The consequences of a UK exit from the European Union

Executive Summary
Although the outcome of the 23 June 2016 British Referendum on EU Membership and the procedure to leave the EU remains uncertain, this paper tries to look ahead and assess the possible consequences of a UK exit from the EU (or ‘Brexit’).

Economic Interdependence
The UK is more economically dependent on the EU than vice versa; 12.6% of UK GDP is linked to exports to the EU, compared to only 3.1% of GDP generated from exports to the UK among the other 27 Member States. Overall, 60% of total UK trade is covered by EU membership and the preferential access it grants to 53 markets outside the EU. If TTIP and other currently negotiated trade deals succeed this could increase to 85%. In total, the seven most affected industries (financial services, automobile, chemicals/pharmaceuticals aerospace, machinery, food/beverages/tobacco, and professional services) employ 20.79% of the UK labour force. Another measure of EU-UK interdependency is the 1.4 to 1.8 million UK nationals that live in other parts of the EU on a permanent basis.

A trade-off between economic well-being and Immigration
Estimates for UK GDP in the case of a ‘Leave’ vote vary between an income loss of 9.5% and an income gain of 1.6% by 2030, with most predicting an income loss of between 2-3% of GDP. The only possible way to realise the scenario of 1.6% GDP growth would however require controversial economic reforms on three fronts: 1) further open up the economy to competition from China, India, USA and Indonesia; 2) pursue a liberal policy for labour migration; 3) slash regulation on environmental rules, social and employment protections and financial services. All three reforms seem highly unlikely given that anti-immigration sentiments are one of the main drivers of a Brexit vote and Britain is likely to keep many EU rules on climate change and banking regulation, where it has gone further in some areas than the EU standard.

Sovereignty and Security
The EU is the principal source of leverage for Britain in the world. The EU allows the UK to leverage the world’s biggest single market to secure the UK’s economic interests, to shape policies towards the EU’s Eastern and Southern neighbourhoods, to maximise its ability to shape global policies on climate change and to give it more clout vis-à-vis countries such as the United States. Leaving the EU would accelerate and make more permanent the UK’s diminished influence in the global order, forcing it to fall back on secondary relationships in order to exert influence.

Negotiation Position vis-à-vis the EU
Due to the formal process of leaving the EU, laid out in Article 50 in the Lisbon Treaty, and the nature of its trade relationship with the EU, the UK would be at a disadvantage if it found itself in the position of having to renegotiate its relationship with the EU following a Brexit vote. Article 50 allows all EU Member States a veto on any part of a renegotiated deal and empowers the EU to set the pace of negotiations. Furthermore, although the UK has a net trade deficit with the EU, it has a net trade surplus in services of £10.3 billion. The EU will thus have far less of a rationale to conclude a liberal agreement on services access than on goods, which would severely hurt the UK economy, where the service sector makes up almost 80% of the economy according to the UK Office of National Statistics. Lastly, the UK will be affected by a significant array of EU legislation, especially if it takes the likely route of wanting substantial access to the EU Single Market, with the important difference being that the UK would not be able to influence legislation.

Conclusion
Upon looking at and assessing a variety of reports and analysis, it is clear that a British exit from the EU will carry with it large economic and political costs. It is also evident that none of the alternative relations with the EU presents itself as more advantageous compared to EU membership. The clearest trade-off seems to be between economic well-being and immigration. In order to avoid the most catastrophic growth estimates, the UK would either have to accept an increased level of freedom of movement within Europe to gain full access to the EU Single Market or, if it decides to have a WTO-style relationship with the EU, it would have to substantially increase immigration from non-EU countries.


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