What new deal should we strike with the EU?Published Wed 13 Jul 2016
The most critical job for Theresa May’s government will be to strike a new deal with the EU. She has said that ‘there is clearly no mandate for a deal that involves accepting the free movement of people as it has worked hitherto’. Given this, the EU will almost certainly want to restrict the UK’s access to the single market in some way.
We cannot know now precisely what trade-offs between migration policy and market access are truly available to the UK – that will depend on a long process of diplomatic negotiation between the UK and the EU. But policymakers and thinkers need to work out very soon which trade-offs they believe would be better than others. Then they can work out what they think the UK’s approach to the negotiation should be.
This blog goes further than those briefings – here, we make initial recommendations about what shape of EU deal progressives should be pushing for.
We draw the following conclusions.
- We should ask the EU for the right to an emergency brake that is triggered when EU migration is harming wages in particular occupations, sectors or locations. When the brake is triggered, it should result in restrictions only on the number or type of EU migrants permitted to work in the occupation, sector or location affected.
On the single market:
- If we have to give up some single market access in return for concessions on migration the first thing to concede should be the customs union. This would make it harder for British firms to trade with the EU, as a new customs border would need to be erected – but it would allow us to choose to impose lower tariffs on imports of, for example, food and clothing.
- The second price to pay for control over migration should be the fee that we pay into the EU. We believe that the politics of the referendum around the fee should not constrain May from making a rational economic choice. In our judgement, it is better to pay a higher fee than to sacrifice access to the single market in tradable goods or in services, which will come at much greater long-term cost. The political problem is that the fee is known and transparent, whilst the counter-factual case of restricting access for goods or services is opaque and will not be known immediately. Having taken an enormous risk by leaving the EU, now is not the time to gamble again.
We are not naïve about the political difficulty of securing these outcomes in any negotiation with the EU: many of our European partners are not at all well-disposed to give us a good deal, and the politics of securing agreement with 27 other countries will be extremely complex. But we think there is merit in policymakers and thinkers being clear about what the ideal outcomes would be.
Our reasoning for these initial recommendations is outlined below.
Part 1: What should we offer the EU on migration?
What are the options?
Let’s assume that free movement with the EU in its current form is politically unacceptable. That means the government needs to make some combination of four types of policy change:
- Capping the number of EU migrants – either the overall number, or the number of certain types of migrant (for example, those with certain levels of skill or income, or those in certain sectors, or those intending to live in certain parts of the UK)
- Restricting the type of EU migrant admitted – for example, saying that migrants can only enter the UK if they are over a certain level of skill or income, or if they intend to work in a particular sector.
- Changing the balance of tax and benefits for EU migrants in order to address (largely misguided) public concerns that EU migrants are getting an unfairly generous deal. This could be done restricting benefits for EU migrants or subjecting them to special charges (for use of public services, or via the tax system); or
- Mitigating the impacts of migration on local communities and public services – such as through a ‘migration impact fund’ that would channel extra money to areas facing high levels of migration.
The government could make those policy changes either on a permanent basis or a temporary one (for example, as the result of an ‘emergency brake’ being pulled).
Our briefing sets out the options more fully.
What should government’s objectives be?
In order for progressives to work out what combination of these tools they should be pushing the government to advocate in a deal with the EU, they need to consider three objectives:
- Public concerns: addressing the public’s concerns about EU migration, and thus maximising political acceptability.
- Living standards: Ensuring the best possible living standards for British citizens – balancing the economic impacts of excessively restricting migration against the real downsides that migration has in certain occupations, sectors and communities.
- EU Relations: Maximising the probability that the EU will give us a good deal on single market access and on the treatment of UK citizens living in the EU.
The following sections look at each objective in turn.
1. Controlling migration: How to address public concerns
The first objective is to address the public’s concerns about migration. The public have a mixture of concerns– each of which points towards a different combination of policy responses.
Pressures on wages and jobs
This could be addressed through some capping or restricting of EU migrants, especially in sectors of the economy where migrants are perceived to have pushed down wages.
