 emits 122 g of carbon dioxide/km. According to my calculations, the annual environmental impact of this travelling circus is equivalent to that average car travelling 155.6 million km. At an average speed of 80 km/h the journey would take 222 years…
The democratic deficit
A common concern is that the EU does not pay enough attention to the needs of Britain and I think there may be some truth in this fear.
The UK championed recruiting more Eastern European countries with the result that Britain’s voting power on the European Council reduced from 17.2% to 8.4%. This is of course an expected democratic outcome given the enlargement of the EU. What is more alarming is that there has been a sharp drop in British officials working in the EU institutions. In 2014 only 2 UK candidates were accepted to work at the EU compared to 15 from France and 16 from Germany. It would appear that this has been a long term trend because although Britain has 12.3% of the EU population, the proportion of staff at the European Commission (the body that proposes and monitors EU laws) was down to 4.3% in 2015. This compares to 8.3% for German workers and 9.7% for French workers. Even Poland, a relative newcomer to the EU with a population of 38.6m versus the UK’s 65m, supplied 4.9% of the EU staff. This perhaps represents another aspect of Britain’s growing alienation from Brussels and creates the real danger that future legislation will be progressively less sympathetic to the needs of the UK.
My assessment of the economic issues over the course of these 3 chapters has provided me with some useful insights that have served to alter my view and possibly change my voting intention.
The issues around trade are finely balanced and on this subject I am certainly more ‘stay’ than ‘leave’. On immigration, my view is that it has been economically beneficial so far, but that this might not always be the case. Finally, in this article I have covered EU spending and the democratic deficit, both of which back the case for Brexit.
I appreciate that there are a number of non-economic issues that are equally important but, based on those considered in this series of articles, I do not believe that the interests of the UK will be best served by continued membership of the EU in its current form. My concern is that the direction of travel of EU policy is against us. However, I do believe that with reform the EU can be a powerful economic force for all of its current members. I also believe that the EU is likely to be less of a threat to us if we are on the inside driving such reform and resisting the drive to broaden its remit towards a ‘United States of Europe’.
My voting choice is now a tactical one. Do I vote to stay in the belief that it would provide an effective platform for reform? Or, do I take the view that our Government’s negotiating position is a busted flush and the only way to shift the odds back in our favour, to achieve proper reform, is to call the EU’s bluff and vote to leave? The stakes are certainly high, but I’m going to call their bluff…
Simon Lewis is writing on behalf of Partridge Muir & Warren Ltd (PMW), Chartered Financial Planners, based in Esher. The Company has specialised in providing wealth management solutions to private clients for 47 years. Simon is an independent financial adviser, chartered financial planner and chartered fellow of the Chartered Institute for Securities and Investment. The opinions outlined in this article are those of the writer and should not be construed as individual advice. To find out more about financial advice and investment options please contact Simon at Partridge Muir & Warren Ltd. Partridge Muir & Warren Ltd is authorised and regulated by the Financial Conduct Authority.