Britain will hold a referendum on June 23 to decide if it will stay in or leave the European Union. This is a complex economic question with profound impact on Britain, the European Union and the world economy, coming at a time when Europe is struggling with euro crisis, high unemployment, slow growth and debt-ridden Greece. Prime Minister David Cameron, US President Barack Obama and other EU nations such as France and Germany want Britain to remain in the EU. Most of the opinion polls suggest that the British public is evenly split on the issue of Brexit. It is unfortunate that with insufficient information and lack of adequate explanation of economic impact of Brexit, such a critical issue is at the risk of being decided by people based on their intuition and emotions.
Main arguments of Brexit are loss of British sovereignity and imposition of too many rules on business by the EU. But, supporters of ‘Remain’ reject this argument. They say that OECD ranks the UK as having one of the least regulated labour and product markets in the world. The World Bank rates the UK as being one of the easiest places in the world to do business – easier even than the United States.
Second argument of Brexit is the economic burden of contribution to EU Budget. Britain’s net contribution to the EU Budget is only $12 billion, and the benefits from EU membership far outweigh the cost.
Third argument is the flow of immigrants, especially from the countries of Eastern Europe. They depress wages and steal jobs from Britons. They also take away a large share of welfare spending of the government and burden public services. But ‘Remain’ campaigners argue that low cost labour provided by immigrants fuels economic growth and EU immigrants are not a burden on government finances, they are net fiscal contributors.
If Brexit happens
If Britain leaves the EU, the cost to UK economy will be exorbitantly high.
Britain became a part of the EU, then called the EEC in 1973. Since then the EU share of British exports has risen considerably, from just one tenth of total exports to nearly half today. According to John Springford of the Centre for European Reform, a London-based think-tank, Britain’s trade with the rest of the EU was 55% greater than it would have been if outside. Brexit may lead to a drastic fall in UK exports. Britain would have to replace EU’s 53 trade pacts. Britain will also be excluded from the Transatlantic Trade and Investment Partnership – or TTIP – currently under negotiation between the EU and United States to create the world’s largest free trade area.
If Brexit happens, Britain will have to negotiate a trade deal with the EU, which may take 3-4 years. Brexit may trigger anti-EU movement in other EU countries, hence EU is not likely make these negotiations easy for Britain. Britain accounts for a meagre 3% share of EU exports, giving a better bargaining power to EU. The uncertainty about implications of Brexit will adversely affect investment, jobs and economic growth in Britain.
UK also attracts more foreign direct investment than any other EU member state, which is likely to take a hit. Modern manufacturing based global supply chain networks, will be severely affected by Brexit.
Britain’s Current Account deficit is 7% of GDP. It needs constant flow of foreign capital to finance it. Brexit may lead to capital flight and currency crisis.
Almost 40% of MNCs have chosen UK as their European headquarters, who are likely to move their headquarter out of Britain. London may no longer be the financial capital of Europe. Chunks of Financial industry, that accounts for 12% of UK GDP, would migrate.
Effect on Markets
There has been a fall in the value of Pound in recent months. If Brexit happens, Pound and Euro will fall further and dollar will gain. Equities are also expected to fall.
The author is, Dean, IBS – Mumbai. Views expressed here are personal.