As the referendum campaign in the UK intensifies, three significant reports on the economic consequences and implication of exit from the European Union have appeared, from the UK Government and two leading think-tanks.
The Treasury has published a 200-page analysis entitled The long-term economic impact of EU membership and the alternatives.
The Treasury assessed continued membership of the EU against three alternative models – Norway, Switzerland, WTO membership – and concluded that, under all three models, the UK would be permanently poorer, productivity and GDP per person would be lower and there would be an annual loss of GDP per household in a range between £2,600 and £5,200. The negative impact on GDP would result in substantially weaker tax receipts which would significantly outweigh any potential gain from reduced financial contributions to the EU. It also concluded that to maintain access to the Single Market the UK would have to accept the free movement of people and the majority of existing rules and regulations.
The Treasury argued that the settlement negotiated by Prime Minister Cameron in relation to the reform and further development of the Single Market, in areas such as services, energy and digital, could produce a significant increase in the UK’s GDP by up to 4%: “With the UK outside the EU these economic reforms would be less likely to happen. So the cost of exit in terms of the potential loss of GDP would be correspondingly greater.”
The Vote Leave campaign group responded immediately with the former Chancellor, Lord Lamont, arguing that the Treasury’s “precision is spurious, and entirely unbelievable” and Chief Executive, Matthew Elliott, asserting that figures in the report were “deeply flawed”.
The Open Europe think-tank has produced two extensive reports on the implications of Brexit, the second entitledWhere next? A liberal, free-market guide to Brexit.
Open Europe looks at life outside the EU, a scenario which it says will be neither apocalypse nor utopia. It argues that exit would produce a small initial negative economic result – in the region of 0.5%-1.5% of GDP under the assumption that a “reasonable” trade agreement is struck between the UK and the EU. An eventual positive outcome could be achieved but only through policies such as free trade, opening up to low cost competition, maintaining relatively high immigration, and pushing through deregulation and economic reforms in areas where the UK has historically been sub-par compared to international partners.
The report deals with the controversial issue of labour market rules and regulation, arguing that there is substantial scope for deregulation but that this would trigger serious domestic political and industrial relations battles: “EU social and employment laws come with a significant cost to the UK economy and they are particularly burdensome for small business. We envisage that under our deregulatory scenario the UK government would seek to cut costs in this area by scrapping the Agency Workers Directive entirely and reining in the costs imposed by the Working Time Directive.”
Open Europe concludes that in all the areas that they examine – trade immigration and deregulation – the optimal policy response requires a relatively high degree of flexibility vis-à-vis the EU. They also note that the argument that Brexit will benefit Britain economically is based on the premise “that the EU is of declining economic importance, and that freedom from the EU offers better potential to take advantage of future global opportunities.”
The report concludes that the “most rational option” in the event the UK leaves the EU, would be for the UK “to seek a modern bilateral agreement, outside the confines of the single market and European Economic Area.”
Centre for European Reform
The Centre for European Reform has issued the final report of its Commission on Brexit 2016 – The economic consequences of leaving the EU.
The CER Commission, of over twenty members, including Oxford and former TCD Professor Kevin O’Rourke, the Financial Times expert, Martin Wolf, Bruegel’s Andre Sapir, LSE’s Paul de Grauwe and Lord Mandelson was established in 2013 following Cameron’s Bloomberg speech. It previously produced an interim report in 2014.
The report deals in great detail with the main issues – trade, investment, regulation, the City of London, migration and the EU budget. It draws on the work of other commentators such and Oxford Economics and the London School of Economics.
The report concludes that the pro-Brexit argument that Britain would be liberated by exit from the EU and could negotiate access to European markets is doubtful: “The trade-off that the UK must make is quite simple: it is between regulatory sovereignty – which would not transform Britain’s growth prospects – and unimpeded access to the EU’s single market.”
It argues that Eurosceptics are wrong to assert that the EU constrains Britain’s trade with the fast-growing economies of Asia and Latin America. It states that EU policies work, and Britain’s membership of the EU has led to increased trade with the other Member States. “At the same time,” the report continues, “there is no evidence that membership of the EU constrains Britain’s trade with the rest of the world.”
Looking at the implications of Brexit, the report argues that Britain would face an invidious choice – “access to the single market, but less influence on the rules that govern it; or freedom from the rules, but loss of access to the single market.” Freedom to negotiate trade agreements with non-EU countries would not be easy. The paper claims that to persuade a trading partner to start negotiating, the UK would need to be able to offer something attractive: “Britain benefits from the EU’s size in trade negotiations, which gives it something to bargain with.”
The CER Commission on Brexit asserts that the economic case for remaining in the European Union is clear. The alternatives are unsatisfactory and, in the referendum, the choice will be between national sovereignty and unimpeded access to EU markets.