22 January 2018

Financial Times: What will the EU look like after Brexit?

According to data by the Commission and FT analysis, the UK’s departure is likely to translate into higher growth figures for the bloc as well as stronger export figures and savings rates. But Brexit would also leave the EU poorer and more afflicted by joblessness and low productivity than before.

Such figures are not the result of conjecture about the future. They are the statistical effect of removing Britain from aggregate EU data in a status quo scenario.

Losing such a big economy — the second biggest in the bloc after Germany and accounting for 12 per cent of EU gross domestic product — will inevitably have a significant impact on the bloc as a whole.

To give a sense of the scale, Britain’s departure will mean the union’s population will go down by 13 per cent. Only Germany and France have more inhabitants. 

The UK’s departure also means the EU’s economy will become smaller than that of the US. At present the 28-member bloc’s GDP is calculated to be more than 1 percentage point larger. 

The UK was an engine of growth for the EU in the decade before 2007, but since then its contribution has diminished. It is now a drag on average EU growth. 

Over the past two years, the economy of the rest of the EU has been growing faster than that of the UK. The commission expects that to remain the case for this year and next.

This is not the result of any new Brexit effect on the British economy. Brussels says its forecast for the UK economy is “based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK”, rather than any sudden change in terms of trade between the two.

The rest of the EU also has a larger manufacturing base and a stronger export performance than the UK. This year, the UK’s exports of goods and services are expected to grow by 3.1 per cent, below the 4.5 per cent rate forecast for the EU27.

Households in the rest of the EU spend less as a proportion of what they earn than the UK, giving the EU27 a higher average savings rate. The gap has increased in the past two years, since UK household spending has increased at a time of reduced earnings. 

On public finances, the UK used to compare well with the EU average — but no longer.

In 2001, UK public debt stood at 35 per cent of GDP compared with 60 per cent for the 28 countries that today form the EU (overall, 13 countries joined the bloc in 2004, 2007 and 2013).

Britain’s fiscal deficit has become much bigger since the financial crisis, pushing up UK public debt, and marginally increasing the EU average for debt as a proportion of GDP.

Britain outperforms the EU average on some important metrics — notablyemployment. This year the UK unemployment rate is set to hover around 4.7 per cent, much lower than 7.7 per cent level in the EU27. 

However, the gap is set to shrink this year — the EU27 labour market is expected to improve while the UK is likely to remain stable.

The UK is also richer and has higher labour productivity than most of the other members of the EU.

Productivity levels are notoriously low in the UK compared with most G7 countries, but they are still higher than most of the largely former communist countries that joined the bloc this century. 

This means that with the UK out of the bloc, the EU27 will — on average — be less productive and poorer than it is today. 

Full analysis on Financial Times (subscription required)

 

 

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