The effect of migration on particular communities
These concerns are caused by a perception that migrants have failed to integrate socially and/or that local public services are under excessive pressure. This might be addressed through capping or restricting of migrants – especially if the cap or restriction were targeted at particular localities. It might also be addressed by action on mitigation, such as a ‘migration impact fund’.
Perceived unfairness in the balance of contribution and reward for EU migrants
This concern usually takes the form of a perception that migrants get more in benefits than they deserve. This could be tackled by changing tax and benefits for migrants.
A concern about national volumes of migration per se
This type of concern can take the form of a general sense that the whole country is simply too 'congested' for its infrastructure and public services to handle high migration flows; or a belief that is impossible for migrants to integrate properly unless the national rate of migration slows; or to simple xenophobia or racism (although only a very small minority explicitly admit to this motivation). This type of concern could only really be tackled by capping the overall number of migrants, or by very heavy restricting.
A general concern about the degree of control that the UK has over immigration
This could be tackled by capping or restricting the volume or type of EU migration, so long as the controls and restrictions were determined by the UK.
Which of these concerns do the public care about most? It’s hard to tell: most people asked about their objections to EU migration cite a combination of a number of these. But research does indicate that the biggest concerns are probably around control, wages, benefits and pressures on particular communities.
2. Controlling migration: How to minimise damage to living standards of British citizens
The second objective for choosing a migration policy is ensuring the best possible living standards for British citizens.
Options that crudely and excessively cap the overall number of EU migrants are likely to harm average living standards – because, in general, higher migration leads to higher GDP per capita. A crude cap might have the effect of improving living standards in the particular occupations, sectors or localities that suffer negative impacts from migration. But this is likely to be outweighed by the overall hit to GDP so, overall, the effect on the living standards of the average UK citizen is likely to be negative.
By contrast, judicious use of caps or restrictions on particular types of EU migrants in certain sectors and locations could – if well targeted to prevent migration reducing wages – help to improve average living standards.
And action to mitigate the effects of EU migration, by channelling extra funding to areas experiencing the greatest impacts of migration might help to improve average living standards.
3. Controlling migration: How to get the best single market access from the EU
The third objective for choosing a migration policy is maximising the probability that the EU will give us a good deal on single market access.
Any divergence from full free movement will almost certainly result in reduced access to the single market. And, in general, the larger the divergence, the worse the single market access. But it is worth trying to identify which kinds of divergence would upset the EU more than others.
We suspect that there are three features of a migration policy that would minimise the degree to which we upset the EU:
- Temporariness: The more temporary any restriction seems to be, the more acceptable the EU will find it – because it can be presented as a time-limited diversion from the principle of free movement, rather than a clear admission that free movement is permanently dead.This was how Prime Minister David Cameron was able to negotiate the ‘emergency brake’ on in-work benefits for EU nationals in February. EU leaders argued that it was not discriminatory – and therefore did not contravene the EU treaties – because the measure was designed to be temporary. Options that have this benefit of ‘temporariness’ include imposing restrictions only under an emergency brake that is triggered under certain conditions; or an arrangement under which restrictions are imposed with a sunset clause.
- Prioritising workers: The more that freedom of movement for workers is protected, the more acceptable the EU will find it. The original principle of freedom of movement was about workers. The free movement provisions in the 1957 Treaty of Rome applied to people who exercised economic activity, whereas other groups were included only later, through further treaty changes (notably the 1992 Maastricht Treaty which introduced the concept of EU citizenship), secondary legislation, and court judgements.
- Justifying with reference to specific impacts: The more that restrictions of workers can be justified with reference to specific impacts of migration, the better. There is some precedent for the EU allowing at least theoretical ‘emergency brakes’ on these grounds. For example, within the EEA agreement (which includes all EU member states and Norway, Iceland and Liechtenstein) there is an option to apply 'safeguard measures' (relating to any aspect of the agreement) in the case of 'serious economic, societal or environmental difficulties of a sectorial or regional nature liable to persist'.
