A leap in the dark?

Possible Impacts of the UK Referendum

Much is at stake for the UK economy in case of a Brexit. The UK could partially lose access to the EU internal market affecting particularly the freedom to provide services and the right for establishment in the EU. The EU is still the UK's dominant trade partner and runs the risk of being no longer able to benefit from future EU trade agreements and the Single Market. Higher EU trade barriers, transaction costs and customs delays could induce companies to relocate production away from the UK. And, the dominant position of the City of London in euro denominated financial transactions could be endangered.

Against this background, it is small wonder that there are many studies and analyses trying to quantify the economic impact of a potential Brexit. Jürgen Matthes, senior economist of the Cologne Institute for Economic Research, sees “a lot of those effects, welfare-, trade- and non-trade effects not being covered in the model-based mainstream studies.” Therefore he and his colleague Berthold Busch conducted the IW Report ‘Brexit – The Economic Impact: A meta-analysis’ to approximate the real economic consequences of a potential Brexit based on plausibility.

At the IW Lunch Debate „A leap in the dark? – Possible Impacts of the UK Referendum” in Brussels, they presented their findings and discussed them with Terry Scuoler, the CEO of the British manufacturing association EEF.

Possible strategic misconceptions and high uncertainty

• There will be no free lunch for the UK in choosing from different options of future institutional integration with the EU. The more the politically motivated strive for sovereignty prevails regarding regulatory issues, the higher will be the price for the UK in terms of lost market access to the EU.
• Expectation that the EU would want to keep good political relations, could be overly optimistic: the EU might be inclined to avoid a precedent that encourages other EU members to fol-low the UK in leaving the EU. The UK could rather find itself in a defensive position, as it re-lies much more on market access to the EU than vice versa.
• On top of this, a large uncertainty in case of a Brexit and possible rating downgrades could damage the general investment climate in the UK.

Overall, a Brexit would indeed resemble a potentially dangerous leap in the dark.

The Debate

An intense debate, obviously much more controversial than in the other EU-27, is currently taking place in the UK. “We are being assailed by a blizzard of often contradictory information dressed up as economic fact and the sometimes vile misinterpretation of issues, concerning migration, security, and welfare as being linked to our membership to the EU”, says Terry Scuoler after expressing his enormous sympathy for his fellow countrymen who have to decide on such a momentous issue.

Relating to the IW report he emphasises the issue of uncertainty and the possible traumatic consequences a Brexit could end in after 43 years of membership. Britain being the leading recipient of Foreign Direct Investment (FDI) in the EU makes it “hard to accept that some of the [British overall] FDI is not directly linked to the UK’s membership of the EU and access to the tariff free and open market of 500m people which is the commercial target of many of the global businesses who have their European headquarters in the UK”. Losing this position could therefore lead to a reduction in investment, a slowdown in technological innovation and a loss of jobs. Trade with the EU and also the rest of the world would be “very likely to stutter at least or be in a deep shock for a considerable period of time at worst”. Hence a decline in output, productivity and GDP would be a great hazard in respect of living standards and general well-being of UK citizens.

Finally, as long as the UK stays part of the EU after June, Britain has to “address what has felt like a leadership vacuum in [the] relationships with Europe and re-energise [the] membership for the benefit of Britain”.

“We have heard a lot about unknowns today and throughout the public debate. Is there a possibility to measure those?” asks Sandra Parthie (Head of Brussels Office of the Cologne Institute for Economic Research). “You cannot, by definition, measure uncertainty… but you can surely measure what happens with markets and investments in times of enormous uncertainty.” (Jürgen Matthes) “And what our analysis shows is that overall, net economic damage around 10 percent of economic output or more cannot be ruled out.” With regard to the role of British industry and business representatives, Terry Scuoler said: “We have to translate the economic consequences and our arguments in general into the language of the men and women in the streets. The vast percentage of undecided have to be targeted. Those will decide the referendum.”

Being asked by the audience about unfulfilled promises of the European Union, Jürgen Matthes states: “European Citizens need to stand together. We do not need a Europe of single countries striving for their own self-interested goals and even using the European Union as their scapegoat. The challenges of our world today demand unity and joint action.”