It only takes a quick browse of the media coverage on the possible exit of the United Kingdom from the European Union (EU), to realise that the most commonly recurring response is fear of economic disaster. These concerns are coming from UK companies, fund houses, the legal industry, and economists, who are all racking their brains to decide how to deal with the potentially disastrous consequences of a ‘Brexit’.
Britain has only just returned to its pre-downturn growth rate of 0.7% in the second quarter. Cornelissen, the chief economist of Robeco, told the Financial Times that to destabilise the country with a ‘Brexit’ would be ‘a kind of economic suicide’. This raises a question – are there any plausible benefits of leaving the EU that are truly capable of outweighing the negatives?
“The reputable think-tank Open Europe predicts a possible £55 billion loss per annum by 2030 following an EU exit”
Research from a former UK Foreign Office chief economist predicts that it would take around a decade to negotiate Britain’s exit from the EU. This ‘long and uncertain’ process would inevitably undermine stability and growth for businesses and investments. The reputable think-tank Open Europe predicts a possible £55 billion loss per annum by 2030 following an EU exit. This is not to mention the consequences it would have outside of the UK; it is expected that Ireland, Cyprus and the Netherlands would be particularly affected. This is due to their similar stances on policy and well-established financial and investment links. From a political perspective, US president Barack Obama has warned Britain that it could lose influence and appear disengaged from the world, noting that the EU had made the world ‘safer and more prosperous’.
The ‘Grexit’ effect
The threat of ‘Grexit’, the portmanteau word coined by the press concerning Greece’s prospective exit from the Eurozone monetary union, has brought discussions of Brexit to the forefront. As Grexit fears have subsided, how has this impacted people’s views on a Brexit?
“But the Greek crisis has also, in a sense, made Britain’s demands look insular and trivial.”
In July, talks of using the European Financial Stabilisation Mechanism (EFSM) to save Greece had been held without consulting London. Considering the UK’s €1 billion share in the ESFM and Mr Cameron’s fervent objection to using the fund, some claimed it may prevent Grexit at the expense of triggering a Brexit. It only highlights the significant savings that would be made in the form of EU budget contributions (approximately £14 billion) if a Brexit were to happen. But the Greek crisis has also, in a sense, made Britain’s demands look insular and trivial. Indeed, an actual Grexit would certainly push Mr Cameron’s attempts at renegotiations far down the priority list in Brussels.
The popular alternatives: practical or simply ideological?
Countries such as Switzerland, Iceland and Norway have been oft used by Eurosceptics as alternative models. They are all members of the European Free Trade Association (EFTA), hence still being linked to the EU’s internal market. For UK businesses to continue to thrive, it is essential to ensure trade is not significantly hindered by its exit. Yet, Switzerland has been citied as proof that offshore financial centres have their limitations: it’s hard to be the centre whilst being outside. Some major UK fund houses hold the opinion that a Brexit could be so disruptive that they would consider moving their domicile to continental Europe if it were to materialise. Furthermore, a free trade deal with Europe would still necessitate substantial border controls, which would come at the expense of 0.8% of UK’s GDP in 2030.
“Yet, Switzerland has been citied as proof that offshore financial centres have their limitations: it’s hard to be the centre whilst being outside.”
Not all is lost, however: looking beyond Europe and increasing market access to countries such as China via unilateral free trade agreements and large scale deregulation could actually make UK £34 billion richer. Shifting focus towards rapidly growing emerging economies outside of the EU could certainly pay off in the long-run. Nevertheless, this would also require a liberal attitude towards labour migration, which is unlikely to go down well considering issues of immigration and free movement are the biggest motivators for leaving the EU. This is not to mention the UK’s likely decline in bargaining power for trade agreements that comes with no longer being a part of the powerful EU entity.
Does the ‘no’ campaign need to step up its game?
Unless pro-Brexit campaigners are able to firmly unite behind a realistic alternative, the future of the UK without an EU membership is, in many people’s eyes, on incredibly shaky grounds. It is now up to the Eurosceptics to fight back their complacency and demonstrate their capability in challenging the ‘yes’ campaign. Whether or not they are intentionally holding back prior to the outcome of the prime minister’s renegotiations with Brussels is still yet to be seen. Therein lies the problem: such a negative view of a Brexit could actually undermine Mr Cameron’s attempts to renegotiate on EU reforms. On that note, here’s to hoping for a more interesting contest ahead.
Image by tristam sparks via Flickr.