Economic damages of a Brexit underestimated

The economic consequences of a Brexit are hotly debated. The Cologne Institute for Economic Research (IW Köln) has examined relevant studies and concludes: An exit could cause more severe damage to the UK than the mainstream view suggests.

"The economic damage for the UK could be significantly higher than many people assume," says IW economist Jürgen Matthes. The IW Köln argues that the pertinent forward-looking theoretical models are unable to capture many important advantages of economic integration between the UK and the EU. Overall a net economic damage in the order of 10 percent of economic output and more cannot be precluded in a more pessimistic scenario in the longer run.

Much will depend on the legal basis the UK would have for doing business with the EU after a Brexit. An important trade-off to watch: The larger the desire in the UK for sovereignty regarding regulatory issues, the more British firms would suffer from worsened access to the EU market. In general, the British economy is more dependent on the (larger) EU market than vice versa. “Moreover, the EU would not necessarily be inclined to offer generous market access conditions, not least in order to deter other members from withdrawing from the EU, " warns IW expert Berthold Busch.

A plethora of analyses attempts to quantify the economic impact of a Brexit for the United Kingdom (UK). The results are rather confusing - ranging from significant advantages to marked losses. The IW Köln cuts through the fog of assertions and seeks to get to the reality of the situation facing the UK after a Brexit. The more reliable among the many studies surveyed estimate the net economic costs to remain moderate (between 1 to mostly below 5 percent of economic output or income). The IW Köln researchers provide a thorough overview of the various advantages that are left out and point out their specific relevance for welfare and growth.

Currently there is no universally accepted estimation method available to integrate all these specific effects in a comprehensive way. The backward-looking empirical studies that do try, can be criticised to some extent. But they point to significantly greater risks for the UK.