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Britain Joins the EEC

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1972
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Hans O. Schmitt

On January 22, 1972, the United Kingdom signed the Treaty of Accession to the European Economic Community (EEC). Two previous approaches—one initiated by a Conservative Government in 1961, the other by a Labour Government in 1967—had not been brought to a successful conclusion, though on the second occasion the Community unanimously decided that Britain’s request for membership should remain on its agenda. The third round of discussions emanated from the decisions of the heads of government of the Six at the Hague Conference in December 1969, which was convened on the initiative of the President of France. The Labour Government declared in May 1970 that it wanted to resume negotiations as soon as possible, and when the present Conservative Government took office it did so on schedule, with the first ministerial meeting on June 30. Now that the necessary enabling legislation has been passed, the instruments of ratification of the treaty have to be submitted in time to make British accession effective from January 1, 1973.

Looking back over the negotiations as a whole, five issues assume particular importance. There was, first, the customs union on which the Community was built and which includes, apart from a common external tariff on industrial goods, a system of variable levies on agricultural imports. The second issue concerned the financing of the institutions and programs of the Community on whose strengthening the prospects for eventual economic and perhaps political union may well depend. Third, Britain’s full commitment to European unification was seen to be inconsistent with an independent world role for sterling. Furthermore, longstanding arrangements with other Commonwealth countries could not of course be precipitously broken off without causing undue hardship; particular difficulties were foreseen for New Zealand dairy products and for Commonwealth sugar producers. The phasing out of specifically British responsibilities in these two instances constituted the fourth and fifth major issues that had to be settled in the negotiations.

The Customs Union

Though the decisive reasons for British entry are probably as much political as economic, the U. K. authorities expect that membership in the European Economic Community will also provide a favorable opportunity for achieving economic progress after many years of balance of payments difficulties, a disappointing record in industrial investment, and a low rate of economic growth. Most of the impact of EEC membership on growth and prosperity is expected to derive from increased competition, the exploitation of economies of scale, the developing and marketing of new products, and a higher level of investment in up-to-date equipment. The possible costs of entry are mainly associated with shifts in the pattern of production and consumption which, without a transitional period, would be required before the positive response of managers and investors could produce the off-setting beneficial effects. The precise quantification of possible gains and losses has proved extraordinarily difficult; nevertheless, the authorities expect the balance to be positive by a substantial margin.

Most of the positive stimulus to British economic growth is expected to derive from access by U. K. manufacturers to the Community’s large and growing markets. A five-year transition period was agreed for the complete abolition of industrial tariff and non-tariff barriers toward the Community and the adoption of the Community’s common external tariff (CET) toward the world outside. Tariffs on imports from member states will be reduced in five equal steps of 20 per cent each, the first to take effect on April 1, 1973, the last on July 1, 1977. A year’s breathing space was granted on the CET; the move to it will proceed in four stages, the first of 40 per cent due by January 1, 1974, to be followed by three more of 20 per cent each, the last to come on July 1, 1977. The tariff adjustments required will be fairly substantial. The arithmetic average duty charged under CET is 7.6 per cent. The United Kingdom at present charges an average 10.2 per cent on imports coming from outside the sterling area; for imports originating within it, the arithmetic average is only 1.2 per cent.

A large part of the costs of entry will be related to participation in the Community’s common agricultural policy. Under its rules, market prices for the main agricultural commodities are maintained in two ways. The price of imports is kept to a minimum or threshold price by means of variable import levies; and the internal market is supported at an intervention price, slightly below the threshold price, at which any surpluses are bought through intervention agencies by the Community’s agricultural fund. This Community system of support, though not the Community’s prices, is to be adopted in the first year of membership. The United Kingdom’s threshold and intervention prices will then be increased gradually to Community levels in six equal steps over the five-year transition period, subject to a 10 per cent tolerance up or down if needed in the interests of the smooth functioning of the process of integration. For the 1972–73 season prices in the Community and Britain were, respectively, £47.41 and £34.40 a ton for soft wheat; £43.41 and £31.20 a ton for barley; £15.60 and £13.20 a live hundredweight for beef cattle; and £ 3.10 and £ 281 a score (20 lbs.) for pork.

