The Europe Report: A win-win situation

In 'The Europe Report: A win-win situation' the Mayor’s chief economic advisor, Dr Gerard Lyons, considers how London’s economy would be affected by four different scenarios based on the UK’s relationship with Europe in 20 years time. London alone is currently the ninth biggest economy in western Europe and its £350bn economy represents 22.5 per cent of the entire UK economy.

Read the Mayor's speech, 6 August 2014, in response to the publication of this report (PDF).

The report uses specially commissioned and independent long term forecasting by Voterra found in the separate appendix. It is the first time that an economic forecast regarding London’s relationship with the EU has looked two decades into the future and their results very clearly indicate that the best economic scenario for London would be for the UK to remain part of a reformed European Union. However they also indicate that a scenario where the UK leaves the EU but continues to conduct outward looking and positive economic policies with the EU and the wider world offers nearly the same level of benefits.

A third scenario where the UK remains in an unreformed EU offers far less opportunity for economic growth and a worst case scenario where the UK leaves the EU and operates isolationist economic policies would cost London’s economy more than one million jobs. The four different scenarios have been named:

• ‘Brave new world’: The UK would remain in the EU but with substantial reforms. London’s economy would nearly double in size to a £640bn economy and 1m jobs would be added. In this scenario Europe would position itself to benefit fully from the changing world economy and reform would potentially be led by the UK. It is the most favourable scenario for London with a growth rate forecast over 20 years to be as high as the UK obtained over any similar time period during the whole of the 20th century.

• ‘One regime, two systems’: The UK would withdraw but with goodwill on both sides and pursue a pro-growth, reform agenda. London’s economy would soar to £615bn and 900,000 jobs would be added. In this scenario leaving the EU has a short term negative impact but ultimately an unconstrained status allows the UK to rapidly adapt to the growing global economy and target new markets without restriction.

• ‘Business as usual’: The UK remains within an unreformed EU. London’s economy would slowly increase to £495bn but only 200,000 jobs would be added. This results in a relatively sluggish period of output and performance that stifles the growth of London and leads to a decline in world reputation, along with the rest of the EU.

• ‘Inward looking’: The UK leaves and suffers from a combination of a poor post exit relationship coupled with an inability to position itself globally. London’s economy would creep slowly up to £430bn but a disastrous 1.2m jobs would be lost. By retreating inwards there is a total inability to reform and growth declines to a level not seen since the 1920s. London enters a dramatic period of decline.

From any evaluation of those four scenarios it is clear that the UK remaining in a reformed EU is the best outcome. However the report argues that the UK can only achieve those reforms by being serious about leaving. And the UK can only be serious about leaving if absolutely convinced that it would result in a better economic outcome than remaining in an unreformed and underperforming EU.

With two very positive economic scenarios forecast, which both share an outward looking attitude, it becomes clear that the real choice for the UK is not between Europe and the rest of the world, but between an innovative, open and business friendly policy agenda against a stale, stationary and closed policy agenda. The major consideration will be whether the EU is able to reform and what those reforms would be.

In 'The Europe Report: A win-win situation' the case for reform is made as being clearly in the long term interest of the EU as well as the UK. The reforms that are needed include:

• Accepting the case for economic reform: This makes the case for unlocking the barriers to growth both in the UK and EU in order to boost innovation, investment and competitiveness. The poor economic performance and weakness of demand suffered by the EU would be addressed alongside reform of the supply chain.

• Halt the process towards ever closer union: This would be the greatest challenge and may require a new treaty. It links directly to the issue of EU competencies and requires a willingness on the part of the Commission to show that the direction of travel in Europe is not just moving towards integration.

• A timetable for reform: a clear timetable for reform should be identified focusing on the relationship between the Eurozone and non Eurozone countries and also on The Single Market.

• Reforming the relationship between the Eurozone and non-Eurozone: this is key to adding greater weight and protection to the City, which should remain Europe’s financial centre whether the UK stays within the EU or leaves it.

• Completing the Single Market: This has to be a central part of reforms. The idea of movement of people needs to change to take into account the fact that the expansion of the EU to the east has resulted in huge variations in income levels. It is important to ensure there is continued free movement of people with the appropriate skills within the EU but that needs to be seen alongside the sensible economic need to discourage benefit migrants. Given the importance of the digital economy a case could be made for having a Digital Commissioner and barriers could be removed to digital infrastructure improvements. There is also a legitimate case fot the UK having a fully recognised ‘Luxembourg Compromise’ over financial services legislation and regulation. A clear aim should be to cut out unnecessary, complex and intrusive regulation. EU social policy also needs to be considered particularly in terms of avoiding increased regulation, which adds to the cost of employing people and can hit small firms hard.

• Non economic areas for reform: Non-economic areas of interest may prove to be as important in any referendum as the economic ones. A key issue is the future relationship between national and European law, and the case for re-establishing the supremacy of UK courts in some areas.

A major chapter of the report considers the impact of a decision to leave the EU. The immediate impact of any decision to leave cannot be over-estimated but the report explains that with a clear and swift strategy, contingency planning and sensible reforms the UK economy can still achieve huge success.