Tuesday, 7 May 2013

Britain and Europe

This post will give you a walk through the years of the relationship between Britain and the rest of Europe. We start with the 1800s. In this period, Europe is generally a protectionist place, but Britain is closer to it economically than any other point since the 1600s. Due to the protectionism, though, Britain sees most of its trade growth occurring outside of Europe. It is cheaper to import and export from elsewhere.

By the time World War One starts most of Britain's trade is not with Europe. The only real interest Britain has in Europe at this point is a political one - they didn't want one nation (Germany) from dominating the continent. Two wars are fought to stop this happening, they succeed. During the 1930s, the gold standard collapses which pushes Britain closer to its empire. This relationship continues through World War 2 and the Commonwealth and the USA become Britain's main trading partners.

The years immediately following World War 2 leave Britain relying on European recovery to stop the spread of communism. Despite this, the empire and USA are still the main trading links. The expectation is that Western Europe will remain protectionist and broken for a whole generation following the war, so Britain still considers itself a key power.

An important event occurs in 1957 when the European Economic Community is formed with the signing of the Treaty of Rome. France, Germany, Italy, Belgium, Netherland and Luxembourg were the original 6 members. They all agree to strive for three keys goals: Abolishment of internal trade barriers on manufactured goods, introduction of a common external tariff and aim for further economic and political integration between the six of them. How does Britain react? It immediately feels like it cannot join. The common external tariff would not be compatible with Britain's empire and trading patterns. Britain goes and creates its own community - the European Free Trade Association with Scandinavia and parts of Central and Southern Europe. It was a much looser agreement than the EEC; there was an internal free market on manufactured goods but no external common tariff so Britain could still effectively operate with their empire.

By the time the 1960s come around it is obvious that the Sterling is no longer a major currency. The Commonwealth begins to erode away as countries gain their independence and trading with the EFTA is growing too slowly.  Conversely, trade with the EEC is growing faster despite not being a member. It would be access to these markets that would be necessary for prosperity. The decision to join comes in 1961 when Britain makes a formal application. France initially blocks the join, they think that Britain is far too committed to the Commonwealth and therefore would not be a beneficial member. It took 12 years for Britain to finally be accepted, but there are problems almost instantly. The loss of sovereignty, relations with the Commonwealth and the EEC budget are all issues.

The Common Agricultural Policy was the main spending focus of the EEC budget. The problem was that Britain's agricultural sector was so structurally different from other EEC members that the CAP was not beneficial. Britain imported cheap food and subsidised its own small agricultural sector. Deficiency payments were made to try and increase productivity, but overall the cost of aiding the British farms was very small. The 6 EEC members all had very large and inefficient farming sectors. Imports were kept out with high tariffs and any surplus product was bought by the EEC to maintain the price. It was costly for the consumer and highly inefficient, but it gave the farmers a lot of political power. The rest of the budget was also an issue for Britain. Roughly 1.2% of each members GDP was donated to the EEC budget. Income was also derived from external tariffs, and as Britain imported a lot of food and raw materials they found themselves contributing a lot to the budget. 75% of the budget was spent on the CAP, and with Britain's small farming sector they did not receive much. Britain was essentially contributing more than it was getting from the EEC.

So why did Britain join? Well, mainly through fear. They thought economic and political marginalisation would take place, they'd lose influence and not be considered an important player in Europe if they didn't become a member. Britain also hoped to ride the short term costs in the hope that the longer term would reap benefits. They hoped the longer term benefits would come in the form of access to fast growing markets and exposure to greater competition. I guess in the long run some of this does occur, Britain benefits in the early 1980s when they receive a rebate on the EEC budget, but an economic crisis in the 70s puts plans for further integration well and truly on hold.

Since 1985, the Single Market has been created in Europe by the Single European Act. The EEC became the EU and political governance changed partly to police the market. The single currency, of course, was introduced, but Britain vetoed. They opted out in the hope that the whole plan of a single currency would fall through, but this did not happen. By 2000, though, Britain had become closer to Europe economically despite being less integrated than the other Euro members. Most foreign direct investment goes outside of Europe, but the amount staying within is increasing.

Essentially, Britain goes along with change in Europe because it has no other choice. It is no longer the biggest player in the continent and other countries are setting the agenda. 

1 comment:

  1. Surely the biggest economic issue with Europe is the epic trade deficit between the UK and the EU. It currently stands at £70 billion in 2012. (See Membership of the EU: pros and cons).