The economic impact of a Brexit
On Thursday, June 23, the United Kingdom will vote on whether or not to leave the European Union. This historic referendum is one of the most contentious issues of modern times. At the heart of this divisive issue is whether or not a Brexit will leave Britons in a better financial predicament or worse. It has been exceptionally difficult to gauge the likely outcomes of a decision either way. The benefits associated with continued EU membership and the costs entailed in breaking free from the Union have been evaluated on a theoretical level by analysts, forecasters and MPs on both sides of the aisle. One such committee that has been assessing the risks/benefits of continued EU membership is the Commons Treasury Select Committee. The problem in all instances remains the same: there is no failsafe way to effectively gauge the impact of a Brexit on the UK economy.
It is all hypothesising at this juncture and the factual analysis is rather limited in all instances. Committees that have been established to evaluate these issues are severely divided along partisan lines, with Prime Minister David Cameron in favour of remaining with the European Union and London Mayor Boris Johnson and his cohorts in favour of breaking from the EU. Various studies commissioned by leading authorities including the Bank of England have resulted in findings that differ widely from one another. For example, the BoE is of the opinion that membership of the European Union has been good for the British economy. On the opposite end of the spectrum you have those calling for a Brexit claiming that EU membership has been detrimental to the UK economy. These divergent opinions are difficult to reconcile. There is a feeling at least in political circles that a move away from EU membership would result in less bureaucratic red tape.
Since everything is determined in Brussels, and billions of pounds in annual fees are paid by the UK to retain its EU membership, there is a feeling that a Brexit could relieve some of the regulatory and financial pressures that the UK is facing. Even with the most astute minds on the subject burning the candle at both ends, no clear consensus has been reached on the overall pros and cons of a Brexit. Despite the great divide, there is a feeling that over the short to mediumterm, a Brexit would be disruptive to the UK economy and the broader EU economy. The legal, logistical and financial ramifications of a Brexit are beyond perplexing. As it stands, the EU and the UK are intimately entangled in political, social and economic ways. The disentanglement in the form of a Brexit is anything but clear-cut. Future investment opportunities are beginning to feel the pinch of a potential Brexit, with less money being earmarked for various operations. Already, the GBP has been placed under tremendous pressure as is evident from its exchange rate relative to other G-10 currencies. The UK current account deficit is at record highs. That an influx of foreign capital is required to finance the current account deficit is also a deep concern.
Some of the forecasts from leading watchdog authorities on a Brexit include the following:
Oxford Economics has assessed a Brexit to have a -0.10% to -3.90% effect on the GDP of the UK.
The Centre for Economic Policy Research has assessed a Brexit to have a -1.24% to -1.77% effect on GDP.
The Centre for Economic Performance, LSE has assessed a Brexit to have a -1.30% to -2.60% effect on GDP.
The Institute of Economic Affairs made an assessment that a Brexit could lead to a possible 1.10% improvement for the UK economy, or it could result in a -2.60% downgrade of the UK’s GDP.
In 2015, Open Europe forecast that a Brexit could have a positive impact to the tune of 1.55% on GDP, or a negative impact to the tune of -2.20% on GDP.
In any event, there is widespread divergence in opinion on the issue of a Brexit. The most concerning aspect of all is the decreasing revenues as a result of the UK not having the collective bargaining power of the EU at its beck and call. In fact, various watchdogs have confirmed that the UK has indeed benefitted immeasurably from the EU, with as much as 55% improvements owing to EU membership. Other factors that have been weighing heavily on this debate include the following: the GBP 8.5 bln that the UK has to pay the European Union annually, decreased levels of foreign direct investments (FDIs) if a Brexit were to take place, a reduction in stringent rules and regulations, and the issue of migration. The migration concerns stem from the influx of refugees and asylum seekers from Eastern Europe and North Africa/Middle East. Later in April, the UK Treasury Department will be weighing in on the issue with a comprehensive assessment of the UK’s membership of the European Union. Most analysts expect the Treasury report to be pro-EU membership.
Regardless of the position that protagonists and antagonists are taking in this highly contentious issue, there is no doubt that the short-term impact of a Brexit will be disastrous for the GBP, UK indices and the broader EU. It will also raise questions about another Scottish referendum on membership of the UK, perhaps even an Irish and a Welsh referendum too. Then of course there are concerns that a Brexit will encourage countries within the EU to also seek to chart their own course independent of the Union. Earlier in 2015, a Grexit was a real threat to the unity of the Europe. That seems to have abated for now as the Greeks realise the inherent benefits of remaining part of the EU over independence.