British views on the merits of European integration have always been heavily influenced by the relative health of the UK and other European economies. In 1975, when a large majority voted to remain in the common market, Britain appeared to be sinking irretrievably into decline while French and German living standards had been transformed by the postwar “economic miracle”. Now the situation is reversed. In the years since the financial crisis, Britain’s economy has looked resilient next to a eurozone grappling with debt, deflation and double-digit unemployment.
Proponents of Brexit have been quick to take advantage, arguing that the economic case to remain in the EU does not stack up and trumpeting the dangers of being “shackled to a corpse”. This crass comparison, however, is becoming ever less appropriate. In fact, there is mounting evidence that the eurozone economy may have turned the corner, just as growth in much of the rest of the world is starting to slow.
In the first quarter of this year, growth in eurozone output accelerated to 0.6 per cent, compared with a slowdown to a paltry 0.4 per cent in the UK, even before the chilling effects of referendum-related uncertainty set in. That makes the eurozone something of a rarity: it is the only major economy in the developed world to be doing better than was forecast six months ago.
Moreover, some of the most persistent symptoms of the eurozone’s ill health are fading. Unemployment has fallen faster than expected with the improvement particularly striking in countries such as Spain and Ireland, whose younger workers had suffered most. Consumers are finally playing a bigger part in driving German growth. And record lows in government bond yields, while hardly a sign of confidence in markets, is a welcome respite for governments whose solvency was in question at the height of the crisis.
Of course, the eurozone still faces a long road to recovery. Although consumption has picked up, there is little sign of improvement in business investment. Banks are still encumbered by bad loans and unwilling to lend. Productivity growth is slowing even as the region’s population ages. Without fundamental reforms, these structural problems will continue to hold back growth.
Yet this is a very different situation from the one the eurozone faced in 2012. The Brexit camp is wrong to suggest a deepening crisis that will inevitably require further bailouts. The European Central Bank undoubtedly made mistakes in its earlier handling of the crisis but its current policies are having an effect. Moreover, many of the bloc’s long-term problems are present, albeit to a lesser extent, in the US and UK.
The main reason that Britain does not face as big a demographic challenge is because it has been open to younger migrant workers, a fact that Brexit supporters calling for control of borders would do well to acknowledge.
One thing that is clear is that eurozone membership does not prevent some countries prospering inside the bloc. It has been no obstacle to Germany having high levels of employment, a stronger export sector than the UK’s and the biggest increase in gross domestic product per capita of any developed economy since the crisis.
For the UK, there is no question of eurozone membership. Yet the eurozone’s prosperity is vital for Britain and this will remain true whether or not it remains in the EU. A vote to leave would be profoundly destabilising to Britain’s main trading partners and the UK would not escape the consequences. It would be more costly, in terms of UK exports and jobs, than any hypothetical future bailout.