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Impact Of Brexit On The Economy Of The UK And Other Countries

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Question:

Is Brexit a Good Move?
 
 

Answer:

The passing of the Brexit referendum on June 23, 2016 is undoubtedly one of the key economic events in the recent past which in its impact would not be limited to Britain and EU but probably would extend globally considering London’s reputation as a global financial hub. Ever since the passing of the referendum, there have been speculation from various quarters as to what would be likely implications of this move for the economies of Britain and EU both in the short term and the long term. Besides, there was speculation also with regards to whether Britain would actually go ahead with the painful process of Brexit or not (Bowler, 2017). However, all these reservations have been put to rest with the UK government finally officially notifying the EU on January 29, 2017 that it intends to separate from the EU (Gray and Cooper, 2017). This would certainly put to grave the speculation surrounding whether and divert the focus to what the impact of this move would be for Britain and the global economy.

There is widespread consensus that in the short run, the British economy would be adversely impacted. One of the prime reasons for the same would be in the form of deferred investments as the painful process of negotiation with the EU has just begun and is expected to be closed within two years. At this moment, it is difficult to speculate the exact terms on which the two entities would segregate (Gray and Cooper, 2017). Even though the government is hailing the strong economic growth witnessed since the referendum as evidence of adverse effect being overstated, however, the adverse effects would now set in with the process of negotiation actually commencing (Bowler, 2017). Further, empirical evidence has indicated that in the field of trade and investment, any shift to a new system would have a transition cost which even Britain could not avoid (Handley and Limão, 2015).

 


However, the key question is to predict the impact of this which would essentially depend on the post Brexit relationship that Britain would have with the EU. The optimistic scenario in these negotiations could be a status akin to Norway and Switzerland which have treaties for free trade with EU. The pessimistic scenario could be failure on the part of the negotiators to secure such a deal and therefore trade and commerce would be governed by the rules of the WTO (World Trade Organization). The estimated benefits on trade and public finance for Britain under the above two scenarios has been summarised (as a % of GDP) as follows (Dhingra et. al., n.d.).

In the optimistic scenario, the trade effects would be witnessed primarily on the account of non-tariff barriers that would be erected especially for the service sector. Since UK is a major service exporter to EU countries, hence this would adversely impact the overall trade. In the pessimistic case, both tariff and non-tariff barriers may be deployed and both the goods and services trade from the UK would be hit (Bagg and Mushovel, n.d.). On the fiscal front, there would be savings of public finance from Brexit as Britain no longer would have to contribute to the EU budget. The savings in this regard would essentially depend on the extent of funding which is still continued after Brexit. However, it is apparent that it is the trade which would be the clear loser due to erection of various barriers to free trade (Woodford, 2016).

Besides, the decline in GDP, there would also be macroeconomic impact which would be most evidently seen in terms of employment. It is noteworthy that the trade with EU nations accounts for 12% of the total consumption of goods and services from UK which leads to the creation of 3.3 million jobs. With the trade especially in services bound to get adversely impacted, it is likely that would be some job losses as well specially in the financial services sector concentrated in London (Bagg and Mushovel, n.d.). However, as the exports turn out to be lesser competitive, it works well for the import based industries who might lead to incremental job creation and resolve some of the unemployment issues. Also, with the limited immigration of EU nationals to UK, the supply of manpower from EU would also dry up which can be soak up any employees who have to face job losses. Thus, it seems that the impact of Brexit on unemployment would essentially be shortlived and in the long term, the natural unemployment rate would be attained (Dhingra et. al., n.d.).

With regards to public finance, scholars associate Brexit with a weekly savings of £ 350 million that Britain has to contribute to EU. However, it discards the fact that UK also tends to provide funds to UK through various forms particularly research which would be curtailed and hence the actual savings would be in the vicinity of £ 280 million per week. Another key aspect is migration where UK no doubt has gained immensely due to the inflow of skilled labour from EU member states. There are some sections of Brexit opposition which highlights how this inflow has helped in ensuring that businesses remain competitive as wages remain in control. However, no actual study exists which actually backs the claim. Besides, the manpower from EU also tends to repatriate some of their earnings to their respective countries or origin which reflects a loss to the UK economy (Bagg and Mushovel, n.d.). Also, additional people would typically imply greater pressure on the existing services and infrastructure. Thus, on migration front, Brexit could be potentially positive for Britain which would become clear in course of time (Global Counsel, 2015).

 


The various projections highlighting the impact of Brexit on the economy are summarised in the figure below (Bagg and Mushovel, n.d.).

The above projections must be viewed relative in reference to the long term growth projected for UK is 2.1% p.a. till 2030.

The impact of Brexit is not confined to Britain but also extends to other nations especially which Britain has significant relationships and are driven by the British economy. This is not limited to the various EU members only and typically expands below them as well to include other major economies such as Russia. As evident from the figure below, it is not only Britain that would be adversely impacted as almost half magnitude of the same adverse impact would be faced by various EU members (Dhingra et. al., n.d.)

Thus, in the short run it is apparent that the Brexit would be associated with overall losses for both EU and Britain driven by loss of benefits of free trade in goods and services. The various aspects of Brexit on both Britain and EU nations can be summarised in the tabular manner as indicated below (Global Counsel, 2015).

Source: Global Counsel

Having discussed the impacts of Brexit on Britain, it is worthwhile to discuss the potential impact of the same on the EU members as a whole. In respect of trade, while there is no denying that UK would be bigger loser but some individual members with huge trade surplus may also end up as the losers as UK was a important market for their products and services as is apparent from the figure shown below (Global Counsel, 2015).

