Why Britain would fare better on the fringe

The time has come for Britain to think the unthinkable: could it survive outside the EU?

The gentlemen (and women) of Verona meet today to discuss the future relationship between the "ins" and "outs" of European Monetary Union. It is billed as an informal meeting of the EU finance ministers and central bank governors to talk about ideas rather than make decisions, but in the run-up it has already been presented with headlines such as "Clarke's new euro battle" and "Britain faces ERM threat". Even allowing for headline-writers' hyperbole, zummat is clearly up.

There are, I think, two stories running in parallel. The first concerns the practical need for the planners at the European Monetary Institute, Europe's embryonic central bank, to think about the relationship between countries that will sign up for a common currency and those that will not.

The EMI itself will have both groups as members, for it is a body set up by all EU countries and no one is suggesting that all its members would participate in the single currency on day one. So inevitably, assuming that the single currency does go ahead, there will be one set of EMI members that will be subject to its monetary decisions and another that will not. All sorts of questions arise, most obviously, whether the outsiders should have any role in forming EMI policy at all, and whether the EMI should have any role in forming the outsiders' monetary policy. To put it at its lowest, it would be helpful to have a reasonable degree of co-operation between the two groups of members: currency and interest-rate instability is in no one's interests.

But there is another and less agreeable tale, which those headlines reflect. It is the extent to which the outsiders can be compelled to run similar economic and monetary policies to the insiders, so that the countries which have retained their own currencies do not gain any competitive advantage by being able to devalue against the euro. In its most extreme form, the case has been made for imposing trade sanctions against countries that deliberately devalued their currencies in this way.

This raises a real possibility that a country such as Britain, which chose to retain its own currency and which did not agree to follow the monetary and fiscal policies decided by the EMI, might be faced with a set of circumstances that made it difficult to remain within the European Union.

At the moment that possibility might seem remote. But if the discussions this weekend head in the less benign of the two directions noted above, both this government and the opposition should be doing some contingency planning. We are talking about a set of institutional changes that will, on present schedules, take place during the life of the next British parliament. So to look at the sums to see the pluses and the minuses in terms of Britain's economic self-interest of remaining or not remaining within the EU, is not at all to argue the case for leaving. Rather it is to say that it is irresponsible of governments - and serious-minded oppositions - not to consider possibilities which they hope will not occur, but which must be recognised as real.

Put it this way: the possibility of British manufactured exports facing trade barriers in Europe at some time in the next five years must be at least as large as the possibility in 1991 that British beef exports would be completely banned from the European market this year.

So how do the numbers stack up? There are three main areas: the UK's budgetary position with the EU; our present trade relations; and the dynamic impact on the shape of the UK economy.

The first set of sums are easy. Britain's taxpayers pay each year rather more than pounds 2bn to cover the cost of running the EU bureaucracy and to give to other EU member countries. On an annual basis that is not enormous - it is equivalent to a penny on income tax, or all the revenue from vehicle excise duty, but it adds up. A quick tally of the total net payment to Brussels since 1984 comes to pounds 19bn. Not only would that money be available either to cut taxes or increase public spending here, but because we have paid it overseas our foreign assets would be higher than they are at present, and so we would have a larger flow of income from those assets.

A further balance of payments advantage would be that Britain could buy food imports at world prices rather than at EU prices, so both our import bill and our food prices would be lower. It is difficult to put a quick number on the saving, and UK farmers would presumably still require similar subsidies to those they receive as part of the common agricultural policy, but there is no doubt that UK food prices would be lower, closer to those of, say, the US or Australia than to, say, France.

If this first effect of leaving the EU would be wholly positive, the same cannot be said for the other two. It is perfectly possible to export into the EU from outside in Europe: Sweden and Austria have done so very successfully, and Switzerland has and will continue to do so. Trade is protected under the Gatt and the small tariffs that might be imposed would hardly be significant. In any case the EU has a visible trade surplus with Britain running at around pounds 4bn a year: we are a better export market for them than they are for us. So it would be unwise of EU countries to jeopardise access to the British market by imposing trade barriers on British exports to the EU. Reason would dictate that the free transfer of goods should continue.

Nevertheless it would be naive to suppose that things would go on just as before. There would not be any immediate trade catastrophe, despite the fact that more than half our physical exports go to the EU, but there would be longer-term costs. In particular inward investment into the UK would be threatened. Over the last decade Britain has been the largest recipient in the EU of inward investment, with nearly 40 per cent of the total. Still, France has recently overtaken the UK, which shows that this position as Europe's favourite base for new manufacturing enterprises is by no means secure. Losing inward investment would be deeply damaging, for it brings expertise and access to markets as well as funds.

It is this final effect, the dynamic impact on commercial confidence, that should worry a future government most. The greater the hostility surrounding the ejection, or resignation, from the EU, the greater the economic costs. One can make an argument that Britain ought to direct its trade away from Europe because this is and will remain a slow-growth zone compared with the new markets in East Asia and even with North America. But that is worth doing anyway: one could not only pursue such a policy while remaining an EU member, it would probably be easier to do so.

Conclusion? Well, the sums need to be done properly, for this is just the roughest sketch. But I suspect that the optimal economic position for the UK - leave aside the politics - would turn out to be a loose but friendly association with the EU, rather than full membership, particularly if the rest of Europe pressed on towards an ever-closer union. We do need a free-trade agreement, but we do not need anything more. If the Verona meeting is the start of a move to an explicit multi-tier Europe, the fringe will not be a bad place to be.