Brexit: What’s at stake for the UK

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Deutsche Bank has been the first one to fire a warning shot over the UK vote to leave the EU, but others are certainly already preparing too, says Dr. Dennis Novy, associate professor in the department of Economics at the University of Warwick argues.

“It is now clear that Britain will have an EU referendum. Businesses do not like uncertainty. Not surprisingly, many – like Deutsche Bank – are reviewing whether they should stay in Britain or move resources towards continental Europe. The key question is: What would an ‘independent’ Britain look like? We don’t know. It would certainly be a much weaker player on the global stage,” he explains.

Uncertainty is the word for the time being, Novy stresses, as recent polls following the elections seem to show that most of British citizens are in favour of staying in the UK. However, as the general election has proven, polls are not always entirely reliable and the referendum certainly constitutes a risk factor that managers have almost certainly already started to look at, Novy says.

“What we know for sure is that the upcoming referendum has triggered substantial reviews of business plans in the financial services industry. It’s just part of risk management.  Deutsche Bank was vocal about it, but I would be very surprised if other banks were not already thinking about it very seriously.”

The main arguments put forward by the ones in favour of Brexit include that the UK would benefit from it by being able to treat both immigration and trade relationships with other economies like China and the US in their own terms rather than in the EU’s. However, Novy argues, Brexit would definitely make market access to the EU more difficult as trade barriers and costs would rise as a result.

As a matter of fact, when the UK joined the European Economic Community in 1973, just over 30% of UK exports went to the EU. By 2008, over 50% of UK exports went to EU countries.*

“While it has been made very clear that there is going to be an in-or-out referendum, it has not been made equally clear to voters what happens in case the UK actually leaves the EU,” Novy points out.

“What would be the trade relationship between Britain and China, or the US or even the EU? This will all be up in the air. Britain’s power will be likely diminished overnight. The Ukip crowd keeps claiming that when Britain will finally be freed from the EU’s shackles it will be able to renegotiate its trade relationships with the US and China. That statement is simply ludicrous,” he adds.

According to the professor, Britain alone does not have the adequate economic weight to dictate terms and will simply be faced with “take it or leave it” deals by economies that are way larger and more influential at a global level.

Moreover, Novy argues, that even if Britain ends up staying in the EU, relationships are already damaged. “The EU does not like this threatening attitude that the UK has adopted in recent years and some damage has already been done,” he says.

But how likely is it that the UK will leave the EU in 2017? Again, a very uncertain guess to make in Novy’s opinion. “Although the polls, as well as all the major parties in parliament, point towards staying in the EU, the timeframe for a treaty change is not realistic and I feel that Cameron might be setting the country for the big disappointment if he can’t get anything substantial in his negotiations,” he says.

The EU side

Looking at the issue from the other side of the fence, Novy says that, while the French-German relationship is certainly very special, there is a common interest in getting Britain to stay. “That’s very clear, I believe. Moreover, the EU will at least want to be seen to be doing something to assuage Britain. The question is how much they will be able to do to accommodate Cameron’s request,” he concludes.

*LSE paper “Should we stay or should we go? The economic consequences of leaving the EU”

Box out

Should we stay or should we go? The economic consequences of leaving the EU”, a paper published in May by the London School of Economics (LSE), outlined both an optimistic and a pessimistic scenario resulting from the Brexit referendum. In the first case, it estimates that leaving the EU and joining EFTA will reduce UK income by at least 2.2%; while in the second case the drop could be between 6.3% and 9.5%.

Other interesting figures from the study:

  • Optimistic scenario’s total welfare change: -1.13%
  • Pessimistic scenario’s total welfare change: -3.09%
  • Expected loss of income in case of strong immigration curb: 1.5%
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