international analysis and commentary

The impact of Brexit: dealing with political uncertainty


“There are three kinds of lies: lies, damned lies, and statistics, the former conservative British Prime Minister Benjamin Disraeli is thought to have said once. This maxim comes to mind when surveying the numerous studies produced on the topic of the economic impact of a possible “Brexit”, the scenario in which the United Kingdom gives up its membership of the European Union. Although some studies are more informative than others, generally they agree only to disagree.

According to an analysis of the Centre for Economic Performance (CEP) at the London School of Economics, the UK’s GDP would fall somewhere between 6.3 and 9.5 percent in the event of a Brexit; unless of course London managed to negotiate some other favorable trade arrangement with the EU. The fact is, both the EU and the UK benefit from doing business with each other, so there is no reason to believe that once outside the EU, the UK would not be able to find an alternative accommodation to avoid sheer isolation. But as we will see, the terms such a deal could have are uncertain. In any case, in a scenario in which both parties agree to a Free Trade Agreement (FTA) the damage of a Brexit to British GDP would be considerably lower – in the direction 2 percent, according to the CEP analysis.

Open Europe, an independent think tank with offices in London and Brussels, also analyzed several possible Brexit outcomes. In one of them the UK would actually see its GDP rise by around 1.5 percent per year until 2030. But again, this would depend on a lot of variables, such as large-scale deregulation at home and favorable trade terms with the EU as well as with other parts of the world, with which the UK is now trading according to terms negotiated by Brussels.

Other studies narrow their scope down to the effect Brexit might have on the UK’s contributions to the EU budget. These of course would be eliminated in case London gave up its EU membership. But whether these savings would be enough to counteract a possible decline in GDP following Brexit, and the costs of future tariffs imposed on trade with EU-members and EU trading partners is hard to tell.

This leaves us with the question of what a post-Brexit EU-UK trade agreement might look like in reality. At this point, this is not clear. One could envisage an accord similar to the ones Switzerland and Norway have with the EU, allowing products and most services to flow between the parties without the hurdle of import or export tariffs. But for many sectors, the devil would be in the detail. Signing off on the free movement of cars, clothes or food is one thing, financial services is another. If there is one country in Europe depending heavily on its financial sector, it is the UK. During the last few months, several banks and other financial institutions have publicly expressed their concerns over the impact a Brexit would have on their business. Moving their headquarters away from London to Frankfurt or other places in Europe is a possibility that is now seriously being taken into consideration. Banks’ decision to stay or to leave the UK for the Continent would either smooth or worsen the impact of a Brexit on the UK’s GDP. Thus, so would any agreement on passport rights for financial institutions.

When looking at all the studies published on the matter, all the many opinions people have about Brexit, it is in my view legitimate to ask ourselves whether we can fully separate economic logic from political emotions. I doubt it.

Today, economics is often regarded as a rational, technical discipline. In practice however, the economic consequences of a Brexit would to a great extent come down to sheer politics. First, there is domestic politics. In case the UK  split from the European Union, it is likely that Scotland, who appears willing to stay in the EU instead, would organize a new referendum on the question of whether it should in turn leave the UK – to become an EU-member itself. Such a decision could have additional economic effects for the UK, or whatever remains of it. Of even more importance might be European (continental) politics.

The EU’s willingness to come to terms with a Brexit and allow the UK to still trade freely with the block would partly depend on this scenario’s impact on the other EU countries  . The impact of having to wave the Brits goodbye could have considerable effect on the balance at the Brussels’ table. It could both strengthen or weaken the relationship between the two most important Member States in Europe, France and Germany. It could bind them closer together, but it could also make them drift further apart. It could strengthen France’s position behind Germany in terms of influence, but only if the two are able to overcome their differences, which is not a given. Therefore, it is not entirely clear with what voice the EU will speak after Brexit.

But there is another issue at stake. A Brexit could set a precedent for other countries to re-evaluate their EU-membership. With anti-EU sentiments on the rise, some even fear such a dramatic step could trigger a series of similar attempts in the years to come. Especially if it turned out that leaving the EU benefited the UK in the long run. In conversations I held with senior EU officials, some argued that to avoid this scenario it might be worth taking a hard line on the Britons, putting fierce trade tariffs in place in the event that they left. In other words, some in Brussels would happily pay the price of a few percentage points of European GDP in order to show the remaining Member States that leaving the EU is not a decision they should be taking lightly.

This leads us to the conclusion that, all economic arguments aside, it is politics that would ultimately decide whether the EU and the UK benefit from a Brexit or are harmed by it. Considering all the variables at play, the question of what the exact economic effects of a Brexit would be can only be answered with an educated guess.