What are the economic consequences of the UK leaving the European Union?

A feature of these times is that the news flow is dominated by discussions about the Greek crisis. In spite of a deal being “close” and then “closer than close” we find a situation where there is still dissent and plenty of name calling. However there is another issue on the horizon for Europe which is the planned referendum in the UK on the subject of continued (or not) membership of the European Union. Accordingly some 40 years or so after they voted to join what was then a free trade area called the European Economic Community or Common Market UK electors seem set to get the opportunity to vote on what has now become a federal project called the European Union unrecognisable from those days. The vote has acquired its own acronym of Brexit which seems a little unfair on Northern Ireland which is in the UK but not Great Britain. Let us take a look at the economics.

The UK establishment

This has continued to run various unsubstantiated lines of which the most prominent has been “3 million jobs depend on Europe”. As Europe is our largest trading partner of course plenty of jobs depend on business there just like they did before we joined the EEC back in 1973. As we traded with Europe before 1973 presumably we could post 2017 and any Brexit. It is of course possible that some jobs will be lost but let me give you an area where it is certain.That is of UK politicians and officials who work in the European parliament and institutions who will lose well paid jobs sometimes which are tax-free and which frequently come with substantial expense accounts. This ,makes me wonder if the UK establishment has confused its well-being and circumstances with ours.

The other side of the argument is that the UK would have changed European policy if it had “engaged” more with the project. This has been expressed by Martin Sandbu in the Financial Times and this is the argument.

The important question, therefore, is how the UK would have changed the eurozone’s policies from the inside.

You may note that the sands have shifted here as the FT’s economics leader writer looks to justify its long-standing support for the Euro project. Apparently everything would have been better.

The BoE understood the need for extraordinarily aggressive policy much better than its counterpart in Frankfurt.

So in the fiscal sphere, too, British euro membership would have tilted policy in the direction of growth. And the influence could have been substantial.

There you have it as we are so clever in the UK we could have fixed both monetary and fiscal policy! Rather against the reality of the policy errors of the Bank of England which gets a lot of rose-tinting here.

There are quite a lot of issues with this. Firstly had we been in the Euro and the lower interest-rates there had been applied to our housing market then it would have had a boom and bust which would have made the ones in Ireland and Spain look like an afternoon tea party. As an example post 9/11 UK Base Rates fell to a low of 3.5% whereas the ECB cut to 2%. Never mind Greece how about paying for a UK bailout? That may well have broken the Euro. Also as an implicit part of our policy response under Bank of England Governor Mervyn King was for the UK Pound £ to fall and this fall was if we use our rule of thumb a larger monetary stimulus than the Base Rate cuts we have a problem if we are in the Euro do we not?

Life is rather different if you look at the facts rather than cherry-picking from a wish list. But of course the Financial Times is writing to itself with this bit.

If you were so misguided as to have supported the euro then, they argue, surely we cannot take seriously your argument for continued EU membership today.

The economics leader writer of the FT seems to be a little short of knowledge of economics and economic history. Perhaps he might take a look at 1992 when we left the forerunner of the Euro called the ERM in a rather undignified fashion.

What about trade?

The simple fact is that the UK trades on a large-scale with Europe and both not just one side benefits from that. This is reinforced by the fact that we have a balance of payments deficit with Europe and in particular a large goods or balance of trade deficit. Here is the data from UK Customs and remember this is just one month.

EU Exports for April 2015 are £11.0 billion….. EU Imports for April 2015 are £17.6 billion……..EU trade is a net importer this month, with imports exceeding exports by £6.6 billion.

I do like the way they put “this month” as I cannot remember when we last had a trade surplus with the European Union. But if we look at individual countries we bought some £2.6 billion more goods from Germany than we exported in April alone. Thus any closure of trade with Germany would have Audi.BMW,Bosch,Porsche and Volkswagen knocking on Chancellor Merkel’s door in very short order. Or let me be more realistic ringing her mobile phone as I am sure they will have the number.

In the unlikely event that such numbers do not influence Germany there is always the £1 billion goods deficit with the Netherlands, the £600 million deficit with Belgium and Luxembourg, the £570 million deficit with Italy or the £400 million goods deficit with France in April to consider.

If you want a longer-term perspective here is the latest quarterly data is below.

