The eco­nomic im­pact of a Brexit

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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