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03 February 2015

Robert Guest of The Economist shares his views on Europe, and the rise of UKIP.

Many people whose spouses divorce them say they never saw it coming. And so it may be with Britain and the European Union. John Major, the former prime minister, puts the chance of a split at 50/50. Many British businesses have not woken up to the danger.

To many business people, the advantages of sticking together are obvious. The European Union (EU) is the world’s largest economy and British firms enjoy easy access to its biggest market – and to a colossal pool of talent. Granted, some European regulations are cumbersome and foolish, but divorce would make us poorer – just as it tends to impoverish families.

If the Conservatives win the election, David Cameron has promised a referendum on whether or not Britain should remain within the EU. My best guess is that British voters – like Scottish voters last year – will avoid taking a huge leap into the unknown. But there is a serious chance that they will risk it, out of sheer disgruntlement with the status quo.

As in many rich countries, defenders of open borders and free trade are struggling to make themselves heard. The other side has better sound bites. UKIP may have no coherent plan for governing but its leader, Nigel Farage, strikes many Brits as a man who understands their anguish.

Although he blames the EU and immigration for the stagnation of middle-class living standards, far more disruption has been caused by advances in technology, which benefit consumers but have shaken up industry after industry and destroyed the old notion of a job for life. Politicians know it would sound ridiculous to be against technology, so instead they bash the banana-regulating bureaucrats of Brussels and the immigrants who are supposedly stealing British jobs.

Both EU membership and immigration make Britain richer. Let’s start with Europe. Fully half of our trade is with other EU members.  Britain’s attractiveness as a destination for foreign investment, and London’s role as the world’s leading financial centre, would be drastically diminished if we were to drop out of the EU. Without a voice in Brussels, we would find it harder to push for the liberalisation of the trade in services, from which Britain stands to gain more than any other nation.

The EU rests on three planks: the free movement of labour, the free movement of goods and services, and the single currency. The first two have been huge successes. The last one has been a wretched failure. Britain gets the benefits of the first two but has opted out of the euro. What’s not to like? The debate about immigration is, if anything, even more worrying. British people say they trust Farage more than any other leader on this subject.

The Tories echo his rhetoric about immigrants imposing a burden on British taxpayers, yet they put in far more than they take out.

Between 2001 and 2011, immigrants from the 14 pre-2004 members of the EU contributed 64% more in taxes than they received in benefits, according to Christian Dustmann and Tommaso Frattini of University College, London. Newcomers from the 10 new member states contributed 12% more than they took out. Immigrants are younger, better educated and much less likely to receive state benefits than the native-born. Indeed, it is the locals who take out more than they put in: to the tune of a massive £617 billion over a decade.

One of my colleagues at The Economist wrote a tongue-in-cheek manifesto for an immigrants’ party that declared: ‘I’m not against Britons. Some of my best friends are British… But for too long the establishment has closed down a debate about the effects of Britons on Britain…

The burden of the native population on this country is simply insupportable.’

The world’s most precious resource is talent. Countries that can nurture it or attract it will out-compete those that can’t. Britain is extremely well-placed in this regard. Our best universities are globally renowned. We speak the world’s lingua franca. More of the world’s brightest students want to study in Britain than in any other country besides America.1

This can benefit the UK in several ways. Because they pay higher fees, foreign students subsidise the education of the native-born. They also enrich it: British students who mingle with foreigners are exposed to a wider range of ideas. And foreign students create links between Britain and the rest of the world.

Some stay to work in the UK, where they are exceptionally enterprising. Other foreign students return home with fond memories and an address book full of British contacts. That makes them more likely to trade with or invest in Britain.

While researching a book on this subject I found countless examples of how powerful the network effects of migration can be. People  who experience two cultures often combine ideas from both to make something better.

For example, Devi Shetty, an Indian doctor, studied heart surgery at St Thomas’ Hospital. When he went back to India, he combined what he had learned here with the mass-production techniques of a car factory and created the cheapest heart hospital in the world. His doctors perform bypasses for one-tenth of the cost of the same operation in a rich country.

Yet the British government is trying to limit the number of foreigners who study here, shutting out future Devi Shettys. That makes little sense.
 

1 British Council Going Global report, 2012

The opinions expressed are those of Robert Guest, and are subject to market or economic changes. The views are not necessarily shared by St. James's Place Wealth Management.

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