Abstract. A look at the economic effects of Britain leaving the European Union.
Summary. The UK has been a member of the European Union since 1973. The European Union gives many economic benefits to member countries. These include free trade, inward investment from European companies, free movement of labour, harmonisation of regulations and qualifications and the stability of being in world’s largest trade block. However, critics argue that the European Union imposes unnecessary costs on business and hampers the UK ability to grow. Leaving the EU could enable the UK to have the economic benefits of a Single Market but without unnecessary costs and bureaucracy.
Economic effects of leaving the EU
1. Less free trade with EU The UK currently has free trade with all 28 European countries, enabling a range of imports and exports. In 2014, trade with the EU accounted for 44.6% of UK exports of goods and services, and 53.2% of UK imports of goods and service (ONS). When the UK leaves, it may not be able to negotiate replacement free trade deals with all 27 countries. This could lead to trade diversion and a negative impact on the UK export industry.
- However, if the UK leaves, it may be able to lower EU external tariffs. The EU has free trade within member countries but imposes significant external tariffs on goods, such as agriculture. This raises the price of some food imports. If the UK left the EU it may be able to negotiate better free trade deals without the EU’s external tariffs.
- Another factor is that the EU’s share of world trade is declining in relative terms due to the growth of emerging economies like China and India.
2. Inward investment
The European Union is an important source and target for inward investment. Many European companies have invested in the UK and the UK earns revenue from investment in the EU. If the UK leaves the EU, this investment may be less attractive causing foreign firms to return to within the EU border. Companies like BMW has already warned workers of potential job losses in the case of a Brexit (1)
in 2013, 43.2% of UK overseas assets were held in the EU, whereas 46.4% of assets held in the UK by overseas residents and businesses were attributable to the EU. (ONS)
However, if the UK can negotiate successful post-leaving treaties, investment may not be under threat. Non-EU countries like Iceland, Norway and Lichtenstein make up the European Economic Area (EEA) and in theory, this could be a satisfactory alternative for the UK economy.
3. Free movement of labour
A big political issue is the net migration of mostly Eastern European workers into the UK. This has created stress on housing, infrastructure and population pressures. From an economic perspective, the impact of net immigration is mostly positive – migrants tend to be of working age, net contributors to the budget and help fill labour market shortages in areas, such as plumbing, nursing, cleaning and teaching. If the UK left the EU, labour markets will become less flexible. Since 2016, there have been firms reporting labour shortages – especially in areas like agriculture, retail and construction.
If the UK left, it would have greater freedom to be able to restrict net immigration. However, it would also make it harder for UK nationals to work abroad. There are currently 2 million Britons working in EU (Guardian)
4. Short term costs of leaving
Since the referendum, the value of the Pound has fallen 10-15% reflecting markets more pessimistic view about the long-term economic prospects for the UK.
The devaluation in the Pound has led to a rise in cost-push inflation, which has reduced living standards – this is particularly problematic because of low nominal wage growth.
A particular economic concern for the UK leaving the EU is a decline in inward investment from the EU. With a current account deficit of 4.5% of GDP, the UK requires capital flows to finance the deficit. If the UK receives less inward investment, the Pound will have to fall.
If the UK did leave the EU, the uncertainty and political wrangling over a new deal could cause a fall in investor confidence and (in worse case scenario) trigger an economic downturn.
Since the vote in June 2016, there has been a fall in the rate of economic growth. In the first half of 2017, the economy has grown by just 0.5% (annualised growth of 1%) – real wages have started falling again due to rise in inflation.
Others argue the markets are exaggerating the impact of leaving and that once the vote is known, stability will return. In the long run, Britain could adjust to the new reality.
5. Costs of EU Membership
In 2014, the UK paid £17bn to the European Union (approx. 0.06% of GDP) (1). However, the UK also received a CAP rebate and also is a recipient of EU funds from social and regional programmes. If the UK leaves the EU, it would still have to pay to be able to benefit from the single market. The EU would not allow the UK to have benefits of Single Market without paying into it. As a percentage of GDP, the cost of membership including money coming back to the UK is 0.4%. The net contribution of UK to EU is £7.1bn according to EC. See more on cost of EU
6. Inefficient policies
Despite years of reform, the EU still spend a high percentage of its budget on agriculture (43% in 2013). Arguably these agricultural policies have also encouraged inefficiency and a waste of resources. Leaving the EU will enable the UK to pursue its own agricultural policy and not be subject to EU policy.
However, there still needs to be some kind of deal with other European countries other cross-border issues, such as fishing, environment and pollution.
7. EU regulations
A big criticism of the EU is burdensome regulations. Some of these regulations are myths (e.g. the myth of banning the bendy banana). Leaving the EU would enable the UK to cut these EU regulations from its law. However, if we want to trade with the European Union, companies will still need to meet EU standards on environmental, health e.t.c. Some argue the biggest cost to EU business is not from EU regulations but the UK’s own planning regulations.
Also, it should be remembered that regulations can have beneficial social effects – e.g. better safety standards and reducing excess energy use.
8. Effect on productivity and investment
A concern about the UK economy is the very poor performance in productivity since 2008. Productivity is a key determinant of economic growth and therefore tax revenues. Since 2009, productivity growth has been poor. This can be blamed on different factors
- Global fall in productivity (though UK fall is more severe)
- Low investment in new technology and robots
- Effects of fiscal austerity and low wage growth
- Uncertainty over Brexit. Whilst Brexit is not wholly to blame for the continued poor performance of productivity, the uncertainty over future trading arrangements is discouraging investment when the UK needs more investment.
The impact of Brexit will impact the economy for many years. It also depends on the type of deal and new trading arrangements made. In the immediate aftermath of the vote, the economy was relatively resilient, but the devaluation has begun reducing living standards. Combined with poor productivity growth, growth forecasts have been downgraded causing a deterioration in public finances.