Community Finance

The Community is financed from a common fund. Under the present system, which came into effect on January 1, 1971, all levies on agricultural imports, net of a 10 per cent rebate to cover collection costs, are handed over by member states to the Community; of customs duties an increasing proportion is being paid over until January 1, 1975, when all proceeds are to be surrendered less the 10 per cent rebate. Additional contributions by member states will make good any deficit in the period until January 1, 1975, when the Community is due to receive the proceeds of up to 1 per cent of a value-added tax which, by then, is to be in force in all member countries. After 1975, therefore, the central institutions of the Community will have their own resources independent of national appropriations. In 1971, all but 4 per cent of the Community budget net of administrative and collection costs was absorbed by the common agricultural policy. Other purposes, however, such as industrial policies, regional policies, and social policies, may in time take a larger share.

Thus far the major net beneficiary of the system has been France; the major contributor, Germany. Since Britain’s few, relatively efficient, farmers will receive virtually no financial support in return, Britain’s net contribution could ultimately turn out to be larger than Germany’s. This possibility was accepted at the outset of the negotiations by the U.K. Government as the price of entry; the transitional arrangements, nevertheless, produced some hard bargaining. Britain’s opening offer was for a 2½-3 per cent initial gross contribution to the Community budget, rising to 13-15 per cent over five years, to be followed by another three years during which correctives would be applied if the automatic formula were to result in undue hardship. The Community rejected this offer, viewing the proposed figure for the end of the transition period as casting doubt on Britain’s confidence in its ability to meet within a decade the Community’s financing requirements on a basis comparable to its partners. But the Community in turn could not at once agree on a counteroffer among themselves.

The deadlock was broken in the end on a formula, proposed by the French, that set a full British contribution from the first year of entry, based on Britain’s share of the Community gross national product, but with provision for rebates that decline during the transition period. The “key” defining the nominal contribution increases from year to year, as does the proportion of it that Britain is actually required to pay. As a result of this rather complicated formula, the United Kingdom will contribute up to 8.64 per cent of the budget of the enlarged Community in the first year of membership; that contribution will then rise to 18.92 per cent in the fifth year. From January 1, 1978, the United Kingdom will contribute on the same basis as other member countries, subject to specified safeguards for only two additional years. Only from 1980 will Britain’s contribution become fully automatic; but it is clearly impossible to predict so far in advance what size the total budget will have attained by then, and hence what the British contribution is likely to be in absolute terms.

Sterling

The problems of sterling as an international currency were at first thought to require a wider forum in which to find a satisfactory resolution than the negotiations for British accession to the EEC could provide. They became an issue, nevertheless, when the Common Market countries, on February 9, 1971, agreed among themselves to take steps toward a monetary union to be achieved over the next ten years. Starting on June 15, 1971, the central banks planned to intervene in exchange markets in such a way that in U. S. dollar terms none of their currencies would vary from another by more than a specified margin. A fresh medium-term credit facility for $2 billion was concurrently to be set up for use by any member in serious balance of payments difficulties. A European exchange fund was to be established before the end of 1973 through which the Six (Belgium, France, Germany, Italy, Luxembourg, and the Netherlands) could pool reserves. For the next three years, finance ministers and central bankers would meet regularly to discuss national budgets and credit policies. Due to the uncertainties in foreign exchange markets that began with the floating of the deutsche mark and the Netherlands guilder in May 1971 and were not settled until the general realignment of currencies in December, the first narrowing of margins had to be postponed; it came into effect on April 24, 1972.

