The economic consequences of Brexit for the UK and EU: A losing game?

Panel: What does Brexit mean for Europe's security architecture (c) Thomas Lobenwein

On 24 and 25 November 2016 experts from politics and academia discussed the impact of Brexit on several policy areas in a series of workshops at the Hertie School of Governance in Berlin. All events took place under Chatham House rules. 

Workshop 2 focused on the economic consequences of Brexit and the feasibility of disentangling the EU and UK’s trade relations. Sasha Milonova, Communications Manager for the Dahrendorf Forum in London, summarises the primary conclusions.

The situation as it stands

There was general consensus amongst workshop participants that, aside from the initial shock following the referendum result, the market response to Brexit has been very slow. This can be partially attributed to the immense uncertainty surrounding when and how Brexit will occur.

Most participants viewed the current timeline of negotiating both the legal separation (or “divorce”) and the new agreement by May 2019 as completely untenable, suggesting that the process will be prolonged and messy. The UK will want an agreement that the EU cannot accept, such as wanting to keep free movement of services without allowing for free movement of people, or some other edited version of the so-called “Four Freedoms.”

Possible alternatives

The presenters analysed the various economic models that the UK may adopt to replace the current EU arrangement. Tim Oliver (Dahrendorf Postdoctoral Fellow) summarised the three options as follows:

1. The Cutty Sark– This model would see the UK pursue a global-first trading approach aimed at emerging powers and new markets, one in which trade with the EU is second to that to be found by pursing options around the rest of the world. It would resurrect Britain’s Victorian trading outlook as now remembered by such ships as the preserved tea clipper Cutty Sark. This model, however, hasn’t evolved to deal with the institutionalisation of the world trading system and overlooks that Britain’s main trading links are with the EU, a situation that is best served by the existing model of membership.

2. The Hong Kong Model– The UK would pursue a libertarian model of deregulation, low taxes, minimal social protection and unilateral free trade, opening up the UK economy to the full force of global competition. This would spur UK productivity and draw in investment from around the world. By producing a hyper-competitive economy the UK would be in a position to undercut and outproduce the economies in the rest of Europe. The model would face considerable resistance within the UK from the left and from ‘one nation’ sections of the Conservative party, and risks provoking retaliatory measures from the EU.

3. One Continent, Two Systems– This model would reflect something similar to that China offers to Taiwan where the island is recognised as part of China, albeit in a way that it is allowed to pursue its own political, economic, legal and international affairs. Under such a model the UK would remain part of the EEA and pursue its own trade policy allowing it to develop with a degree of autonomy denied to others in the EU’s customs union. Though this model could be mutually beneficial, particularly if some EU member states or regions turn against trade liberalisation, neither side would be entirely comfortable with it. Some in the UK would resent the degree of power it afforded the EU in British life, with pro-Europeans pointing to the inability of the UK to shape EU policy and politics as it can now as a full member. The EU can be expected to resist the model because it would complicate institutional arrangements and weaken the EU’s unity.

Implications

As outlined above, it appears as though none of the existing models are viable options for the UK. This uncertainty means that Brexit will not give rise to an acute crisis for the UK economy, but rather to a gradual economic decline as banks and companies re-locate and the pound continues to weaken. This is dangerous for the UK, whose economy already features significant debt, low productivity growth, and unsustainable public finances. For the average Brit, this will first be felt by increasing costs of holidays abroad, then by increased prices on imported goods (which currently make up about 50% of consumption), and will finally result in a contraction of real incomes by about 10%. Ironically, the impact will be felt most by the poorest – those earning less than £15, 000 annually – who are the very people who voted to leave. It will also have substantial negative impact on countries with the strongest economic ties to the UK, namely Ireland.

Finally, despite the economic focus of this workshop, it was widely agreed that the UK government will have to accept a deal that is motivated more by political rather than economic considerations. This was foreshadowed during the campaign leading up to the referendum, in which experts argued that Brexit was economically irrational, yet issues such as migration and general EU scepticism trumped economic arguments.


Speakers at the workshop included Henrik Enderlein (Director of the Jacques Delors Institut-Berlin and Professor of Political Economy and Associate Dean at the Hertie School of Governance) and Garvan Walshe (CEO of Brexit Analytica in London). Robert Falkner (Co-Director of the Dahrendorf Forum at LSE) offered opening remarks. The event was chaired by Anna auf dem Brinke (Research Fellow at Jacques Delors Institut-Berlin). The workshop was attended by more than 40 international experts.

The opinions expressed in this blog contribution are entirely those of the author and do not represent the positions of the Dahrendorf Forum or its hosts Hertie School of Governance and London School of Economics and Political Science or its funder Stiftung Mercator.