By Andonis Vassiliades
It is hard to believe that in less than seven months the UK will be leaving the EU. With the British government’s publication of a series of notes advising people and businesses of the potential risks of not reaching an exit agreement with the EU and offering advice on how to protect themselves, and the EU’s chief Brexit negotiator Michel Barnier doing the same on behalf of the bloc, the pending departure of the UK from the EU is becoming a very pressing issue fraught with implications for both the EU and the UK. Brexit may have a serious structural impact on the UK’s economy and its people.
Predictions on economic trends are notoriously unreliable. Ceteris paribus applies. Nonetheless, studies conducted by economists, business and commercial organisations agree that there will be short-term and long-term negative and destabilising effects on the economy (e.g. the British Treasury, IMF, WTO, Centre for Economic Performance, Oxford Economics, PricewaterhouseCoopers, National Institute of Economics and Social Research, Bank of England, London School of Economics and JP Morgan).
The projection provided by economist professor Patrick Minford, a stern supporter of Brexit, is an exception. Whilst other studies lead to the conclusion that post-Brexit the UK economy will contract, Minford claims that it will expand. His claim is based on a shaky and biased modelling that makes unrealistic assumptions. He reaches his positive outlook by proposing that if the UK unilaterally drops all tariffs and barriers on imports and the EU reciprocates or reduces its own tariffs by half, the UK will see its economy growing by four to six per cent. But even Minford acknowledges that in the short term there will be serious negative results which will shock the UK economy more than they will shock EU states. The British Treasury explains this in terms of unpredictability, uncertainty, the fall in investment and transitional costs involved in changing from EU trade and other regulations to new trade relations with the EU and outside the EU.
Market shivers, currency fluctuations and volatility, loss of skilled EU labour and the deflected psychological propensity to invest may have damaging consequences. UK official statistics released on July 31 show that about 54 per cent of UK’s imports are from the EU and 44 per cent of its exports are to the bloc. A failure to reach an agreement on tariffs and quotas with EU member states may mean the loss of the many advantages of free trade within the EU. Any attempt to shift to WTO rules will leave some sections of the economy facing very serious and substantial losses. On August 24, the head of the WTO told the BBC: “it’s not going to be the end of the world…and that everything is going to fall down, no. But it’s not going to be a walk in the park either.”
In particular, UK agriculture exports over 60 per cent of what is produced to the EU. Although a declining industry, it does survive on substantial grants from the EU. The farmers and other sections of the economy (e.g. higher education teaching and research and regional policies as in the case of Wales) receive close to six billion pounds per year from the EU. On departure from the EU, it defies any rational calculation how the UK will deal with the gap in revenue; and how it will replace the lost revenue to these sections of the economy by equal amounts. It can only do so by replacing the EU with another external funder – a very improbable prospect. Therefore, it either lets these sectors diminish, which means the loss of jobs and retraction of economic activity due to the multiplier effect; or reduce their funding but still continue supporting them with special grants coming from savings from other expenditure; or inevitably, by increasing taxation to meet their budget requirements.
Another area – the financial and business sector – constitutes a crucial contributor to the UK economy. It is as important as the manufacturing industry in generating income from external markets and a main source of job creation. Almost 50 per cent of the world’s financial institutions are London-based with over one million employed in the industry. Official statistics show that the UK exported £20 billion of services to the EU in 2014. Brexit may jeopardise all that with the loss of services going elsewhere. If so, it will deliver a severe blow to the UK’s troubled economic growth prospects. Various banks (e.g. JP Morgan, HSBC and Morgan Stanley) have forecast such lower growth in the industry, loss of jobs and the relocation of services elsewhere in the EU. The same concerns and negative predictions are expressed in regard to the insurance, manufacturing and pharmaceutical industries.
Overall, there will be a reduction of the UK’s competitiveness, a retraction in the general economy, higher costs, lower economic growth and loss of jobs, a fluctuating currency and a possible weakening of the pound. These and other consequences arising from Brexit may result in increasing living expenses, higher inflation and pressure on wages.
The common conclusion is that even under an agreement and current terms, new trade agreements (if successfully struck with US, Canada and Japan or new emerging markets as in Africa) will not succeed in compensating for the losses in trade and income from the EU. For three facts are often ignored: that new agreements take time to take off and deliver; that trade with distant markets (as opposed to the closer European markets) involves extra distribution and other trade costs adding to the pricing of exports and imports; and the broader social and geopolitical environment of an unsettled world and a looming trade war are not conducive to good trade relations.
Although the EU will face a big hole in revenue following the loss of the UK’s £76 billion contributions which will add to its social, economic and political woes, analysts are in common agreement that Brexit will prove far more damaging to the UK than the EU. This is in sharp contrast to OECD data which show that between 2011 to June 2016 the UK consistently outperformed other EU partners on every economic indicator. Post-referendum for Brexit, it is underperforming and its fortunes have turned sour.
The proverb ‘if it ain’t broke, don’t fix it’ applies here. Brexit as an attempt to fix the UK, when the UK has been, by most economic and social indicators, doing relatively well, may prove folly. It defies belief that UK politicians and the government are proving so disruptive. They are steering the country into the unknown under uncertain and risky propositions in order to fix a relatively well functioning economy. In doing so, they jeopardise the well-being of fellow citizens and the status of the country as a whole.
Brexit will accentuate existing inequalities which always hit low income groups the hardest. What is even more worrying is that Brexit is contributing to a rise in populism; is destabilising the territorial integrity of the UK; is inflating local, national and regional divisions; and is leading the UK towards ‘splendid isolation’.
Andonis Vassiliades is an Emeritus Professor. The author’s second part on Brexit, political power and representation, will appear in next week’s CM’s Sunday edition.