What would a Brexit mean for the UK economy?
Britain might really bail on the EU next week. What then?
In six days, Britain will hold a national referendum on whether to leave the European Union.
The "Brexit" vote on June 23 looks to be a neck-and-neck decision, with the pro-Brexit forces holding a slight edge. Needless to say, the prospect of a British exit from the EU has roiled world geopolitics.
But what, exactly, would happen to the UK's economy if a Brexit actually happened?
Britain never joined the eurozone currency union, instead opting to keep the pound, and thus escaped the tender mercies of the eurozone's spectacular economic mismanagement. But the UK is still subject to plenty of EU regulations and the EU's remarkably free immigration laws, and it must abide by certain rules for how it structures government benefits. The British government contributes about 8 to 10 billion pounds to the EU budget every year. And EU laws govern Britain's free trade with other countries on the continent, where British citizens can work their day jobs in other countries, and where others can work in Britain.
All of this would be ripped up by a Brexit. What would that mean?
A study by PricewaterhouseCooper (PwC) and another by the think tank Open Europe provide good examples of how to approach the question. Both started by setting projections of how Britain's economy would perform between now and 2030 if Brexit doesn't happen. Then they modeled different scenarios for how Britain might handle itself after leaving the EU, and compared where Britain's economy would be in 2030 under those scenarios relative to the no-Brexit baseline.
It's worth noting: PwC did its analysis for the CBI, a British business association that's anti-Brexit. And Open Europe is a conservative outfit that tends to lean pro-Brexit.
Here's what they found:
The pessimistic scenario: The EU framework not only governs Britain's trade with other EU member nations, it governs Britain's trade with other countries as well. With a Brexit, all of those deals would have to be renegotiated — Britain would have to forge new trade agreements with the rest of the world from scratch. In the most pessimistic scenario the studies modeled, Britain not only would fail to set up a new free trade deal with the EU states, it would also fail to pursue a broader free trade agenda with countries like America and China. If that happens, the UK would have to fall back on the rules set up by the World Trade Organization (WTO) as a default. On top of that, the UK would also revert to a more restrictive immigration policy.
According to PwC, this would mean that in 2030, Britain's GDP would be 3.5 percent lower than it would be under the no-Brexit baseline at the same point in time. Total jobs in the UK's economy would be 2.9 percent lower. Open Europe concluded British GDP would be 2.2 percent lower by 2030.
Now it's true that, after a Brexit, the UK would save the 8 to 10 billion pounds that it sends to the EU every year. But that's also just 1.2 percent of British government spending.
The optimistic scenario: In this case, within a short time — the PwC study used a five-year window — Britain would successfully negotiate a free trade deal with the EU that effectively re-establishes something akin to the flow of goods and services that existed before Brexit. It also would set up more ambitious free trade deals with other major economic powers rather than simply defaulting to the WTO rules. And finally, the UK would return the freedom to immigrate to something like the status quo under the EU, especially for high-skill applicants.
The basic idea here is that Britain keeps all the benefits of the EU arrangements, but also clears out the regulatory clutter and various other inconveniences that come with EU membership.
In this instance, PwC found GDP would be 1.2 percent lower in 2030 compared to the no-Brexit scenario, and total jobs would be 1.7 percent lower. The other study, from Open Europe, actually projected the optimistic scenario would result in GDP that's 1.6 percent higher in 2030 than if Brexit doesn't happen.
Now, the actual economic reality of a Brexit is unlikely to be as neat and tidy as either scenario I've outlined above. For instance, by itself, GDP is a very crude measure. You could try to divide the GDP losses equally between every member of British society, and say every person will be such-and-such poorer as a result of Brexit, but it's unlikely to work out that way. It's quite possible, for instance, that existing EU immigration to Britain slightly depresses wage growth by keeping the supply of labor up. So a Brexit could actually raise wages for those lower down the income ladder even as it lowers GDP overall.
There are also political realities to consider. A lot of the momentum for Brexit is coming from Britain's right wing, precisely because it wants to ditch the EU's free-flowing immigration policy and get a lot more restrictive about who crosses the British border. Since a Brexit is basically a middle finger to the EU, it's certainly possible that turning around and immediately negotiating a new free trade arrangement with EU countries might be a little touchy.
On the flip side, while the countries of the EU collectively buy 45 percent of British exports, that's down from 53 percent in 2003. And Britain's biggest single trading partner is far and away America. It would probably be relatively easy to re-establish a new free trade deal with the U.S. in short order.
At the risk of being anticlimactic, the most reasonable conclusion about Brexit's economic effects comes from this third analysis by Woodford: "Although the impact of Brexit on the British economy is uncertain, we doubt that Britain's long-term economic outlook hinges on it." Far more than its economic future, this decision is about Britain's self-conception about its own sovereignty, and what its general stance and attitude as a society should be towards the rest of the world.
Those are fundamentally moral questions. And it's a pretty common human instinct to assume that morally good things (whatever you think those may be) are also economically good things. Reality tends to be a bit more complicated.