The "Single Market" is the term used for the economic union part of the European Union. Countries that are inside the EU are all part of the Single Market and countries in the European Economic Area (EEA), such as Norway, are part of the economic union, the Single Market, without being part of the rest of the EU.
When journalists say "Access to the Single Market" they mean joining the EEA. It would cost about 40% of the current EU membership fee for the UK to be a member of the EEA (it costs Norwegians much more per head because they are two and a half times per head richer than the British).
The big issue after the EU Referendum is whether the UK should be in the EEA ("Access to the Single Market") or negotiate Free Trade Deals with the EU like many other countries.
The Single Market is based on the free movement of labour, goods and capital. The free movement of workers hits the headlines in the media but the free movement of capital (money) is more significant. Huge amounts of capital are moving out of the UK as a result of the Single Market.
What is happening is that over the past ten years the Eurozone crisis and the liberal economic regime in the UK have encouraged EU investors to buy government debt, property and shares and to acquire or set up businesses in the UK.
The UK has an unusually high proportion of foreign ownership of its businesses, about 40% of listed companies being foreign owned and foreign investors tend to buy the more profitable businesses (accounting for 29% of added value in the economy - see Note 1). Much of the foreign ownership comes from the EU - 54% of Foreign owned businesses in the UK were owned by EU based owners.
Although 40% of UK listed companies are foreign owned, most foreign companies such as EDF, Siemens and VW etc. operate directly in the UK without using a UK registered company. As a result a large proportion of the UK economy is operated by foreign or foreign owned enterprises. Many aspects of this foreign activity are healthy for the economy. However, the Single Market has introduced some major problems. Firstly the EU allows corporation tax liability to be shifted from country to country and even moved offshore:
Secondly the flow of investment has been at a level that distorts the value of the pound. Overall the influx of Euros to purchase government debt, property, shares and businesses has raised the value of the pound making imports more competitive. There were huge influxes before the gradual recovery of the Eurozone that begain in 2014. We gained an insight into how far the pound had been overvalued after the EU Referendum when the prospect of being unable to shunt capital back to the EU led to a sudden fall in this investment. The pound fell back after the referendum to the value that might be expected without excess investment (green line below).
The Purchase Power Parity value pound has been falling in the long term because of the UK trade and balance of payments deficits. The fall is not due to the prospect of Brexit and it can be seen that the pound fell as much from 2014-15 as from 2015-16.
Thirdly, the Foreign owned companies are more likely to import goods than to export goods and EU companies operating in the UK use stock from their central, Eurozone located warehouses, so generate a large trade deficit.
This trade deficit distorts the UK economy, UK manufacturing is disadvantaged because companies like BMW are freely importing parts and UK food and retail production have a problem because companies such as Aldi are importing stock directly from Eurozone sources. The trade deficit is structural and is not due to any failure by UK exporters who are performing well in the more difficult non-EU markets and doing as well as might be expected in the Eurozone.
Lastly, because the UK has relatively low levels of unemployment, foreign investment in the UK tends to draw in staff from overseas. Some companies directly employ EU staff as they expand in the UK and others employ British staff which leads to a staff shortage in a British company which then employs EU staff to fill the vacancy. This means that a very large number of EU workers are drawn into the UK because they can move here freely:
These staff all need medical and educational facilities, housing and infrastructure. The high flows cause raised rental and hence raised property prices. The high rate of influx puts areas that receive these workers under stress. The large influxes are due to the free movement of capital within the Single Market - as outlined above.
The imbalances evident in the Single Market do not happen in trade with countries outside the Single Market. Tariffs are generally low so it is administrative, banking and logistical obstacles that persuade non-EU companies that trade in the UK to use UK sourcing for plant, stock and labour.
The overall effect of the Single Market on the UK economy is very serious, the Primary Income Deficit (rents, profits, interest paid to the Eurozone) and the Trade Deficit combine to create a Current Account Deficit of over £100bn per year with the Eurozone:
It is clear that although the Eurozone is investing about £100bn a year in the UK it is taking almost the same amount back out again every year.
If you or I were running a business called the "Eurozone" that had these returns we would be very pleased with ourselves as we enjoyed an ever increasing growth in our UK assets such as companies, property and shares at no cost! In fact, if we were moral people we would take a bit of profit then tip off our trading partner, the UK, to tell them that the terms of business had been rigged. (The UK is a victim of largely German mercantilism).
There is much debate in the UK at present about whether to have "Access to the Single Market" or Free Trade Deals with the EU. It is obvious that having "Access to the Single Market" will continue to damage the UK economy. The UK must not continue to have unhindered movement of Goods, Capital and People with the Eurozone. If it stays in the Single Market the UK will, over decades, end up as an impoverished region of the EU as economic activity gravitates towards the centre of the Eurozone. The way forward for the UK is to conclude Free Trade Deals with non-EU countries and slowly reduce tariffs with the EU in a series of minor trade deals, to ensure that areas of UK industry that have been damaged by the Single Market can recover.
