Jumping into the Abyss: The economic cost of a Brexit

While international attention is invariably drawn to the current crisis in Greece a far bigger threat to the  project looms on the horizon. lthough not a member of the euro, Britain is much more central to the European Union (EU) than Greece. Thus a Brexit would come with massive economic and political costs for the EU.

Nevertheless it will not be the consequences of a Brexit to the rest of the continent that matters when the British people go to the polls, rather it will be the consequences for themselves that will tip the balance.

A cornerstone of the eurosceptic argument is the economic success of Switzerland and Norway, who despite remaining outside the EU,  inside the European Free Trade Association. The so-called ‘Britzerland’ argument is that the UK could leave the EU without leaving the common market. This is particularly appealing to free traders and former Thatcherites such as Boris Johnson, but is it realistic A study by German think tanks: Bertelsmann Stiftung and the IFO Institute hypothesise that even in this best exit strategy GDP per head would be £157 lower by 2030 than if Britain remained in the EU.

Some may argue that this is a small price to pay for freedom from EU control, hile I also disagree with the sentiment behind such an argument I primarily reject the possibility of the UK exiting the EU and remaining in the common market. Euroscepticism, once  to Britain is on the rise across the Continent. Indeed UKIP is not the largest eurosceptic party in the European Parliament, that distinction goes to Italy’s Five Star Movement who took 25% of the country’s vote in the last European Elections. In France to, the latest polling suggest the Front Nationale’s Marie Le Pen would make it to the second round of a presidential contest instead of President Hollande.

Why does the rise of euroscepticism elsewhere matter for the details of a British withdrawal? The answer is simple, a failing independent Britain would be a killer blow to similarly minded groups everywhere. As a result it is not in the interest of the French, the Italians or any other powerful EU member to allow generous terms post-Brexit. Britain would find barriers to trade erected with all its closest trading partners on the continent.

In this more realistic scenario the aforementioned Bertelsmann Stiftung and ifo Institute report makes the dire economic consequence quite clear. Britain could lose up to 14% of its GDP in the decade following a Brexit compared to if it remained in the EU. This would be the equivalent of a massive £3,500 per person.

Whether people like it or not the City of London is the heart of the British economy. With its links across Europe, how it would survive is a key question for any discussion of the economics of a Brexit. A report by the Centre of European Reform concludes that given its worldwide links the City’s financial institutions would not collapse, but that the cost would far outweigh any benefits.

Taking the  example of Switzerland who also have an important financial sector, we can see that the eurosceptics’ gains from the reduction of regulation are imaginary. As a “third country” Switzerland must constantly keep its regulations in line with that of the EU if it is to do business with EU companies. Thus a Brexit would mean Britain would still have to abide by EU rules, without having any say in drawing them up.

A Brexit would significantly reduce Britain’s bargaining power in international negotiations with rising economic powers such as China and Brazi.To think otherwise is wishful thinking. When it comes to trade negotiations there is strength in market power, the size of the common market both in terms of consumers and wealth allows the EU to collectively gain better deals than they would individually.

These are just a few of the things that the British electorate will have to consider when they vote on an in/out referendum on EU membership. It is also my opinion that the referendum should be sooner rather than later, since as most economists will tell you there is a cost attached to uncertainty.

Author Biography

Callum Trimble-Jenkins is a recent graduate of Trinity College Dublin having studied Philosophy, Politics, Economics and Sociology, majoring in Economics. He is currently working in communications for an international NGO having previously edited Ireland’s only student run financial newspapers The Bull. Callum is particularly focused on issues of economic policy making, European affairs and British politics. Hailing from Northern Ireland he also watches developments in his homeland with keen interest.

You can find him on Twitter

 

*Cover image ‘The Union Jack Flag‘ by UK Ministry of Defence

3 responses to “Jumping into the Abyss: The economic cost of a Brexit

  1. What utter rubbish, the UK has no voice in the EU we are simply 1 or 28 & as Putin said aptly within the EU the UK is a small country that no one takes any notice of anymore. Outside the EU we get or WTO seat back, we have a permanent UN seat we are a member of the G7 & we are the 2nd biggest military power inside NATO we also have huge soft power with the worlds 2nd largest aid budget & a currency that is respected world wide & on top of that we have a significant voice within the commonwealth & a global footprint & Nuclear power.