The FDI (Foreign Direct Investment) patterns currently observed across Europe could undergo dramatic change over the year which would be positive for Europe. As on now, the largest FDI in the EU is attracted by the UK. However, post-Brexit, the ability of the UK to attract FDI especially from the EU nations would be severely curtailed (Goodman, 2017). Currently, there are a host of European headquarters of non-EU firms which are based in UK especially London. Clearly, this could get adversely impacted in the future and it is more likely that the location of the European headquarters for non-EU firms could very well migrate into the various EU member states (Global Counsel, 2015). However, it is possible that UK provides a regulatory environment which is more suitable to attracting FDI as compared to the EU nations which traditionally lack such tradition and hence would require time (Bernanke, 2016).

 


It is likely that with the loss of UK from the EU, the policy debates would shift away from liberalism and hence progressive nations such as Germany may find it hard to search for the requisite minority to block various proposals. Also, the political stability in Germany particularly may face issues as the conservative opposition would get a boost from the UK exit (Global Counsel, 2015). A rather more significant concern would be that the exit of UK from EU would serve as a dangerous precedent for the other member states who in the future could look to exit from the EU. This is particularly possible in the wake of certain countries in EU facing economic and refugee crisis but the impact of this is being borne by all the member states. Further, there are hefty bailout packages that in the future also may be extended to ailing states as an incentive to continue in the EU. However, this puts unnecessary strain on the finances of other nations. Future threats in this regards could lead to the dissolution of the EU (Dhingra et. al., n.d.).

In wake of above discussion, it is apparent that in the short term, it is apparent that economically both UK and EU both end up losing with significant adjustment costs which essentially would not lead to any future gains. It seems that the current process is more politically motivated than economically motivated. It is the difference in opinion on certain key issues particularly immigration that has led to an extreme step called as “ Brexit” (Peterman, Schoof and Felbermayr, 2015).  Now going back to status quo may not be possible so it is essential that the two parties must negotiate for the closest framework possible whereby even though UK is not a member of EU but still the trade and investment ties are not adversely impacted. This would result in requisite policy flexibility to the two parties while balancing the economic interests (Dhingra et. al., n.d.)

A credible alternative could be a model akin to Switzerland or Norway which have FTA and other agreements that continue to provide easy access to the EU markets and essentially thr single market principle is not violated. Also, the contribution of Switzerland to the EU finance is about 40% of that borne by the UK currently. However, one repercussion of the Swiss model which makes it unsuitable for UK is the non-inclusion of services in FTA. But, considering the size of UK economy and the importance to EU, negotiations if done with the right intent could potentially lead to a perfect balance (Dhingra et. al., n.d.)

 


Thus, it may be fair to conclude on the above basis that while Brexit seems inevitable, it is essential that the negotiations are carried out while realising the need for both parties to maintain a closer relation which is not only in the interest of the region but for the world considering the political and economic significance of Europe. It is imperative that through negotiations an FTA must be worked out so as to minimise the negative impact on trade and investment in the region. Besides, a closer UK-EU relations are beneficial for the future stability of the EU where leaving of UK would be more of a sentimental strain rather than an economic one.

 

References

Bagg, l. and Mushovel, F. (n.d.) The economic impact of  Brexit: jobs, growth and the public finances. Available at: https://www.lse.ac.uk/europeanInstitute/LSE-Commission/Hearing-11---The-impact-of-Brexit-on-jobs-and-economic-growth-sumary.pdf (Accessed: 31 March 2017).

Bernanke, B. (2016) Economic implication of Brexit. Available at: https://www.brookings.edu/blog/ben-bernanke/2016/06/28/economic-implications-of-brexit/  (Accessed: 31 March 2017).

Bowler, T. (2017) How has the economy fared since the Brexit vote?  Available at: https://www.bbc.com/news/business-36956418  (Accessed: 31 March 2017).

Dhingra, S., Ottaviano, G., Sampson, T. and Reenen, V.P. (n.d.) The Consequences of Brexit for UK trade and living Standards. Available at: https://cep.lse.ac.uk/pubs/download/brexit02.pdf  (Accessed: 31 March 2017).

Global Counsel (2015) BREXIT: the impact on the UK and the EU. Available at: https://www.global-counsel.co.uk/sites/default/files/special-reports/downloads/Global%20Counsel_Impact_of_Brexit.pdf  (Accessed: 31 March 2017).

Goodman, S. P. (2017) Beginning ‘Brexit’ and Bracing for Impact. Available at: https://www.nytimes.com/2017/03/30/business/brexit-britain-eu-economy-banks.html?_r=0 (Accessed: 31 March 2017).

Gray, A. and Cooper, C. (2017) It’s Official: Britain tells EU “we’re leaving.” Available at: https://www.politico.eu/article/britain-hands-over-brexit-notification-to-eu/ (Accessed: 31 March 2017).

Handley, K. and N. Limão (2015) ‘Trade and Investment under Policy Uncertainty: Theory and Firm Evidence’, American Economic Journal: Economic Policy 7(4): 189-222. 

Peterman, T., Schoof, U. and Felbermayr, G. (2015) Brexit – a losing deal for everybody, Available at: https://esharp.eu/debates/the-uk-and-europe/brexit-a-losing-deal-for-everybody (Accessed: 31 March 2017).

Woodford (2016) The Economic Impact of ‘Brexit.’ Available at: https://woodfordfunds.com/economic-impact-brexit-report/  (Accessed: 31March 2017).

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