Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Charles Kalshoven, macroeconomist at APG, on the economic benefits of the European Union for the Netherlands. “The power of the EU market is enormous.”
Three years ago, the United Kingdom left the EU. Brexit is now costing the British economy nearly 114 billion euros a year, Bloomberg news agency calculated. Their economy apparently has gone down by 4 percent since the Brits turned their backs on Europe. Jeremy Hunt, Britain’s finance minister, this week expressed his annoyance about the “gloom” over the economic outlook. He believes Brexit actually enables economic growth.
“Brussels effect”
For the Netherlands, the advantages of EU membership still clearly outweigh the disadvantages, Kalshoven argues. “The Netherlands is a small country with a limited domestic market. We therefore benefit from free trade and access to the EU market of 450 million potential consumers. Because of its size, the European internal market creates more trade and investment opportunities. This is partly a result of having one market for which the rules are harmonized. If, as a manufacturer, you produce a car or refrigerator that meets the Brussels standards, you can be sure that you can sell your product throughout the EU.” This is also where the so-called “Brussels effect” occurs. The EU internal market is so big, that it is beneficial for manufacturers to design their product to meet the -generally high- Brussels standards. They can then market their product not only in the EU, but also in other markets, such as the United States or China. “The power of the EU market is enormous. We are on a winning team.”
EU membership is also beneficial when it comes to entering into trade treaties, Kalshoven continued. “As a small country, you can say that you negotiate your own free trade treaties, but who are you, as the Netherlands?” The EU carries much more weight when negotiating a treaty, where individual member states do have a say in how it is implemented. “You have more influence when you are part of a major trading power than if you act on your own as a country, because then you can be played off against other countries.”
Trading nation
Kalshoven cites the classic book The Wealth of Nations, published by the Scotsman Adam Smith in 1776. “In it, he rails against all kinds of obstacles to free trade. And within the EU there is free trade. However, non-member countries that want to get their products into the European trading bloc can certainly run into trade barriers. British companies are noticing this now. For example, an English beer brewer was in the news recently, saying that a case of beer costs 20 pounds in England. If he wants to export that same case to the EU, the price would increase to 200 pounds because of all the (customs) formalities. That red tape at the border is anything but conducive to trade.”
If a country is not only a member of the EU but also belongs to the euro zone, not only trade is facilitated, but also payments. This allows citizens to pay with their currency in other euro countries as well, and companies need not fear that the exchange rate will suddenly change after sending their invoice.
The EU has thus reduced trade costs between member states, leading to more trade between them. For the Netherlands, as a relatively small trading nation, this means gross domestic product (GDP) is 3.1 percent higher, according to a calculation by the Netherlands Bureau for Economic Policy Analysis early last year. Few countries stand to gain even more from Brussels’ removal of trade barriers. Figures on how much the average Dutch person benefits from the EU range from 500 to 2,200 euros a year.
Disadvantages
Are there no economic disadvantages of the EU? Yes, there are some, Kalshoven states. “By becoming a member of the EU, as a country you give up partial sovereignty. That is true, at least in theory, but then I come back to my argument about small countries. How much sovereignty do you have as the Netherlands compared to say, America or China, ‘I want to make different agreements about our mutual trade’?” The same applies to countries belonging to the euro zone to a greater or lesser extent. “As a euro country, you can no longer tailor your monetary policy to what is best for your country. Instead, the European Central Bank looks at what is best for the euro zone as a whole. But again, you can ask how sovereign we were when we had the guilder. If the Bundesbank raised interest rates, we followed suit half an hour later. Not that the Germans forced us to do so, but it was much more advantageous for us to latch onto the Deutschmark than to chart our own course. We chose to give up our freedom. So, losing sovereignty by joining the euro is a disadvantage mainly in theory. We used to wait for a phone call from Frankfurt; now Klaas Knot (president of the Nederlandsche Bank) is one of the determining figures in monetary policy.”
In the Netherlands, the discussion also raged on for a long time about the fact that The Hague has been the largest net contributor to Brussels for years: we contribute more to the EU than comes back through subsidies. That is not a good way to look at the net benefit of EU membership, Kalshoven argues. For one thing, part of those remittances consists of customs duties on goods entering the EU in Rotterdam. Other EU countries are usually the final destination. So those payments should not really be seen as Dutch remittances to the EU. In addition, the economic benefits of the EU, as described above, are much broader than just EU funds, Kalshoven concludes.