While staying in the EU may cause political trouble for the major parties, if we leave the EU, the economic trouble will be double. That is the conclusion of a new report from the Centre for Economic Performance (CEP) – the latest in a series of background briefings on key policy issues in the May 2015 UK general election.
The CEP researchers – Swati Dhingra, Gianmarco Ottaviano and Thomas Sampson – note that the economic consequences for the UK from leaving the EU (so-called ‘Brexit’) are complex. But reduced integration with EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget. Especially if one compares it with the recent report from OpenEurope that calculated that the UK would only save 6% of its current contributions to the EU budget.
They calculate that static losses due to lower trade with the EU would reduce UK GDP by between 1.1% in an optimistic scenario and 3.1% (£50 billion per year) in a pessimistic scenario. The losses due to lower foreign direct investment in the UK, less skilled immigration, and the dynamic consequences of reduced trade could also be substantial – comparable to the decline in UK GDP following the global financial crisis.
The CEP team report that:
The EU is the UK’s most important trade partner, accounting for half of all UK exports and imports. UK exports to the EU correspond to almost 15% of national output (GDP).
EU membership matters to the UK economy primarily because it leads to lower trade barriers. This makes goods and services cheaper for UK consumers and allows UK businesses to export more.
Brexit would lead to lower trade between the UK and the EU because of higher tariff and non-tariff barriers to trade. In addition, the UK would benefit less from future market integration within the EU. The main benefit of leaving the EU would be a lower net contribution to the EU budget.
In our analysis of the consequences of Brexit, we consider an ‘optimistic scenario’ with small increases in trade costs between the UK and the EU, and a ‘pessimistic scenario’ with larger increases. In the optimistic case, Brexit reduces UK income by 1.1% of GDP. In the pessimistic case, UK income falls by 3.1% (£50 billion per year).
In the long run, reduced trade may lead to slower productivity growth. Factoring in these effects could easily more than double the costs of Brexit and lead to a loss in the pessimistic case comparable to the decline in UK GDP during the global financial crisis of 2008-09.
Leaving the EU would also affect foreign direct investment, immigration and economic regulation in the UK. These effects are harder to quantify than changes in trade, but are likely to lead to further declines in income.
The EU is currently negotiating major new free trade agreements with the United States (the Transatlantic Trade and Investment Partnership) and Japan. Using estimates from previous EU-negotiated free trade agreements, we estimate these trade deals will lower UK prices by 0.6% and save UK consumers £6.3 billion per year. With Brexit, these benefits would be lost.
This report is based upon a #ElectionEconomics policy briefing from the Centre for Economic Performance, part of the London School of Economics and Political Science.
Should We Stay or Should We Go? The Economic Consequences of Leaving the EU’ by Swati Dhingra, Gianmarco Ottaviano and Thomas Sampson is the fourth in a new CEP #ElectionEconomics series which can be found at http://cep.lse.ac.uk/election2015/
