23 March 2015

Open Europe: What if...? The Consequences, challenges and opportunities facing Britain outside the EU

In a best case scenario, under which the UK manages to enter into liberal trade arrangements with the EU and the rest of the world, whilst pursuing large-scale deregulation at home, Britain could be better off by 1.6% of GDP in 2030. However, a far more realistic range is between a 0.8% permanent loss to GDP in 2030 and a 0.6% permanent gain in GDP in 2030, in scenarios where Britain mixes policy approaches.

What if there were a Brexit?

In this study, Open Europe primarily examines the economic impact of Britain leaving the EU. However, given that Brexit comes down to a finely balanced calculation, unquantifiable considerations such as lost sovereignty and democratic accountability may be what in the end determines whether Britain remains a member.

Open Europe’s study draws on detailed economic modelling, showing that the economic impact of Brexit is not as clear cut in either direction as most previous analyses have suggested. Instead it will depend on a number of tough decisions in the UK and Europe. This includes whether the EU itself will embrace reform and British politicians and voters are willing to accept ambitious deregulation and new levels of competition through expansion of free trade.

The numbers

Based on economic modelling of the trade impacts of Brexit and analysis of the most significant pieces of EU regulation, if Britain left the EU on 1 January 2018, we estimate that in 2030:

• 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.

• However, these are outliers. The more realistic range is between a 0.8% permanent loss to GDP in 2030 – where the UK strikes a comprehensive trade deal with the EU but does nothing else; and a 0.6% permanent gain in GDP in 2030 – where it pursues free trade with the rest of the world and deregulation, in addition to an EU FTA.

The tough choices facing Britain outside

In none of our scenarios would the cost of leaving the single market and the EU customs union be off-set by merely striking a new trade deal with the EU. Britain will only prosper outside the EU if it is prepared to use its new found freedom to undertake active steps towards trade liberalisation and deregulation. It faces a series of difficult choices:

• Beyond the border: Opening up the UK economy to trade with the rest of the world – including the USA, India, China and Indonesia – is essential to economic growth post-Brexit. However, this would mean exposing UK firms and workers to whole new levels of competition from low-cost countries, and would therefore be politically very sensitive.

• On the border: In order to be competitive outside the EU, Britain would need to keep a liberal policy for labour migration. However, of those voters who want to leave the EU, a majority rank limiting free movement and immigration as their main motivation, meaning the UK may move in the opposite direction.

• Behind the border: EU rules have largely been incorporated into UK law, and would remain in force until the UK Parliament decided to amend or scrap them. Outside the EU, we estimate that a very liberally inclined UK government could in theory cut the cost of the most burdensome EU regulations by an amount equivalent to between 0.7% and 1.3% of GDP. However, on current evidence, Britain is likely to keep many of these EU rules, for example on climate change where it has gone further than the EU standard.

The choices for Europe

The economic advantages and disadvantages of Brexit will depend to a large extent on the future relative economic dynamism of the EU. If it manages to overcome its current economic problems, and liberalises internal and external trade, then the cost of Brexit relative to remaining within the EU will be higher.

The process of leaving

Article 50 – the only established legal way to leave the EU – is a major liability. Once triggered, there is no turning back, it excludes the UK from key decisions as well as the final vote and it leaves the EU in charge of the timetable during two years of negotiations, following which the UK could be presented with a ‘take it or leave it’ deal. Our results show that leaving without a preferential trading agreement would dent UK GDP significantly.

Full report and press release

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