Economic consequences of Britain exiting

Economic consequences of Britain exiting (BREXIT) single market of European Union

• May 9, 2016

Abridged essay: “Economic consequences of Britain exiting (BREXIT) single market of European Union”

Economic consequences of Britain exiting (BREXIT) single market of European Union

As the June 23 plebiscite nears questions abound on the post exit ramification. The four decades Britain has been in the economic bloc has presented benefits and disadvantages to the economy. Economist agrees that EU membership has created more trade benefits than diversion. It has also boosted investments, increased competition, enhanced innovation and specialization, making Britain competitive.  Similar studies show that EU membership has boosted and diversified British economy. The Brexiteers, on the other hand, claim that the membership has been damaging to the economy. And it is prudent to leave the union in order to have most command of the economy. The anti-Brexit camp fears that most of the benefits Britain enjoys through membership stand to be wiped out.

Both pro and anti-Brexit crusaders agree there is economic uncertainty post EU exit. Even economics modelling cannot predict full economic ramifications of Britain leaving the EU. Economists agree that in the short term after leaving the EU, Britain will suffer economic losses. As a result of transition and uncertainity over Britain’s relationship with other EU countries, this will damage investments and confidence. According to Schoof, Petersen, Aichele & Felbermayr (2015) if Britain exits the European Union, it will see reduced exports and expensive imports. The scholars posit that in 2030, depending on trade policy isolation UK’s real gross domestic product will be lower by between 0.6% to 3% than if the country remained in the bloc. Given the dynamic effects of economic integration on innovation and investments, Britain may incur GDP losses of more than 14%.

Britain exit from the European Union is counter economic. After leaving the trading bloc, United Kingdom will have to renegotiate trading pacts. This uncertainty over future trade arrangements has already negatively dampened the Pound. Confidence in investments is also waning; current account deficit is also widening putting financial stability in limbo. Besides trade, other economic channels that will see negative impact include: foreign direct investments, financial services, budget, industrial policy and liberalization. Britain stands to incur economic losses, both short term and long term, if it exits the trading bloc.

Trade

According to Giles (2016) United Kingdom is closely economically tangled with the EU. It is estimated that 55% of Britain’s exports go to EU markets. Likewise 50% of imports in the Britain come from the EU member states. Trade between UK and the European Union has been increasing over the past 40 years. If United Kingdom leaves the union, there will be lower trade activities and increased cost of trade. Economists argue that the biggest GDP losses post EU exit will arise from trade.

Freyer (2009) agrees that expected decline in cross border trade will hamper productivity. Weakening pressure from international competition will make British companies to de-emphasis on investments and innovation, which will hamper productivity. Brexit will cause trade opaqueness, Felbermayr & Groschl (2013) observe that Brexit will lead to a real GDP per capita of between 2 percent and 14 percent depending on trade policy isolation.

Schoof et al (2015) argue that in case of Brexit, Britain will forego benefits from ongoing trade negotiations close to ratification with overseas countries (Canada, USA, Vietnam, Japan, Singapore, Idia, Malaysia etc). Britain will be required to negotiate a fresh with these countries since they will no longer be EU member state. Expected long term GDP losses from foregone trade integration will range from 1.4 percent to 7.5 percent. The severity of the losses will depend on level of economic and trade isolation.

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References

Felbermayr, G., & Gröschl, J. (2013).  Natural Disasters and the Effect of Trade on Income: A New Panel IV Approach. European Economic Review 58, 18-30

Freyer, J. (2009) Trade and Income Exploiting Time Series in Geography, NBER  Working Paper 14910, Cambridge, MA

Giles, C. (2016, February 22) What are the economic consequences of Brexit? Financial Times. Retrieved from: https://next.ft.com/content/70d0bfd8-d1b3-11e5-831d-09f7778e7377

Schoof, U., Petersen, T. Aichele, R. & Felbermayr, G. (2015) Brexit-potential economic  consequences if the UK exits the EU. Policy Brief #2015/05. Retrieved from: https://www.bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/GrauePublikationen/Policy-Brief-Brexit-en_NW_05_2015.pdf