We've been on the back foot with the EU ever since we joined

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EU referendum: Can we agree to lead separate lives or must it be divorce?

Last week, the EU crisis was hotting up. Chancellor Merkel met Prime Minister Cameron amid a sense that Britain and the EU are drifting apart. Over here, a referendum on EU membership is in the air. Over there, exasperation with Britain is mounting.

As it happens, I was in the lion’s den, addressing a group of MEPs. If you think that Westminster exists in a bubble, you should try Brussels.

For the 18th successive year, the auditors have failed to approve the EU’s accounts . Meanwhile, the EU wants much more money.

Many of our MEPs do a good job of standing up against the spending juggernaut but it is a superhuman task. The European Parliament is coupled to the very gravy train that it should be trying to derail.

It feels as though we are trapped in a situation that we would never have chosen. In fact, we joined the EU willingly, but with our eyes shut, at a time when our self-confidence was at a low ebb, and when continental economies had recently enjoyed a prolonged period of strong growth. Having lost the Empire (Other OTC: EMLAF.PK - news) , it seemed that we could miss the last chance to be part of a large and successful trading bloc on our doorstep.

We have been on the back foot ever since, constantly trying to preserve more independence than the European establishment wanted to grant. If, as seems likely, the response to current problems is “more Europe”, we will be at the very edge of our tolerance.

Our discomfort is not atavistic. It is one thing to give up sovereignty to a body which is honest, efficient and prosperous; it is quite another to give it up to one which is riddled with corruption, incompetence and failure. That would be like shackling yourself to a corpse.

Yet that is what we have done. The EU is a zone of relative economic failure. There are four main reasons. The first derives directly from the founding dream of a united Europe (Chicago Options: ^REURUSD - news) in which national differences have faded away.

Since, in practice, national differences are still very great, that implies the need for substantial intervention and regulation in favour of harmonisation and integration, which stifles competition and harms business.

Second, since the union cannot function effectively as a full democracy, the power of unelected bureaucrats is unchecked, leading to bad decision-making, inefficiency and corruption.

Third, owing to the dominance of the “social model” in many of the key members, there is a marked anti-business mindset.

Fourth, because the Union is so large, and because the inheritance of institutional and cultural capital is so great, it is perfectly possible for European policy-makers complacently to continue on the wrong course for decades.

Sadly, we are again at a low ebb economically. Since 2008, apart from Italy, the UK has been the weakest performer in the G7. Until the last few months, by contrast, Germany has seemed to weather the storm comparatively well.

But our current economic weakness will pass. We must not let it blind us to the fundamental economic realities which will shape our future.

Unless something radical happens, European economic prospects look grim. Quiet apart from bad governance, the drag from austerity and the travails of the euro, the population is set to fall sharply in Germany, Italy and Spain.

By contrast, ours is still rising. Perhaps too much. But the implication will be that within the lifetimes of most people reading this article, the UK will probably be the largest economy in Europe. Meanwhile, the emerging markets will be continuing to grow strongly.

It is ironic that a country which, over the last few centuries, made its mark on the world and earned its living across the seven seas, should do the economic and political equivalent of marrying its next-door neighbour.

What’s more, this has happened in an age when modern communications have made distance less important. If ever there was a time when it made sense to make associations on the basis of common culture, language, fellow-feeling and political philosophy, rather than geographical proximity, surely this is it.

It is often argued that Britain cannot afford to break with the EU because so much of our GDP derives directly from it. In fact, exports to the EU account for about 15pc of our GDP. This is a lot. But the remaining 85pc is somewhat larger.

Not that we would cease to trade with the EU if we were outside it. The rest of the world exports extensively to the EU. And in all probability we would be able to negotiate privileged access, as Switzerland has.

The upshot, for me, is clear. The UK should be prepared to leave the EU. Only from this starting point might it be possible to negotiate arrangements which allow us comfortably to remain members.

But if that proved impossible, as I suspect it would, then we would be better off out.

Roger Bootle is managing director of Capital Economics. roger.bootle@capitaleconomics.com