Britain, Europe and Trade

henningSo, tomorrow we will finally hear David Cameron’s big speech on Britain’s future in the European Union. So much has already been trailed and leaked that it will be difficult for Cameron to come up with something substantially new, but rumour has it that he is at least trying.

In the meantime there is an interesting new opinion poll out that for the first time in quite a while sees a majority for staying in the EU, if there was an in-out referendum in the UK. YouGov reports:

For the first time in the current Parliament, more people would vote for Britain to stay in the European Union than to leave. The six-point margin is not large. Future polls may well tell a different story. But as David Cameron prepares to deliver his long-awaited speech on Britain and the EU, YouGov’s latest survey for the Sunday Times finds that the public mood is more pro-membership than for some years.

This is on the back of a recent poll showing that young Brits in particular support staying in. So there might be a swing of mood underway. At least the support for a UK exit, that has looked solid over recent months and years, seems to be crumbling. An interesting development.

Elsewhere, BBC Economics Editor Stephanie Flanders points out the increasing trading ties between Britain and Germany. She goes on to state the now quite wide-spread decoupling hypothesis backed up by some Goldman Sachs research:

This may not last, but it’s consistent with a broader trend in Germany’s trade, away from other eurozone countries, which has been much debated in Germany and France, and was flagged up last year by the likes of Goldman Sachs.

The latest figures show that only 37% of German imports and exports in the first three-quarters of 2012 were with other euro member states, down from more than 45% when the euro started in 1999.

As the UK’s trade ministers know very well, the fastest growing markets for German products aren’t in the UK but in the Bric economies.

Here, I think, one has to add a few comments as this is a slightly distorted picture. First of all what is the cause and what is the effect? It is just as plausible to argue that German exports into the rest of the Eurozone have dropped because the rest of the Eurozone is in recession and the BRICs are not (Germany has been kept afloat by a substitution effect: declining exports into the Eurozone where compensated by increasing exports into the BRICs).

So this changing trade pattern might be due to different growth rates at the time being rather than a deeper structural decoupling. Once the Eurozone recovers, which it could faster if the German government finally abandoned its disastrous austerity policy, exports into the Eurozone might well bounce back.

This also shows that it is easily possible to be a full member of the EU and trade a lot with the rest of the world. It might sound  silly but a common argument amongst UK eurosceptics is that EU membership somehow prevents Britain from trading more with the rest of the world. Look at Germany’s export performance and you immediately see how silly this argument is.

Another thing is the relative importance of the trading relationship. Of course British trade with the rest of the EU is utterly important and that’s why people say the UK should stay in. But it needs to be made clear that the UK is more dependent on EU trade than vice versa. Think about it this way: if the terms of trade worsened as a result of a British EU exit, 26 (soon to be 27) export markets of the UK would be affected (including really important ones such as Germany, France, the Netherlands and Ireland). The other way around, for each of the remaining EU members only one export market, albeit a vey important one, is affected.

We will see tomorrow what David Cameron has in store and in what direction this debate is moving. Interesting times ahead!