A swansong for Europe

But the EU constitution debate, and the pressure building on Britain this summer to surrender or modify its EU budget rebate, are unlikely to warm public opinion to the merits of EU integration.

Many found it unsettling to hear Jean-Claude Juncker, the Prime Minister of Luxembourg which currently holds the EU presidency, declaring last week that "if it's a Yes, we will say 'on we go', and if it's a No, we will say 'we continue'." Why, then, hold a referendum at all? No less bizarre to British ears was the insistence by Grard Errera, the French ambassador to the UK, that it would be "illegal" for the UK not to hold a referendum, even if France and the Netherlands say 'No'.

Now comes the prospect of Britain being pressured to become the largest net contributor to an economic bloc that on most economists' reckonings of performance is a singular and palpable failure. It is a prospect likely to meet with as much opposition from Chancellor Gordon Brown as any backbench Tory euro-sceptic.

It is true to say that, from the first, the UK's attitude to Europe has been ambivalent. For most of the 1970s we were 'The Sick Man of Europe'. The EU - or Common Market, as then was - offered hope.

It was not just the attractions of joining a free trade club that won us over, but the prospect that, by drawing closer to Germany, then some of its economic miracle would rub off on us. The Common Agricultural Policy would bring dearer food. But we saw compensating benefits. Indeed, there is much in Europe we admired, and still do. And few wished to be thought small-minded or xenophobic.

Long after the 1975 referendum, the economic benefits of EC/EU membership were taken as read. But neither at that time nor since has the UK government ever undertaken a cost-benefit analysis. It is this that has made the work of economist Patrick Minford over the years so important and so necessary. Whether or not you agreed with his thesis that, on detailed inspection, the costs outweighed the benefits was arguably less important than the professional role he fulfilled: to submit popular assumptions to scrutiny and to challenge those who encouraged them to come up with their own evidence-based research.

And Minford cannot be accused of skimping on research. His latest book, Should Britain Leave The EU?, published this weekend, runs to more than 250 pages with more than 70 tables of statistics on everything from agriculture statistics to restrictiveness index scores. Free trade liberals will love it.

Minford estimates the ongoing costs of our EU membership at between 3.2% and 3.7% of UK GDP. But adding in potential future costs, this could rise very substantially through future costs of harmonisation and pension sharing.

To do this research, he has, not unreasonably, interpreted the thrust of future EU policy in the light of recent policy actions by the EU (for example the recent climbdown from reform of the CAP) and of the general thrust (in favour of protectionism and social rights) of proposed new policies.

The EU, he emphasises, "does not have to be this way". But in a calibration of this sort he has little alternative but to take it as he finds it.

His headline conclusion is that the total annual cost of EU membership to the UK could rise to 20% of GDP if the EU continues with its current policies. The CAP, for example, boosts the prices paid to farmers by consumers from across Europe by about 50% above world prices. For Britain, as a big net importer of food, this means that consumers are paying a lot more for their imports than they need. He estimates this cost at between 0.3% and 0.5% of national income (1% of national income is roughly 10bn a year).

Less evident or well understood is the cost of protectionism in manufacturing. The argument for membership has always stressed the importance to Britain of being in the EU because of the benefits to manufacturing industry. However, we import more manufactures from other members of the EU than we export, and therefore what is happening in manufacturing is very much like what is happening in food.

Britain, with its trade and economy more exposed to global influences, has generally let volume production go east to those economies where manufacturing is cheaper, reserving specialised or high tech niche areas.

However, this has not happened to the same extent on the continent. As a result there is a great deal of protectionist pressure.

The EU is therefore a customs union: it raises tariffs externally on manufactured imports so that prices are kept up inside the EU for manufactures. In addition to tariffs the EU also protects manufacturing through quotas in certain areas like textiles, but mainly through informal agreements (as in cars) and anti dumping measures.

Some idea of the differences in prices paid for personal computers and household electrical goods can be seen in the accompanying table. Overall, Minford estimates the cost to Britain of this "Common Manufacturing Policy" at between 2% and 3% of GDP.

The third area of EU economics is services: not the happiest of stories for UK service companies, whether in transport or in financial services who have sought to expand in continental Europe only to meet daunting barriers to competition. The EU's services environment is one of national protection. Minford reckons there would be a gain for the UK of ceasing to participate in EU customs union arrangements - that is, opting instead for free trade at world prices, with no 'EU preferences'. This gain foregone he puts at between 2% and 3% of GDP.

A further area of cost - and one central to the EU Constitution - is harmonisation. The constitution incorporates the Charter of Fundamental Rights that would take the UK back to the 1970s in terms of rights of collective bargaining and the unions. There is also a great deal on workers' rights and social entitlements. On Minford's calculations the adoption of the EU harmonisation programme would have the effect of raising unemployment by 5.7% and cost us 6.4% in reduced output.

Finally, he allows for the cost of potentially insolvent state pensions on the continent. Taking OECD projections these working out at 10% of GDP in Germany by 2030, Italy about the same and France a little bit less. If the UK had to pay a portion of this under some federal system "to share the burden fairly" the bill would be some 7% of GDP.

What, then is to be done? Some argue that the overriding objective of our membership is political, and that there is no question of renegotiating or leaving.

But do our political gains need to be achieved at such economic cost? Britain could, as the current Chancellor clearly hopes, step up pressure for economic reform and liberalisation. If this fails there is the option of renegotiation of membership within the Rome Treaty - a UK Protocol.

Here Britain's hand may be stronger than is currently assumed, as the UK is a key export market for the rest of the EU and other members would wish to maintain their trade surplus with the UK. What is clear from Minford's analysis is that the status quo may prove to be the most expensive option.

Should Britain leave the EU? An economic analysis of a troubled relationship. Patrick Minford, Vidya Mahambare and Eric Nowell, Edward Elgar and the Institute of Economic Affairs