In March 1971, however, the French had asked that the problem of fitting sterling into Europe be discussed along side the entry negotiations. The existence of a sterling area in which the pound acts as a reserve currency was thought to create three problems for the Community. The first, already a part of the formal negotiations, was the privileged access sterling area countries have had to the London capital market. Second, it was thought that fluctuations in the official sterling balances might lead Britain to draw on the Community’s credit facilities to finance balance of payments deficits originating outside Europe altogether, a use for which they were not intended. Third, the management of a reserve currency might induce policies relating to interest rates and other aspects of demand management that could not be easily coordinated with those of the rest of the Community. The proposal, therefore, was that “the volume of sterling reserves be diminished progressively.” Accordingly, on June 7, 1971, the U. K. authorities formally pledged to manage their policies “with a view to stabilizing the official sterling balances” and declared themselves “prepared to envisage an orderly and gradual rundown of official sterling balances” after entry. The U. K. Government undertook also to liberalize U. K. exchange controls as required by EEC directives by the end of the transitional period. And although British participation in the scheme to narrow exchange rate margins among members of the enlarged Community was interrupted by the temporary floating of the pound on June 22, 1972, the U.K. authorities have stated their intention to return to it in time for accession.

The official sterling balances had in fact increased dramatically following the dollar guarantee provided in the Basle Agreement of September 1968. These balances increased by nearly £600 million, to a total of £2,244 million, in the two years to the end of 1970. Virtually all the increase was due to the growth of total reserves of sterling area countries. The “minimum sterling proportions” to which they had individually been pledged in return for the gold guarantee required that some part of these be held in sterling. Fewer than one half ran for five years, however; when the remainder came up for renewal in September 1971, the minimum sterling proportions were reduced by 10 per cent for all. Twelve countries, the so-called Basle group,1 had already pledged to roll over for another two years the $2 billion line of credit on which Britain can draw to the extent that sterling holdings fall below an agreed base level. The Basle Agreement runs to 1973; meanwhile, with the temporary floating of the pound in mid-1972, U.K. exchange control has been extended to cover all sterling area countries with the exception of the Republic of Ireland.

New Zealand Butter

Preferential trading arrangements between the United Kingdom and the overseas Commonwealth area will automatically disappear, subject where necessary to transitional arrangements to avoid undue hardship. A particular problem was posed by New Zealand. Butter accounts for about 11 per cent of New Zealand’s total export earnings and cheese for another 4 per cent: about 85 per cent of its export earnings from butter and cheese comes from guaranteed exports to the United Kingdom. Benefiting from better pastures and larger farms and requiring no winter stabling, New Zealand butter costs about one third as much as Community butter to produce and ship to Britain. New Zealand argued that a contraction of its dairy industry now might be premature; there was no surplus production in Community countries in 1970 and stocks fell. Although there may have been some erratic elements in the butter shortage that year, without a substantial new increase in support prices it was argued that Europe would face a shortage in the longer run, as rising standards of living induced European farmers to shift from dairying.

The issue was complicated for Britain by a special responsibility felt toward its own “kith and kin.” The British negotiators accordingly asked that for five years New Zealand should be allowed to market in the enlarged Community the “milk equivalent” (nearly 5 million tons) of its initial exports to Britain of butter (170,000 tons) and cheese (75,000 tons), the proportion of butter and cheese to be decided annually, with the entire arrangement subject to review toward the end of the period. The Brussels Commission instead suggested that New Zealand’s butter quota be phased down to no more than half its initial level over five years and that levy-free access for its cheese be phased out altogether. France initially maintained that a consistent application of the common agricultural policy would require that New Zealand should lose all guaranteed access in five years. As the common agricultural policy was felt to be central to its interest, France did not wish to compromise it by beginning, with New Zealand, to make exceptions to the principle of strict Community preference.

The New Zealand issue consequently remained one of the last to be settled in the negotiations. It was finally agreed that the guaranteed quantity of butter for the first five years would be reduced by 4 per cent per annum so that in the fifth year of the transitional period New Zealand would be able to sell to the United Kingdom no less than 80 per cent of its initial entitlement. For cheese, the quantities guaranteed would be reduced to 20 per cent over the same period. While adjustments may be made between the guaranteed quantities of butter and cheese during the first five years, the combined tonnage expressed as milk equivalent cannot fall below 71 per cent of the initial quantity by 1977. During the third year after accession, the institutions of the Community will review the butter situation, and in the light of this review will decide on suitable measures for ensuring the continuation beyond 1977 of special arrangements for New Zealand butter. These agreements have been accepted by the New Zealand Government as adequately safeguarding its interests.

