What happens with Brexit? – The London Economic

By Valentina Magri

Brexit economic conseuqneces

The decision of the European Council to propose Jean-Claude Juncker as the next President of the European Commission was “one step closer to quitting Europe” for Britain.

The move made David Cameron feel very angry. Indeed, the PM has promised a referendum in 2017 over EU membership if the Conservative party win the 2015 general election. Opinion polls show that Brits are split on the issue. But what would be the economic consequences of Brexit?

The five economic consequences of Brexit

The economic consequences of a Brexit have been deeply investigated by the CER (Centre for European Reform), a pro-European but critical think-tank. The CER has divided the consequences into five groups:

1. Trade and investment;
2. Regulation;
3. The City of London;
4. Migration;
5. The EU budget.

Let’s have a look to all of them.

Trade and investment

EU membership increases British’s trade with other member states. There is scarce evidence that it reduces trade with external EU countries. Moreover, considering that Britain attracts a larger stock of EU foreign direct investment (FDI) than any other EU-economy, some of this investment may be threatened by Brexit, since UK will become less attractive to firms that want to sell their products to other countries. In addition, it should be taken into account that the EU has many free trade agreements with non-EU countries and a complex system of unilateral trade preferences. If the UK leaves EU, it will have to renegotiate trade agreements from scratch: a time consuming and uncertain process, which would surely reduce investments.

Regulation

Despite costs from regulation, the UK enjoy one of the most lightly regulated economies, as signalled by the comparative indices of the OECD. In other words: British products are more similar to those of the English-speaking world. What’s more, eliminating some rules would have a limited impact. Take the “working time directive”, from which the UK has negotiated opt-outs. The directive imposes a maximum of 48 working hours per week. Well, actually there is a spike in the number of English people working 48 hours per week. Thus, the gains from the abolition of the directive would be small. If we think about environmental and social standards, some of them are even more stringent than European ones. Finally, in order to access EU markets, Britain must sign and accept European rules, having little say over their drafting.

The City of London

London has always enjoyed a top position as a European financial centre prior to UK’s accession to the EU, but its importance has grown after that. This fact allows London to market itself as a bridgehead to non-EU financial institutions wanting to serve the EU market. Moreover, European banks relocated to London their wholesale activities (i.e. lending, borrowing and trading between financial institutions). In case of Brexit, banks would shift some of their activities in London into the EU, and since the City of London was involved in the latest financial crisis, EU have an interest in ensuring its financial stability. The eurozone banking union is not a threat to the City and British and European regulation has moved in the same direction since the crisis.

Migration

Contrary to popular opinion, migration is positive for Britain. In particular, European immigrants are far less likely to take up benefits than the British population. On the contrary, they are net contributors to the British treasury, then they help UK to deal with the costs of an ageing society. Demand for immigrant labour will increase in case of Brexit, since baby boomers are on the verge of retirement and it is expanding the demand for high-skilled and low-skilled services jobs, such as personal care, retail and hospitality.

The EU budget

Each year the UK gives 0.5 per cent of its GDP to EU as a contribution to its budget. This money will be saved with Brexit. But the price will be a cut in farm subsidies and development funds. Since Wales and the Northern Ireland are large net beneficiaries of the EU budget, they will need British funds or they will fail without them.

In conclusion, Britain may have strong political interests that push for Brexit; but are we sure that economic ones move in the same direction?

1 Response

  1. celt darnell

    Re: The economic consequences of a Brexit have been deeply investigated by the CER (Centre for European Reform), a pro-European but critical think-tank.

    Could you please explain how the CER is in any way “critical” of the EU?

    It is a paid-up member of the Brussels lobby. Please identify it accurately.

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