The Treasury has been derided for its prediction that each UK household would be £4,300 worse off if the UK were to leave the EU. When official forecasts have been unusually volatile and inaccurate, they have been brave to attempt to predict in detail contingent outcomes nearly 15 years ahead.
But the Leave campaigners have been criticised for failing to describe the economic implications of leaving the EU. To try to help our clients understand the implications, we have tried to put together what analysis is available to give an impression of what the UK might look like after Brexit. We have tried to be as neutral as we can but obviously any view on this has to incorporate assumptions which are liable to be disputed, especially with passions high on both sides.
First, what might happen if we stay in? I’m assuming that the European economy will continue to have a difficult time and that there will be another Euro crisis this summer. Ultimately the Greek debt burden is simply not payable and some of it will have to be forgiven. Other EU member states may also be in a similar position. It is unlikely that the other Member States will make this deal without further control over the fiscal budgets in those states where debts have been written off. It is also difficult to see how the Eurozone can grow particularly quickly given its current level of regulation and competitiveness.
What might happen if the UK leaves? In theory it is highly uncertain but there are transitional arrangements that have already been negotiated and my best guess is that these transitional arrangements will largely determine what actually happens. I am assuming that the most likely outcome would be that the UK stays in the Single Market and therefore has largely to accept existing EU trading agreements and migration rules as well as product regulations. The UK would probably want to rejoin EFTA and negotiate through EFTA on future developments. There would probably be some (small) net Budgetary contribution but a saving of at least £500 million a year in net contributions and more on the gross contribution. The UK would not be in the Common Agricultural Policy or Common Fisheries Policy and would benefit accordingly.
If this were to happen, leaving the EU, which is not priced in to markets or corporate thinking would be quite a shock and we should expect a sharp fall – perhaps 10-15% – in sterling. Inward investment would also be blighted until investors were comfortable with the new arrangements. This hit would last at least two years while any new arrangements were negotiated. GDP would be reduced by the initial effects of the devaluation, by monetary policy that would have to be tighter than otherwise and by the reduction in inward investment – probably there would be negative growth in 2017. But once the arrangements had settled down, the new lower exchange rate would make the UK look rather more attractive and most of the lost GDP would be recovered and quite likely the economy would settle on a slightly faster growth path. The economy very much needs a lower exchange rate and Brexit might just be the catalyst that delivers it. Although the outcome is highly uncertain, on this scenario it is more likely that GDP would be higher by 2030 after Brexit than lower.
BUT all this depends on being able to trade with the EU, attract inward investment when things settle down and keep the flow of skilled migrants which do so much for the economy and particularly the Flat White Economy covered in my recent book. But the book also warns that a halt to net immigration could cost as much as 6% of GDP per capita by 2025. This would be scary stuff – more or less on the scale of the Treasury forecasts for the negative effect on GDP from Brexit.
What all this implies is that the advantages of both leaving the EU and staying in are greatly exaggerated. We are unlikely to become core members accepting Schengen, the euro and fiscal integration if we stay in. Equally we are unlikely to leave the Single Market even if we leave the EU, in which case we will largely have to accept EU rules on migration, product regulation and trade.