The main supporters of staying in the Single Market are the banks. They love the free movement of capital - but should the whole economy be sacrificed for bankers?
It is odd that most people in the UK do not realise that the EU is very liberal in granting Free Trade Deals without any requirement for partners in these deals to be part of the Single Market - see The Great Myth of EU Tariffs. Singapore, South Korea etc. all have Free Trade with the EU without membership of the Single Market.
There is, of course, also the standard WTO option of "Most Favoured Nation" status with the EU. This would cost about £5-10bn per annum in export tariffs and yield about 20% more than this in import tariffs from the EU. This is the standard "WTO Option" that is used for much of the world's trade - not to be confused with radical "WTO" options such as that proposed by Patrick Minford. A sensible UK government would declare an "emergency" until trade deals are completed whereby all export tariffs to the EU are paid for by import tariffs from the EU. Such emergencies are permitted by the WTO, indeed, the WTO explicitly permits measures to be taken in cases of severe Balance of Payments problems:
"Agreement that contracting parties imposing restrictions for balance-of-payments purposes should do so in the least trade-disruptive manner and should favour price-based measures, like import surcharges and import deposits, rather than quantitative restrictions. Agreement also on procedures for consultations by the GATT Balance-of-Payments Committee as well as for notification of BOP measures." https://www.wto.org/english/docs_e/legal_e/ursum_e.htm#General
In the initial stages of Brexit the UK, as a member of the WTO, can trade under Most Favoured Nation rules with other members. Contrary to the media reports this is not hugely problematical and is how the UK trades with many countries today (The WTO option is much more straightforward than pro-Remain lobbyists suggest - see The WTO Option after Brexit). The UK might also explore membership of EFTA without EEA membership. EFTA includes free movement of people but this is probably negotiable given that Norway and Switzerland would be more concerned to prevent a flood of migrants from the UK than vice versa.
“Although businesspeople and the Bank of England keenly understand
the risk that an unsustainable current account deficit presents,
successive governments have failed to treat it with the seriousness it
deserves. The size and persistence of the UK’s current account deficit
make us hugely vulnerable to external shocks, unexpected shifts in
market sentiment, and unwelcome downgrades to our credit rating.
“While it is good to see some improvement over the quarter, the huge current account deficit should be setting off alarm bells. Recent improvements mask long-term falls in net investment and overseas income, as well as our lacklustre export performance. These issues merit immediate and sustained attention, both in Westminster and in boardrooms across Britain.”
Note 1: Those who wish to make light of foreign ownership point out that only 1% of UK businesses registered in the UK are foreign owned, conveniently ignoring the fact that foreigners buy large listed companies which account for 29% of the added value in the economy ie: foreigners buy profitable listed companies, not two man window cleaners. Listed companies are those with shares that can be acquired publicly on the Stock Exchange, including AIM listings.
When journalists say "Access to the Single Market" they mean joining the EEA. It would cost about 40% of the current EU membership fee for the UK to be a member of the EEA (it costs Norwegians much more per head because they are two and a half times per head richer than the British).
The big issue after the EU Referendum is whether the UK should be in the EEA ("Access to the Single Market") or negotiate Free Trade Deals with the EU like many other countries.
The Single Market is based on the free movement of labour, goods and capital. The free movement of workers hits the headlines in the media but the free movement of capital (money) is more significant. Huge amounts of capital are moving out of the UK as a result of the Single Market.
What is happening is that over the past ten years the Eurozone crisis and the liberal economic regime in the UK have encouraged EU investors to buy government debt, property and shares and to acquire or set up businesses in the UK.
The UK has an unusually high proportion of foreign ownership of its businesses, about 40% of listed companies being foreign owned and foreign investors tend to buy the more profitable businesses (accounting for 29% of added value in the economy - see Note 1). Much of the foreign ownership comes from the EU - 54% of Foreign owned businesses in the UK were owned by EU based owners.
Although 40% of UK listed companies are foreign owned, most foreign companies such as EDF, Siemens and VW etc. operate directly in the UK without using a UK registered company. As a result a large proportion of the UK economy is operated by foreign or foreign owned enterprises. Many aspects of this foreign activity are healthy for the economy. However, the Single Market has introduced some major problems. Firstly the EU allows corporation tax liability to be shifted from country to country and even moved offshore:
 |
| The smaller the bar the greater the fiddle - 2012 Data |
Thirdly, the Foreign owned companies are more likely to import goods than to export goods and EU companies operating in the UK use stock from their central, Eurozone located warehouses, so generate a large trade deficit.
