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.

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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

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