The Far-Reaching Costs of Brexit

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by Jeremy Weiss

uk-flagAs the Brexit referendum looms on June 23rd, polling indicates a recent swing in favor of the “Remain” campaign. Recent polling shows the Brexit campaign losing support among key groups, such as older voters, while Remain enjoys a 13% lead among those who say they will definitely vote in the referendum, expanding to 20% among all voters. Though Tory voters are perceived as the more euroskeptic of Britain’s two largest parties, the Telegraph poll shows Remain with a 17% lead among Tory supporters. In March, the same poll revealed 52% overall support for Brexit, with this figure falling to 46% by the end of April to only 42% two weeks ago. These numbers illustrate a continuing shift against Brexit.

The UK Economy and Brexit

Much of the media attention surrounding Brexit has focused on the potential implications for Britain should it leave the European Union. Remain campaigners buttress their calls for a “no” vote with a considerable amount of economic research. The National Institute of Economic and Social Research (NIESR) released a study last month forecasting serious negative economic consequences in the event of Brexit. These include a potential 3.7% decline in GDP and a 6.3% decline in wages by 2030 relative to Britain maintaining the status quo. The NIESR also warned that controlling immigration would remain difficult for Britain even if it quits Brussels, while Chancellor George Osborne’s Treasury compiled a litany of its own economic statistics on the potential fallout of Brexit. These include a potential loss of £36 billion in tax revenue per year and a loss of 6.2% of GDP even if Britain negotiates a new free trade agreement with Brussels along the lines of that enjoyed by Canada, which would provide access to the common market without freedom of movement.

On the other side of the debate, a group called “Economists for Brexit” makes the opposite case, writing that Brexit would increase GDP by 4% while a loss in value for the pound would make UK services and high tech exports more competitive, though they shrug off continued losses in the heavy manufacturing sector. The General Secretary of the Trades Union Congress had harsh words for Economists for Brexit, noting that their analysis contradicted nearly all other economic predictions. Indeed, virtually every other analysis, including the IMF’s most recent World Economic Outlook, portends poorly for Britain in the event of Brexit. From a historical perspective, Brunel University and Sorbonne economists Nauro Campos and Fabrizio Coricelli illustrated that Britain’s economic performance between 1945 and its accession to the EU in 1973 lagged well behind that of the EU’s early members, who converged with and surpassed Britain’s GDP per capita during postwar reconstruction. The end of Britain’s relative decline coincided with EU membership and the abandonment of trade policies linked to the flagging Commonwealth. The authors conclude: “Today, advocates of Britain leaving the EU parade two economic alternatives, one based on the Commonwealth and another on bilateral free trade treaties….these did not work as well, so it is unclear why they would now be superior to EU membership.”

Brexit’s Broader Effects

As the referendum campaigns continue apace, however, the potential impact of Brexit on the rest of the EU is largely overlooked. Few, at least in the “Anglosphere,” appear to contemplate the scale and nature of the unavoidable economic and political impact that Brexit would have on the EU.

Just as most British voters list the economy as their primary concern when weighing their decision on Brexit, the continent will also have much at stake economically on June 23rd. The OECD provided an overview of the risks facing Europe and the UK in its recent report, The Economic Consequences of Brexit: A Taxing Decision. The report offers a series of warnings for both sides of the English Channel, noting that Britain is responsible for the largest share of foreign direct investment (FDI) inflows into the EU, and that Britain owes much of this appeal to its EU links, which offer investors a gateway to the wider European marketplace. Thus, not only would Britain suffer economically from Brexit, but the remaining EU states would lose the greatest magnet for FDI in their Single Market. More generally, the authors note that while the EU currently boasts the largest proportion of world GDP and trade, the withdrawal of Britain – the world’s fifth-largest economy and with it approximately 8% of the EU’s total imports and exports – would place the EU behind both the U.S. and China in these categories. 

