To Brexit or not to Brexit

Анастасия Устругова Анастасия Устругова Expert of Center Russia-OECD published Economy
To Brexit or not to Brexit

On 24th of June final results of the referendum about Brexit (British exit) in the UK were announced. According to The Telegraph, Brexit supporters won at referendum with 51,9% (17,41 mln votes).

In this connection, OECD Secretary-General Angel Guria said that such results have serious consequences for the UK, for the EU and the international community. Despite the fact that Brexit doesn't comply with the policy recommended by the OECD, the Secretary-General stressed that it is necessary to take into account these results. He also expressed his willingness to assist the UK and support the economic and social programs of the country.

In April, the OECD carried out a study called «The Economic Consequences of Brexit», 2016, which examines the possible economic consequences of Brexit. Since 1973, when the UK joined the EU, its GDP per capita has doubled. Therefore, withdrawal from the EU has for the UK many negative effects in the short and long perspective.

Short term (till 2023)

Official exit of the UK is expected at the end of 2018. It will be accompanied by new trade negotiations with the EU in 2019-2023, as the UK will lose access to the EU single market.

This increased economic uncertainty will lead to a loss of confidence and the tightening of financial conditions (increased "risk premium", which will lead to an increase in financing costs and reduce its availability).

Since the exit of GB the trade in the UK is regulated by the WTO rules that would lead to higher tariffs on goods and services (especially with respect to financial services), as well as other barriers to trade with the EU.

Agreement with the EU on free trade can help to improve the situation. It can be achieved by 2023 (similar to the one operating at the moment between the EU and Canada), but the cost of access to the single market will be higher than today.

Moreover, the UK will lose preferential treatment with 53 third countries (non-EU). It will take time to conclude new trade agreements with these and other countries and non-EU members. Thus, Barack Obama said that the conclusion of a trade agreement with the United Kingdom is not a priority for the United States. Thus, the United Kingdom will face additional barriers to the formation of its trade relations with third countries that will cost a lot of money, time and effort.

Despite the desire of Great Britain to reduce the flow of immigrants, immigration contributes to the growth of GDP by almost half since 2005. Barriers to the free movement of labor from the EU (especially in a weakened economy of the country after leaving the EU) will reduce the number of immigrants. Brexit will cause "financial shock" outside of the UK, which will lead to a reduction of the pound sterling in the world market.

Thus, all of the above events will cost the UK 3% of GDP, which is equivalent to the costs (in the amount) of 2200 pounds per family (Brexit tax). EU losses from the exit of Great Britain amount to 1% of GDP Union.

Long-term perspective (2023 – 2030)

Access to the single market is an important factor for foreign direct investment (FDI). Brexit will reduce FDI inflows and, consequently, investment in the UK business. This, in turn, will negatively affect the country's trade, innovation and quality control. Trade and investment are important factors in the long-term GDP growth. Brexit will reduce the openness and innovation, technological progress and weaken the decrease in productivity.

According to the central scenario of events, Britain's GDP will shrink by 5%, which will cost each family about 3200 pounds. In a "more pessimistic scenario", costs of each household will amount to £ 5,000.

In addition, the real stock of net assets of the UK will fall by 4% in 2030 according to the central scenario.

In the long term, impact of Brexit to other EU member states will be small due to the relatively low UK share of world trade, as well as through other tools that will help the EU to cope with the shock.

As Angel Guria noted, UK will be stronger, as part of the EU, and the European Union will be stronger with the UK.