21 April 2016

The economic consequences of leaving the EU: The final report of the CER Commission

Since CER's initial report was published in June 2014, the Commission have found no new evidence to change our view that ‘Brexit’ would be economically costly – and the best way to mitigate those costs would be to ensure that the economic relationship between the UK and the EU replicates membership of the single market as closely as possible. [...]

Britain is highly economically integrated with the EU

In this updated report, CER show the extent of economic integration between the UK and the EU, using the University of Groningen’s World Input-Output Database. The database allows them to take into account Britain’s exports to the EU and the supply chains that provide intermediate goods and services to exporters. With all of these effects, the share of UK output sold to the EU amounted to 9.8 per cent in 2011. [...]

Would Brexit liberate Britain?

There can be little doubt that some of the EU’s regulations impose more costs than benefits. But many are justified: there would be no single market without them. Moreover, European rules are not a major constraint upon Britain’s economy.

• According to the OECD, Britain has the second least regulated product markets in the developed world, after the Netherlands. Both are EU members.
• The OECD’s labour market protection index shows that Britain has similar levels of labour market regulation to the US, Canada or Australia – and far lower than continental European countries. EU employment rules therefore do little to inhibit Britain’s flexible labour market.

It follows that leaving the EU and ‘de-Europeanising’ British regulation would do little to boost its economy. In any case, Britain would find it difficult to avoid EU regulation even if it left the club. Outside the Union, the UK would lose full access to the single market unless it signed up to EU rules. Membership of the European Economic Area (EEA) would resolve little. [...]

Fiscal gains?

Ending Britain’s contribution to the EU budget is the most easily quantified benefit from leaving the Union. The UK could save 0.5 per cent of GDP. However, the same trade-off applies: the EU insists that the price of unfettered market access is a fiscal contribution to the EU. EEA members and Switzerland help to fund the economic development of the poorer eastern half of the Union, by paying for infrastructure, R&D and training projects. If the UK were to pay into the EU budget upon the same basis as the Norwegians or the Swiss, its net contribution would fall by 9 per cent or 55 per cent respectively. [...]

Free migration is a benefit for Britain

Alongside frustration at regulation by ‘Brussels’, immigration from Central and Eastern Europe is the other main cause of British dissatisfaction with EU membership. Many fear that Central and East Europeans are damaging the employment prospects of low-skilled Britons and driving down wages. While there is some evidence of a depressing effect on the wages of low-skilled British workers, the effect is very small – our best estimate is that immigration from the EU between 2004 and 2015 has reduced the wages of low-skilled services workers by 0.8 per cent. For comparison, the government’s tax increases and benefit cuts between 2010 and 2019 will reduce the incomes of the poorest tenth of Britons by 10.6 per cent, according to the UK’s Institute for Fiscal Studies. Many Britons forget that there are many high-skilled European immigrants in the UK, who raise British workers’ productivity and hence their wages. But academic research shows that the combined impact of high- and low-skilled immigrants on British wages is small.

However, EU immigration is good for the public finances, as immigrants pay more in taxes than they receive in public spending. [...]

In short, the high degree of economic integration between the UK and the EU will always require some system of shared governance. The EU will not allow the UK, upon leaving, to have the same level of market access that it now has without paying a price. Britain will not be able to leave the EU and remain in the single market unless it is willing to sign up to EU rules that it did not help to write.

Full report

© CER