Earlier this year, Prime Minister David Cameron announced that the UK will hold a referendum on whether to leave the EU (often referred to as a Brexit) in June 2016. With the vote creeping ever closer, now seems like the right time to ask: what would be the economic impact of a Brexit be?
The BBC reports that recently, worldwide monetary body the International Monetary Fund (IMF) predicted that a Brexit could inflict “serious regional and global damage” economically speaking. The organisation added that the referendum itself has already facilitated investor unrest; a full-scale Brexit would only heighten the situation and further destabilise an already shaky global economy.
Tellingly, the IMF also slashed its growth prediction for the UK economy. In January, the organisation estimated that the British economy would expand by 2.2% in 2016, while now it believes the economy will grow by 1.9% this year. The IMF’s January growth forecast for 2017 remains unchanged at 2.2%, indicating that the economic impact of a Brexit may be short-lived.
Leave campaign’s response
The IMF’s prediction was touted by government officials such as David Cameron as proof that the UK would be better off as a member of the EU. However, it was refuted by Vote Leave, the official Brexit campaign. Speaking on this issue, Vote Leave’s Chief Executive, Matthew Elliot, said that the IMF “has been consistently wrong in past forecasts about the UK and other countries.”
Continuing, Elliot commented: “The IMF has talked down the British economy in the past and now it is doing it again at the request of our own Chancellor [George Osborne]. It was wrong then and it is wrong now… The biggest risk to the UK’s economy and security is remaining in an unreformed EU which is institutionally incapable of dealing with the challenges it faces, such as the euro and migration crises.” He a point; as The Financial Times notes, the IMF isn’t always accurate when it comes to economic forecasts.
Impact on GDP
Therefore, we need to look at further evidence to determine the economic impact of a Brexit for the UK. European affairs specialist Open Europe released a comprehensive report which explored how a Brexit would effect the UK’s Gross Domestic Product (GDP – the broadest measure of national economic expansion). Open Europe looked at the best and worse case scenarios, before providing a more realistic picture of how the UK leaving the EU would influence GDP performance.
In the best case scenario, where the UK strikes an advantageous trade deal with the rest of the EU, Open Europe estimated that the UK’s GDP could rise by 1.6% by 2030. In the worst case scenario, where there is no trade deal, the UK’s GDP could shrink by 2.2% by 2030. Realistically, Open Europe wrote, the UK’s GDP would register something between a 0.8% permanent GDP loss to a 0.6% permanent GDP gain by 2030 in the event of a Brexit.
Striking trade deals
In other words, the economic impact of a Brexit depends on whether the UK could strike up trade deals with the rest of the EU. Figures quoted by Politico suggest that the EU accounted for 53% of the UK’s imports and 45% of exports in 2014. Over three million British jobs are linked to exports from the EU. In the event of a Brexit, it is vital that the UK negotiates a deal that will allow it to keep trading with the EU on favourable grounds, as it does now as a member of the organisation, to protect British jobs and safeguard the economy.
How likely is it that the UK would strike such a deal? Brexit campaigners point to countries such as Norway, who have negotiated similar agreements with the EU, to show that it would be possible. Reuters writes that recently, German Finance Minister Wolfgang Schaeuble said that it would be really difficult, perhaps impossible, for the UK and the EU to come to such an arrangement. The European Parliament can veto EU trade deals, so Schaeuble’s words carry serious weight.
Time will tell
In truth, it’s hard to accurately predict the economic impact of Brexit. Evidence suggests that it would hinge on the UK’s ability to reach a trade deal with the rest of the EU, but there are no guarantees this would happen. Only time will tell whether a Brexit would damage the UK’s economy and this debate may all be for nothing, as the British people may vote to remain in the EU.