Lastly, because the UK has relatively low levels of unemployment, foreign investment in the UK tends to draw in staff from overseas. Some companies directly employ EU staff as they expand in the UK and others employ British staff which leads to a staff shortage in a British company which then employs EU staff to fill the vacancy. This means that a very large number of EU workers are drawn into the UK because they can move here freely:
 |
| UK Labour Market Statistics |
The imbalances evident in the Single Market do not happen in trade with countries outside the Single Market. Tariffs are generally low so it is administrative, banking and logistical obstacles that persuade non-EU companies that trade in the UK to use UK sourcing for plant, stock and labour.
The overall effect of the Single Market on the UK economy is very serious, the Primary Income Deficit (rents, profits, interest paid to the Eurozone) and the Trade Deficit combine to create a Current Account Deficit of over £100bn per year with the Eurozone:
If you or I were running a business called the "Eurozone" that had these returns we would be very pleased with ourselves as we enjoyed an ever increasing growth in our UK assets such as companies, property and shares at no cost! In fact, if we were moral people we would take a bit of profit then tip off our trading partner, the UK, to tell them that the terms of business had been rigged. (The UK is a victim of largely German mercantilism).
There is much debate in the UK at present about whether to have "Access to the Single Market" or Free Trade Deals with the EU. It is obvious that having "Access to the Single Market" will continue to damage the UK economy. The UK must not continue to have unhindered movement of Goods, Capital and People with the Eurozone. If it stays in the Single Market the UK will, over decades, end up as an impoverished region of the EU as economic activity gravitates towards the centre of the Eurozone. The way forward for the UK is to conclude Free Trade Deals with non-EU countries and slowly reduce tariffs with the EU in a series of minor trade deals, to ensure that areas of UK industry that have been damaged by the Single Market can recover.
The main supporters of staying in the Single Market are the banks. They love the free movement of capital - but should the whole economy be sacrificed for bankers?
It is odd that most people in the UK do not realise that the EU is very liberal in granting Free Trade Deals without any requirement for partners in these deals to be part of the Single Market - see The Great Myth of EU Tariffs. Singapore, South Korea etc. all have Free Trade with the EU without membership of the Single Market.
There is, of course, also the standard WTO option of "Most Favoured Nation" status with the EU. This would cost about £5-10bn per annum in export tariffs and yield about 20% more than this in import tariffs from the EU. This is the standard "WTO Option" that is used for much of the world's trade - not to be confused with radical "WTO" options such as that proposed by Patrick Minford. A sensible UK government would declare an "emergency" until trade deals are completed whereby all export tariffs to the EU are paid for by import tariffs from the EU. Such emergencies are permitted by the WTO, indeed, the WTO explicitly permits measures to be taken in cases of severe Balance of Payments problems:
"Agreement that contracting parties imposing restrictions for balance-of-payments purposes should do so in the least trade-disruptive manner and should favour price-based measures, like import surcharges and import deposits, rather than quantitative restrictions. Agreement also on procedures for consultations by the GATT Balance-of-Payments Committee as well as for notification of BOP measures." https://www.wto.org/english/docs_e/legal_e/ursum_e.htm#General
In the initial stages of Brexit the UK, as a member of the WTO, can trade under Most Favoured Nation rules with other members. Contrary to the media reports this is not hugely problematical and is how the UK trades with many countries today (The WTO option is much more straightforward than pro-Remain lobbyists suggest - see The WTO Option after Brexit). The UK might also explore membership of EFTA without EEA membership. EFTA includes free movement of people but this is probably negotiable given that Norway and Switzerland would be more concerned to prevent a flood of migrants from the UK than vice versa.
BCC: Current account deficit ‘alarm bell’ for UK
The BCC's John Longworth Comments on the Q1 National Accounts
figures, which show the UK’s current account deficit remains
unsustainably high at 5.8%.
“The current account deficit is as big of a risk
to the UK’s future prosperity as the Eurozone crisis or other
international shocks – and it is high time this stark fact is
recognised.
“While it is good to see some improvement over the quarter, the huge current account deficit should be setting off alarm bells. Recent improvements mask long-term falls in net investment and overseas income, as well as our lacklustre export performance. These issues merit immediate and sustained attention, both in Westminster and in boardrooms across Britain.”
Note 1: Those who wish to make light of foreign ownership point out that only 1% of UK businesses registered in the UK are foreign owned, conveniently ignoring the fact that foreigners buy large listed companies which account for 29% of the added value in the economy ie: foreigners buy profitable listed companies, not two man window cleaners. Listed companies are those with shares that can be acquired publicly on the Stock Exchange, including AIM listings.
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