By area, the UK’s deficit with the EU widened by £0.2 billion to £21.3 billion in the three months to April 2015,

They are not going to end that are they? At a time of economic difficulty the UK has been a substantial buyer of European and Euro area goods something which we seem to get very little credit for.

Just to be clear these are numbers for goods. We do have a services surplus but we are very vague about from where (although we have monthly numbers the actual data is quarterly and annual). I regularly discuss the fact that this is an embarrassment in an era of information technology but overall we remain solidly in deficit.

Also to sweep up the whole subject if trade is a benefit for all as argued why would anybody want to stop it?

Looking further afield

On the upside there would be clear gains from the UK moving its emphasis to the rest of the world. If we just look at the subcontinent there is the fast growing India with which we have traditional and indeed cultural links (tea,cricket and increasingly I gather football). Or if we consider China I note that it is playing a long-term game based on resources whereas we have de-emphasised links with Canada and Australia which of course are stacked with them. In a world where Australia sees threats merging we could do a lot worse than actually putting some planes on one of our upcoming aircraft carriers and sending it on a tour to Australia. After all the US defence umbrella is not what it was.

Some numbers from Open Europe

They did an analysis of the situation and it is the scale of the numbers I think which are important here.

In a worst case scenario, where the UK fails to strike a trade deal with the rest of the EU and does not pursue a free trade agenda, Gross Domestic Product (GDP) would be 2.2% lower than if the UK had remained inside the EU.+

In a best case scenario, where the UK strikes a Free Trade Agreement (FTA) with the EU, pursues very ambitious deregulation of its economy and opens up almost fully to trade with the rest of the world, UK GDP would be 1.6% higher than if it had stayed within the EU.

Some care is needed as these numbers represent the impact a fair way down the road as they are for 2030 but they are quite low considering all the hue and cry and they center on zero pretty much! So it does not matter? I think that overstates things but we are obsessing one more time about a narrow geographical issue.

Comment

One thing I would like to make clear is that many of the countries in Europe have long been our friends. Portugal is the oldest ally of England and Wales and I am putting it like that because the alliance even predates the union with Scotland. Also I recall messages to this blog from Greeks back in the early days of their crisis pointing out that British troops had fought for them back in World War Two. Thus I am bemused by the idea that somehow the day after Brexit we would have moved our island into the middle of the Atlantic rather than being next to Europe. Why could we not be friends and do a deal? After all we are always likely to be a disruptive influence to a federal Europe with our economy tilted towards housing and banking.

The other side of the argument that we can start to “really engage” with Europe and help to reform it has as a problem the evidence of the last 40 years. It is silly to argue that everything that has come from there has been bad but exactly where have we made our voice heard? Indeed when this came up some 30 years ago on Yes Minister the apocryphal civil servant Sir Humphrey Appleby put it very differently.

Sir Humphrey: Minister, Britain has had the same foreign policy objective for at least the last five hundred years: to create a disunited Europe. In that cause we have fought with the Dutch against the Spanish,with the Germans against the French,with the French and Italians against the Germans, and with the French against the Germans and Italians. Divide and rule, you see. Why should we change now, when it’s worked so well?

Later he went on..

Hacker: But surely we’re all committed to the European ideal?

Sir Humphrey: [chuckles] Really, Minister.

Hacker: If not, why are we pushing for an increase in the membership?

Sir Humphrey: Well, for the same reason. It’s just like the  United Nations, in fact; the more members it has, the more arguments it can stir up, the more futile and impotent it becomes.

Hacker: What appalling cynicism.

Sir Humphrey: Yes… We call it diplomacy, Minister.

Was he right?

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13 thoughts on “What are the economic consequences of the UK leaving the European Union?

  1. expect a lot of lies Shaun ,

    Being in EFTA will suffice , we should not join the Franko/German Empire or the Unites States of Europe

    look what is does to its own member states ! Cyprus Greece for two ….

    Anways the economic rational for the EU is the same for use joining the US of A ? Atleast they speak sorta the same language !

    No , the real loosers will be our politicians who depend on lucrative jobs in the EU , who else would employ Tony and Neil ? pigs with trotters in the Euro Trough .