    You say we will have to apply EU standards to export to the EU, they will have to meet UK standards to have access to their single largest market (Which the UK will be when we leave) We also have the largest fishing seas in Europe & reserves of Oil that would turn any other member of the EU green with envy.

    The UK exports to the EU but a vast amount of the tangible content merely passes through the EU via Rotterdam & Antwerp but because of warped EU legislation these are classed as EU exports & with regard to loss of GDP we will not include the proceeds of Crime & Prostitution in our GDP figures which is nothing more than an excuse to squeeze an extra few billion out of member states while pretending that the impact of the EU budget is not hitting its members harder than in previous accounting periods.

    The EU has no military clout with dwindling defense budgets & to shy away from an association with the US using interoperable hardware with it is lunacy. The EU as a global military player is a non entity better suited to coastguard duties & even that is a stretch for many member states who’s militaries work 9 to 5 with weekends off.

  2. I must say I disagree with your current assessment of the UK’s position in the world. While you are correct that a Brexit would give us back a WTO seat, as it said in the article the UK’s position to gain concessions in international trade agreements would be significantly weakened compared to the current collective position as the World’s most lucrative market (based on GDP). The rest of the points you make regarding the UK and the UN, NATO, the Commonwealth etc. are true regardless of whether we are members of the EU or not. Indeed these positions make the UK a particularly influential member of the EU when it comes to foreign policy; Catherine Ashton’s tenure in charge of external relations is evidence of that.

    While you are of course right that EU firms would have to abide by UK standards it seems to me that the argument for a Brexit is tangled up with calls for de-regulation (which I believe would be to the detriment of workers and consumers as without regulation both would be exposed to the dangerous forces of a pure free market). Thus is likely that EU products will already be of a high enough standard before entering the EU. In terms of North Sea Oil, evidence suggests that reserves are depleted; output has been in steady decline since the late 1990s. As regards to Fisheries, it would be unsustainable to fish them beyond the already established EU quotas.

    In terms of GDP figures. Firstly I would contend that it is necessary to measure the informal economy as it is an indicator of economic activity. When GDP economists do not make value statements as to the type of activity performed otherwise there would be an argument that we remove profits deriving from child labour in the developing world. It is also wrong to define the informal sector as just crime and prosecution, many low income workers participate in the so-called ‘shadow economy’. Secondly the report mentioned compares current GDP as a baseline and compares it to a simulated situation using the same measure of GDP, thus their conclusions are valid irrespective as the definition does not change.

  3. Inside the EU we can’t even make the most simple of trade deals that even Singapore, Switzerland, Korea, Canada, Australia, New Zealand etc can make. There isn’t the remotest chance of a genuine FTA with Canada, America, Brazil, China, India, Australia or New Zealand, we are simply one of 28 & outvoted on any progressive proposals by those that seek to subsidise inefficient unprofitable business practice rather than deal with the real issues that are holding back their economies. Countries like France & Italy think that the reason their economies are delinquent is they don’t receive sufficient levels of subsidy. If EU countries force subsidised produce onto the UK market we can & should adopt the attitude that the EU took regarding Chinese dumping of Solar Panels & Impose duty to prevent it. You talk about over fishing of UK waters if we leave the EU? do you think I propose increasing UK fishing levels beyond the Quota system for EU boats in our waters, I do not but when we stop EU boats from trawling our waters there will be considerably more fish for British trawlermen. If the EU doesn’t then want to buy British fish there are plenty more markets in the world, remember too that European vessels also trawl vast quantities of fish around Falkland waters which again are British territorial waters & there are plenty more such waters across the globe & while we are on the subject of the Falklands, eventually a considerable quantity of Oil will come on stream from that region & without interference from the EU the government will find it much easier to drive through legislation to take advantage of the vast amounts of oil & gas available with fracking technology we are also one of the few European countries with more fresh water flowing through our taps than we can reasonably get rid of.

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