Commonwealth Sugar

For all British dependent territories with the exception of Hong Kong and Gibraltar and for all independent Commonwealth developing countries with the exception of those in Asia, arrangements were made which provide the opportunity of association with the enlarged Community, though the independent ones among them can opt for trade agreements instead. Again a special problem arose in respect of those developing countries that are members of the Commonwealth Sugar Agreement under which Britain imports some 1.8 metric tons of sugar annually. World sugar production averages 70 million tons a year, but only 20 million tons are exported. Of these 20 million tons, over 11 million are traded under special quota arrangements—5.6 million to the United States, for example, and 2.9 million from Cuba to the U. S. S. R. The remaining 9 million tons are sold on the world market, four fifths under quotas set by the International Sugar Agreement (ISA) that was negotiated in 1968.

The European Community, not a signatory to the ISA, produced in 1971 about 1 million tons of raw sugar equivalent in excess of the 6-6½ million tons it consumed. About half of this surplus finds alternative uses, such as feed, the rest is sold off on the world market. Under the Community’s present arrangements, beet growers are guaranteed £7.31 a ton for a specified quota, plus transport costs and rights to pulp after processing, and are allowed about £4 a ton for beet up to another 35 per cent over their quota. Unless renegotiated, this system of support will run out in 1975. Meanwhile it has helped the beet industry to expand rapidly to the point where French production, for example, has reached its ceiling. Without a new market in the United Kingdom, Community producers appear to have little incentive to expand their output much more, inasmuch as output in excess of 135 per cent of quota is sold off at world prices. The cost of disposing of the surplus is shared between the common fund in Brussels and beet growers and refiners.

The Commonwealth Sugar Agreement runs out at the end of 1974. Britain was prepared thereafter to exclude all the 355,000 metric tons of imports which it takes from Australia, but proposed that other, poorer Commonwealth sugar producers be allowed to continue sending their 1,370 million tons to Britain. As a satisfactory figure could not be arrived at while a sizable sugar surplus existed in the Community, it was agreed to offer sugar producers, in addition to the opportunity for full association with the enlarged Community, the prospect that when the Commonwealth Sugar Agreement, the Community’s Association Agreement, and the Common Market sugar regime all come up for renegotiation in 1974 and 1975, the enlarged Community would “have at heart to safeguard” their interests. The countries affected accepted this formula as “a firm assurance of a secure and continuing market in the enlarged Community on fair terms for the quantities of sugar covered by the Commonwealth Sugar Agreement in respect of all its existing developing member countries.”

The Choice

On the basis of such terms as those described, the U. K. Parliament on October 28, 1971, voted in favor of the principle of entry by substantial margins in both Houses. Given the wide range of possible estimates of costs and benefits, this decision could not have been based on a purely economic calculus. The crux of the argument for entry, according to the Prime Minister, is that it will place Britain in the best possible position to influence economic policies and decisions that determine the environment in which the British enterprise will have to operate. A decision not to join, so the official White Paper argued, would have left the original Community to grow on its own in strength and unity. British power to influence the Community would have steadily diminished while the Community’s power to affect the future of Britain would as steadily have increased. To remain apart would have been a rejection of a historic opportunity. In a single generation Britain “would have renounced an imperial past an rejected a European future.”

The strongest arguments for entry have therefore been political rather than economic; the same has also been true for opposition to it. As the price of participation in the formulation of Community decisions, both internally and on a world arena, British decision-making will in future have to be fitted into a Community context. This was made clear in the enabling legislation giving constitutional effect to the Treaty of Accession. It gives legal force in Britain to all those Community “rights, powers, liabilities, obligations, and restrictions” existing now or to be made in the future which must under the Treaty become law without further enactment, and enables future Community directives to be implemented by direct British order. Accession therefore introduces a real limitation on the traditional powers of Parliament and, in this sense atleast, some loss of sovereignty, to which there has been opposition. The Government however has argued that more sovereignty, interpreted as the practical ability to act autonomously, would be lost by staying out than by going in.

1The participants in the Basle group are Austria, Belgium, Canada, Denmark, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United States, and the Bank for International Settlements.

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