    And also should all the rational for a small trading Island with an ageing population and big deficits mean they should join with the larger continent , like you know, Japan and China ? hahaha

    As for the joke about 500 years , theres a little truth in it along with the supposed insults of being called “little Englanders ” , we have been at war with the major players at one time or other , normally them declaring war on us ( hey we do have some say in Europe then! ) and I say yes , lets stop being little englanders , a spot on the bum of Europe , its a big world out there you know and they need us more than we need them !

    Still gotta laff , as if anything we say here will stop the greedy , eh ? 🙂

    Forbin

    Popcorn is trans-national – here have some , this is going to be quiet the ride !

    • Hi Forbin

      Actually in economic terms as I have written before there is more sense in us joining the US Dollar and becoming the 52nd state or 52-55 with national identities retained more formally.

      As to the lies well I saw people tweeting that Fleetwood Mac are in town this week.

      We’re better off apart let’s give it a try
      Tell me, tell me, tell me lies
      Tell me lies
      Tell me sweet little lies
      (Tell me lies, tell me, tell me lies)
      Oh, no, no you can’t disguise
      (You can’t disguise, no you can’t disguise)
      Tell me lies
      Tell me sweet little lies

      I should have figured out a way of putting those lyrics in the article……

  2. Shaun, glad you brought this up as I have never bought into the idea of massive job losses if we leave the EU. They need us more than we need them. I do however expect the usual tsunami of fear inducing rhetoric from the EU the closer we get to the referendum date. What the EU fears is the loss of British contribution and the worry that a country who leaves might be seen to do rather well on its own! The idea of Britain being in an EU is a good one, just not the EU we are currently involved with. If the EU had the guts to admit its shortcomings, reform, cut waste and expense and to reduce unnecessary meddling in member countries national affairs then I could be an enthusiastic supporter. As you may gather, I am not.

    • I could not agree more and there is a lot more Europeans, than you think, also agree that the present EU can’t carry on like this.

  3. £7bn a month the trade deficit in goods with the EU. £84bn a year.
    That’s just the EU surplus, the total is £33bn per month, £400bn per annum.
    How much of that trade do you think the EU countries would want to lose, in the event that Britain decided to leave their nasty, fascist club?
    Anyone who tells you that (outside of politics) leaving the EU would cost one British job, is a liar.
    In fact, the crap, tasteless Spanish greengroceries which we have to take because they’re in the EU too, can go too.
    How I miss the real flavour of S.African and Israeli oranges, and Channel Island tomatoes; a business that went mammaries skyward with EU membership.

    • Hi therrawbuzzin

      I forgot to add in the UK contribution to the EU which even the European Commission admits exists.

      “Back to 2013 – the most up-to-date figures available. The best estimate (there are several variations depending on the exact basis for calculation) of the UK net contribution is GBP 6.7 billion (Euro 8.6 billion).”

      As to the food and fruit it is the other side of the Common Agricultural Policy which of course explicit about subsidies but much less explicit about the higher food costs it creates.

    • The oranges I eat still taste fine to what I was eating 40 years ago??

      In my part of the country we used to have a substantial market garden presence especially in tomatoes and celery. The celery tasted the same as Spanish imports but the tomatoes tasted a bit better than Spanish ones. The thing that killed our local market garden industry was prices – much cheaper from Europe so they went out of business and the consumer benefited, despite the CAP with the possible exception of a slight decline in quality of tomatoes, so I don’t know where you’re coming from with this argument.

  4. It will be interesting to see what our friends in the City of London say as we get closer to the election date – I suspect they’re more determined than most to see us stay in the EU.
    Similarly they be less than keen on an alternative in which we become more entangled with the USA, since American regulators seem to be keener on, err, regulating.

    • Hi arrbee

      Yes the United States does show enthusiasm for jailing bankers from time to time. Perhaps that is why no-one has suggested us joining the US and the US Dollar which in many ways would be more logical. They fear a bit of jail time.

    • I think the City worries too that if we leave the EU the EU will probably set about creating a rival financial centre (Frankfurt?) in explicit and direct competition with the Ftse for EU companies to list on, which will lead to shrinkage of UK financial services (over many years) and they’ll be out of jobs.

      Whilst shrinkage of UK financial services would be a good thing imo I wonder what we would replace that shrinkage with?

  5. Sahun, there is nothing stopping the UK from remaining in the EU and looking to other parts of the world to trade with is there?

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