13 April 2016

Open Europe: Where next? A liberal, free-market guide to Brexit

[...] The growing economic evidence suggests that there would be a small negative economic result from Brexit, probably in the region of 0.5% – 1.5% of GDP in the long run, presuming a reasonable trade agreement is struck between the UK and the EU. The question then is whether the UK can use its new found freedoms to offset this cost or reverse it to a positive outcome.

Open Europe believe it is possible, but the path to prosperity outside the EU lies through: free trade and opening up to low cost competition, maintaining relatively high immigration (albeit with a different mix of skills), and pushing through deregulation and economic reforms in areas where the UK has historically been sub-par compared to international partners. [...]

Below, Open Europe outline the key priorities for a UK Government post Brexit:

Trade

a) The first step would be to try to strike a Free Trade Agreement with the EU and to maintain the FTAs Britain has with other states via the EU. As we outlined in our previous report, this is not an easy task and could take many years. The emerging consensus is that – taken by itself – there would be a small negative economic impact from leaving the customs union and the single market in the long run.

b) The second step would be to build FTAs with other states to try to offset this effect. [...]

c) The third step could be revisiting and updating older agreements. [...]

Immigration

a) While there would be political pressure to reduce immigration following Brexit, there are several reasons why Open Europe believe headline net immigration is unlikely to reduce much:

• The business case for maintaining a flexible supply of labour. The evidence suggests that, with a record high employment rate, the UK’s labour market is already tightening;
• the political and economic challenge of finding policy alternatives to relieve pressure on the public finances caused by ageing demographics, where immigration can help smoothen the path to fiscal sustainability;
• the effects of globalisation on migration flows, which the UK is not alone in experiencing;
• and the likelihood of some constraints on UK immigration policy under a new arrangement with the EU.

b) Nevertheless, free from EU rules on free movement, the UK would likely pursue a selective policy more geared towards attracting skilled migration, which could be more politically acceptable.

c) Open Europe would recommend a system seeking to emulate the points-based systems of Canada and Australia. The system could be weighted strongly towards those with a job offer, but also offer a route for skilled migrants seeking work. [...] the UK would also need a mechanism to fill low-skilled jobs or meet labour shortages where employers have recently relied on EU migrants.

d) However, there is likely to be a trade-off between the depth of any new economic agreement with the EU and the extent to which the UK will have to accept EU free movement. The evidence from the precedents of Norway and Switzerland suggest that the deeper the agreement, the more likely the UK will need to accept free movement. [...]

e) The UK is far from alone in its migration experience in terms of developed economies. Between 2000 and 2015 the UK received 3.7 migrants for every thousand people, which puts it just above the average but below countries such as Canada, Australia, Norway and Switzerland. [...]

Regulation and competitiveness

a) There is certainly scope for deregulation outside the EU, though maybe not as large as assumed. Open Europe estimate a politically feasible deregulation agenda could lead to permanent gains of 0.7% of GDP – with savings coming mostly from three areas: social employment law, environment and climate change and financial services. But even such a scenario would involve difficult choices such as scrapping renewable energy targets and deregulating social and employment laws.

b) More broadly, the UK remains one of the most competitive developed economies, particularly in areas such as: labour market, business environment and product market regulation. Yet there are of course potential gains, especially in areas such as: education, skills, infrastructure and costs of certain services. There is little evidence that the EU holds us back in these areas, but their reform and the ensuing competitiveness boost will become increasingly crucial in the case of Brexit.

These findings have important implications for the type of relationship the UK should seek with the EU post-Brexit. Realising the potential economic gains Open Europe has identified – notably via immigration and deregulation – means a relatively high degree of flexibility from the EU. The confines of a Norwegian or Swiss-style arrangement would not deliver this. As such, the best option would be for the UK to pursue a comprehensive bilateral free trade agreement, aimed at maintaining as much of the current market access as possible while also adopting a broader liberalisation agenda over the longer term. Of course, this is easier said than done. [...]

Full paper

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