This points towards caps or restrictions that are aimed at particular types of migrants, justified with reference to specific impacts of those types of migrants: for example, restricting migrants in particular occupations, sectors or locations on the grounds that wages are being negatively affected.
Summary: Controlling migration: what’s the best offer?
Putting this all together then what new migration policy should progressives want to see emerging from a new EU deal?
We think we should ask the EU for the right to an emergency brake that is triggered when EU migration is harming wages in particular occupations, sectors or locations. When the brake is triggered, it should result in restrictions only on the number or type of EU migrants permitted to work in the occupation, sector or location affected.
We think this option gets the best balance between the three competing objectives set out above. It would address some of the most significant public concerns about EU migration – about control, about wages and about pressures on particular communities – while minimising the economic damage that could result from blanket restrictions on migration. It will also be more appealing to the EU than a blanket restriction, because any restriction under the emergency brake will only ever be temporary and will always be justified with reference to concrete evidence of problems.
We are not naïve about the political difficulty of securing this outcome in any negotiation with the EU. Many of our European partners are not at all well-disposed to give us a special deal and the politics of securing agreement with 27 other countries will be extremely complex. But we think this would be the ideal outcome.
Part 2: Which parts of the single market should we be most willing to give up?
What are the options?
The main components of our economic relationship with the EU – besides freedom of movement – are:
- free trade in goods
- free trade in services – including ‘passporting rights’ for financial and insurance services
- the customs union
- to gain access to the above, we pay a fee to the EU.
These are set out in more detail in our briefing.
What should government’s objectives be?
We think that progressives should have two main objectives in deciding which bits of the single market the UK should be most willing to give up. The first objective is to ensure that the living standards of all UK citizens continue to rise. The second objective is to try, in line with the views of Leave voters, to increase the degree of ‘control’ that the UK has.
We are clear that the first objective is considerably more important than the second: the living standards of UK citizens should rank higher than the value of ‘control’ per se.
The first objective – to improve living standards – requires:
- A high rate of overall economic growth;
- The right kind of growth: i.e. a better balance of activity across regions, and a mix of economic activity that delivers high-skill, high-productivity jobs that pay well and help us transition to a low-carbon economy;
- Access to a wide range of cheap imports.
Which aspects of the single market should we be most reluctant to give up?
We need to ensure that our advanced manufacturing sector continues to grow and that regions dependent on manufacturing, such as the North East, are not disproportionately affected by our exit from the EU. We need to ensure we keep our position within global supply chains, can sell to as many countries as possible without facing tariffs, and can develop new links as quickly as possible. This means retaining our ability to trade goods freely with the EU.
Our services sector has become increasingly integrated with that of the EU in recent years: our services imports from the EU are 28 per cent higher than a decade ago, while our exports are 63 per cent higher, £89 billion in 2015. Our surplus in services provides an essential boost to our overall trade balance and therefore to economic growth. We should therefore be seeking to retain access to the EU’s free market in services, for our mutual benefit.
Which aspects of the single market should we be most ready to give up?
The first thing to concede is our membership of the customs union. This would not entail giving up free trade with the EU, it would simply mean that we were no longer bound by the trade agreements that the EU has signed between itself and the rest of the world. This would make it harder for British firms to trade with the EU – as a new customs border would need to be erected – but it would allow us to choose to impose lower tariffs on imports of, for example, food and clothing.
The second price to pay for control over migration should be the fee that we pay into the EU. At IPPR, we believe the politics of the referendum around the fee should not constrain May from making a rational economic choice. In our judgement, it is better to pay a higher fee than to sacrifice access to the single market in tradable goods or in services, which will come at much greater long-term cost. The political problem is that the fee is known and transparent, whilst the counter-factual case of restricting access for goods or services is opaque and will not be known immediately. Having taken an enormous risk by leaving the EU, now is not the time to gamble again.
If paying a higher fee is too politically unpalatable, then May will be forced to look at services rights such as passporting. Detailed analysis will be required to understand these rights in detail – not just what subsectors in services are worth to the economy now, but which are growing and which might grow fast in the future.