The OECD report also assessed the broader economic risks of Brexit: “Centrifugal forces within countries and within the reduced EU are not quantified fully, but would be a major downside risk. Following the UK decision to exit, there could be doubts about the future of the Single Market, and more broadly, of the EU. The UK itself would also face the possibility of a break up, with political leaders in Scotland having indicated that they would seek a new referendum on Scottish independence.” A Labour MP from the Liverpool area, Frank Field, warned Britons that potential post-referendum negotiations for British withdrawal have the potential to “unravel” the EU. This specter has also been raised by German Chancellor Angela Merkel, who in addition to calling the referendum an “unnecessary risk” also said Brexit would be the “ultimate disaster” for Europe.

The nature of this potential “disaster” and the “centrifugal forces” alluded to in the OECD report become clear when observers consider recent polling data from across Europe. According to a recent Ipsos-MORI online poll of more than 6,000 EU residents, 45% of respondents in Belgium, France, Germany, Hungary, Italy, Poland, Spain and Sweden said they would like a referendum on EU membership in their own countries. Europhiles can take comfort, however, in the fact that only one third of those polled said they would opt to leave the EU. The poll’s director remarked that “[t]he Italians in particular hope to have their own opportunity to go to the polls on their EU membership, which lends a sense that even if the [UK] vote is to stick with the status quo in June, it will not be the end of the EU’s challenges.”

Assessing even broader implications, earlier this month the BBC reported that a group of prominent Czech citizens drafted an open letter to Britons asking them to remain in Europe, citing Britain’s balancing role that has prevented “any large European power from playing a hegemonistic role.” As reported in the Washington Post, German policymakers and observers are aware of this reality, and fear Brexit would dismantle a power-sharing triumvirate of Germany, France and Britain that has enabled Berlin to exercise leadership without making Germans or other Europeans uncomfortable. Wolfgang Schauble, Germany’s foreign minister, remarked that a “yes” vote in Britain would bring him to tears. The Post also quotes Almut Möller, the European Council on Foreign Relations’ Berlin office chief, who warns “EU membership gave Germany liberation from its past and permission to reenter the family of Western states….To lose Britain now would signal to the rest of the world — including to Russia and China — that the EU is dismantling.” The Guardian also recently featured analyses from commentators in Spain, Germany and Sweden that outlined the damaging effects that Brexit would have on their respective countries.

While each EU member would doubtlessly have their own reaction to Brexit, the health of the EU in general should remain foremost in the minds of observers across the Atlantic. Though polling data currently shows the idea of leaving the EU has little appeal among continental voters, anyone who appreciates the peace and stability that union has brought to Europe is right to fear the signal that Brexit would send. No EU member, large or small, has ever left the Union. There can be no way to minimize the moral and political blow that the departure of a leading power such as Britain would inflict on the idea of Europe “whole and free” – or at least on the first component of President George H.W. Bush’s 1989 statement about the future of a continent approaching the end of Cold War division.

A Downward Spiral?

Since then, the European Union has maintained its appeal as a cornerstone of economic progress and political democratization, and drawn into itself many members of the former Communist sphere. The EU was founded on economic integration and freedom of movement. For it to face even the prospect of losing members over its handling of the Eurozone Crisis, the current refugee influx, and the consequences of free movement from countries such as Poland to the UK demonstrates weakness at the EU’s political and intellectual core. The reality of a British departure that would cost Europe economically, inject further instability into Europe generally, and potentially create the impression that Europe is becoming a German economic fiefdom, can only be greeted with the most serious misgivings when it will pile these problems atop Europe’s already lengthy list of challenges.

The Brexit referendum is, at least, a rebuke of the idea that the EU tramples upon member states’ democratic rights, and British voters have every right to prioritize what they see as the well-being of their own country on June 23rd. European leaders and the English-speaking media are not, however, giving the British electorate a full appreciation of the choice they face in the upcoming referendum by continuing to downplay the serious risks that Brexit poses to Europe as a whole.

Jeremy Weiss is a guest contributor to Streit Talk. He holds a Ph.D. in Political Science from Boston University. Photo credit: c.art

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