The Dangers of a “Brexit” from the European Union

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by Nicholas Hager

uk-eu-flagsThe rise of Eurosceptic parties across the EU has some policymakers and commentators concerned for the future of the Union. While they are expected make modest gains in elections to the European Parliament in May, these fears may be somewhat overstated as the Parliament is currently projected to remain in the hands of establishment parties. One notable exception, however, is the continued popularity of Britain’s United Kingdom Independence Party (UKIP), whose national influence is robust— even overtaking the ruling Conservatives in a recent poll — and its message of separatism unrelenting. The UKIP is spearheading calls for a renegotiated relationship with the EU, followed by an in-out national referendum in 2017, citing a quickly integrating Eurozone and immigration as top concerns. It views the UK’s current woes as directly connected to its EU membership, and therefore sees withdrawal from the Union as a silver bullet to resolve them. But a British exit — or “Brexit” — from the EU is far from a solution; rather, it would only exacerbate the challenges the EU and UK currently face while creating a slew of new ones.

To start, the notion that an exit would somehow bolster the UK’s flagging economy is misguided. Indeed, while some believe that an unencumbered and fully sovereign UK could bemore flexible in attracting investors, there is ample evidence that this would not be the case. Citigroup CEO Jim Cowles, for example, has warned that “international companies will stop investing in Britain…at the scale we have become accustomed to.” This concern is echoed by UK Business Secretary Vince Cable, who has been working diligently to reassure international investors that the UK is a stable investment market. Economists Nigel Pain and Garry Young argue that this could reduce “long-term growth prospects [and the] productivity [of] the UK economy,” such that it would permanently be “2¼% lower…than it otherwise would have been.”

A slow drift of investment away from Britain and toward the continent would be a modest consequence of withdrawal. In the worst case, losing access to the EU market would severely diminish British trade as the EU is estimated to account for at least 30% of its total goods trade and about half of Britain’s total exports. Though the EU market is weaker than it once was, nearly all of the UK’s top trading partners are EU members. Aside from the trade barriers that would inevitably emerge from a Brexit, the UK would also find itself on the outside looking in in terms of EU policy. With an estimated 13 trillion euro GDP, the EU is a massive economy and the UK would ultimately be forced to accommodate EU standards regardless, because it is simply not a robust enough economy to dictate terms. This is amply demonstrated by the Swiss banking industry, which is “subject to significant influence and indirect control through…biased market forces [such as] U.S. and EU regulation.” Phaedon Nicolaides, a Senior Fellow at Maastricht University, confirms this in a recent paper, noting that formal withdrawal will not “confer real policy independence” to the UK because its domestic and economic law would still be “affected by developments in EU law.” In short, EU membership affords the UK, particularly in the realm of trade and foreign investment, a number of benefits that would be impossible to match in the case of its withdrawal. Therefore, contrary to the arguments of Brexit advocates, the economic health of the UK is strongly tied to its membership in the EU.

While the EU would not be undone by British secession, it could take a severe hit if that occurs. Tim Oliver of the German Council on Foreign Relations estimates that losing the UK would divest the EU of “12.5 percent of its population and 14.8 percent of its economy.” It would also force other member states to make larger financial contributions to meet budgetary expectations, and would mean the loss of the “one of [the EU’s] two serious military powers.” In addition, not only would managing an economic contraction consume a vast amount of time and resources — given that formal withdrawal has never been invoked, and Article 50 of the Lisbon Treaty, which provides for secession, offers only an opaque guideline for the procedure — it would also open an ideological “Pandora’s Box” whereby other member states could begin to leave en masse.

A Brexit would also hurt the EU economy more indirectly. The UK has always been a vital, if not always willing, partner in the European project, and is essential for the EU’s economic future. Mats Persson, director of the think tank Open Europe, discusses this through the lens of a potential trade war between the EU and China over the dumping of Chinese solar panels onto the EU market. This dispute has since been largely resolved, but the case is illustrative. China responded to the EU’s anti-dumping policies by attacking its wine subsidies through the WTO, which only encouraged the largest wine producers — France, Italy, and Spain — to lead the charge on the tariffs, which could have had disastrous implications for the burgeoning economic relationship between the two regions. Germany, a major driver of EU policy, nonetheless relies upon the UK to support its policies. With the UK’s help, Germany could form ablocking minorityto counterbalance the protectionist measures that were proposed by Mediterranean states; if the UK were to exit, however, Germany may have trouble mustering a sufficient coalition to deal with similar situations.

In the last analysis, it is clear that neither the UK nor the EU stand to gain from a withdrawal as it would diminish the strength of both economies and undermine their political influence. The current arrangement may or may not be in need of reform, but the advantages of union are too great to ignore and the consequences of ending it would be too devastating to justify.  

Nicholas Hager is an Intern at the Streit Council. Photo credit: kalyan3

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