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09 February 2015

Financial Times series: Counting the cost of ‘Brexit’

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Depending on who you believe, an exit from the EU could give a big boost to Britain’s economy or trigger a sharp drop in output.

The costs or benefits of EU membership ultimately hinge on economics but the studies done so far fail to give any clear answers. The reason is that any referendum on membership will be held before the terms of exit have been negotiated and the details matter. 

The estimates range from a 2010 study by the eurosceptic UK Independence party saying the Brussels club costs 5 per cent of national income a year, or £85bn, to a business department figure claiming annual net benefits of 6 per cent of gross domestic product, about £100bn. There have been even more extreme estimates but these are generally deemed to be based on flawed assumptions.

If the UK does vote to leave, the economy would almost certainly not suffer in the days immediately afterwards; during the period of negotiation, there would be more questions. But in the longer term, all bets are off.

Scotland’s independence referendum provides a useful guide. As the vote came closer, it became clearer that nationalists wanted to keep everything almost as it was in the UK — the monarchy, open borders, EU membership, the currency, banking supervision and regulation from London — while being independent of England, Wales and Northern Ireland. 

In its exit negotiation with the EU, Britain would also seek to maintain the status quo, most crucially access to Europe’s single market for goods and services.

Inevitably, there would be a period of uncertainty during negotiations, which could threaten investment, as well as business and consumer confidence. 

Beyond that, existing analyses provide little guidance. Studies are often highly partisan and come to completely different conclusions, partly because they have to assume the outcome of exit negotiations; partly because they use different techniques; and partly because they do not describe what the counterfactual — or the alternative would be.

“Most of the existing studies lack a credible counterfactual and they tend to exaggerate the costs and benefits of Brexit depending on which side of the argument the authors sit on,” says Mats Persson, director of Open Europe, a think-tank. “The pessimists say that were Britain to leave the EU, it would become North Korea, while the optimists claim it would turn into Hong Kong. Neither is realistic,” he adds.
Full article on Financial Times (subscription required)

© Financial Times

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