Brexit could cost Britain £56bn

A new study finds that leaving the EU could cost the UK 2.2% of its GDP - or gain it 1.6%. Forecasts, eh?

by Adam Gale
Last Updated: 24 Jun 2015

Though the methods for predicting the future have come a long way since the days of bird-watching Roman augurs, the results broadly haven’t. This, of course, hasn’t stopped people from trying.

Think tank Open Europe (OE) has published a report today into the potential costs of a British exit from the EU. It’s based on a good deal more than the flying habits of pigeons, using detailed economic modelling to predict the effects a 2018 Brexit would have by the year 2030.

The OE report gives a range of possibilities. In its worst case scenario, Britain leaves Europe and fails to negotiate a preferential free trade agreement with the EU or with other major economies. Industries from financial services to cars and pharmaceuticals take a big hit, with the result that the UK GDP would be 2.2% (£56bn) smaller by 2030 than if it had stayed put.

In the best case Brexit scenario, the UK economy gains 1.6% (£47bn) as a result of a ‘very ambitious deregulation of its economy’ and opening up ‘almost fully to trade with the rest of the world’. Though you can almost hear the UKIP chorus sing halleluiah, it doesn’t quite drown out the note of caution coming in the report.

OE chairman Lord Leach of Fairford said that although a Brexit wouldn’t be as ‘cataclysmic’ as some claim, pursuing the best case alternative might not be so easy. ‘Transforming Britain into the deregulated, free trading economy it would need to become outside the EU sounds easy in theory, but in practice could come up against some serious political resistance within the UK itself,’ he said.

Unsurprisingly, Leach et al predict the likely outcome of a Brexit be somewhere in between stubborn protectionism and a free market paradise, giving a ‘politically realistic range’ of between a 0.8% GDP loss and a 0.6% gain. Much will depend on what terms Britain would be able to negotiate.

Supporters of a Brexit claim it would be the best of both worlds. Britain could get the main benefit of the EU membership – free trade with its neighbours – without the costs – burdensome regulations, subsidies to poorer EU nations and the inability to negotiate free trade agreements with other countries as a sovereign state.

When it comes to costs, the pro-reform think tank OE doesn’t deny those claims. It estimates, for instance, that deregulation could benefit the UK economy between 0.7% and 1.3%. It does take, however, take issue with the other major assumption, that Britain could negotiate a no strings attached free trade agreement with the EU if it left.

It points to the examples of Norway, which is a member of the European Free Trade Association (EFTA) along with the EU, and Switzerland, which is joined to Europe with hundreds of bilateral trade agreements. Norway gets free trade, but has to accept various EU economic policies over matters such as employment and consumer rights, over which it has no control.

Switzerland has sovereignty over those areas, but doesn’t get full free trade in services, with individuals being limited to 90 days of cross border provision. Although Swiss bankers have found a way around this by operating through subsidiaries abroad at some cost, it’s not exactly the kind of thing the City wants to hear.

Britain could try to use the fact that it operates a trade deficit with the EU as leverage to get better terms - Europe sells more to us than we buy from them, so it would be foolish for the EU to hurt its own exporters. However, as the OE pointed out, it didn’t work for Switzerland, which also has a deficit. Besides, there would be nothing to stop the EU from partially excluding services from an agreement, exactly as it has done with Switzerland. Britain operates a surplus in services to the EU, after all, so its leverage would be less.

OE’s bottom line is that you can’t have your cake and eat it – there will be an economic cost to sovereignty. Its preferred solution is EU reform, or more precisely a ‘Single Market Lite’, whereby Britain, Switzerland, Norway and others that don’t want ever deeper union could have free trade with the EU (or within the EU, in the UK's case), but collectively negotiate better terms when it comes to regulation.

Brexit or no, though, it’s hard to expect a two-tier reform sweeping triumphally through the committee rooms of Brussels and Strasbourg.

Find this article useful?

Get more great articles like this in your inbox every lunchtime