Brexit: the long-term impact on UK and EU economies

Brexit economies

Brexit represents a significant event for the European economy.

To get a better sense of the dimensions of the effects, we have been undertaking a review of a sample of studies on the long-term impact of Brexit on GDP and welfare for both the UK and EU27 economies, focusing on individual countries (the main findings can be found here).

Taken together, these point to a number of recurring themes.

Uncertainty remains a key word when referring to Brexit. Will Brexit take place and when? With or without a deal? What sort of Brexit will emerge?

Until such matters are resolved, these uncertainties have been weighing on economic activity in the UK, and business investment in particular.

Even if the nature of Brexit were to be known, then the estimates of the impact of any scenario are themselves surrounded by a lot of uncertainty.

Reflecting this huge uncertainty, estimated Brexit losses vary widely from one study to another, especially for the UK.

That said, in all scenarios, Brexit is a lose-lose situation for both the UK and the remaining EU economies so that GDP or welfare will be lower in the coming years, as compared to a situation where the UK would have remained within the EU.

The UK is found to be much more affected by Brexit than the EU27 (and most of its member states) even if just the trade channel is considered.

In an orderly no deal scenario where trade relations fall back to the basic rules of the World Trade Organization (WTO), the UK losses may be contained to below 5% of GDP.

However, if Brexit reduces net migration and productivity, they may even exceed 10% of GDP.

In the long term, the main impact of Brexit on the EU economies comes through trade.

When only this channel is considered, the median Brexit-induced losses for the EU27 could on average be limited at 0.6% of GDP in an orderly no deal (WTO) scenario.

Only certain small open economies closely related to the UK are hit harder due to geographical proximity (Ireland and, to a much lesser extent, the Netherlands and Belgium), because of specialization of their economy in financial services (Luxembourg) or because they are Commonwealth countries (Cyprus and Malta).

In the four largest euro area countries (Germany, France, Italy and Spain), losses are likely to be lower than the EU27 average as these member states trade relatively less with the UK.

Under all scenarios, the economic losses due to Brexit are estimated with unchanged policies.

However, one of the main aims of Brexit for the UK is to take back control of its borders and policies. The UK could thus mitigate the economic losses by activating new trade and/or regulatory policies.

The UK would be more able to do so in hard Brexit scenarios (such as the WTO) where it will regain more autonomy than in soft Brexit scenarios since a closer relationship with the EU would require less independent policies.

In the short term, when uncertainty and confidence effects are still fully active, the cost of Brexit might be more substantial, especially in a disorderly no deal Brexit. It might also imply higher frictions under the form of delays all along the value chains.

Preparedness and contingency measures, especially those taken in the financial sector, should mitigate somewhat these disturbances.

Reaching a trade agreement for the future relationship between the UK and the EU could limit GDP losses both for the UK and the remaining EU member states compared to a no deal scenario.

If the relationship goes no further than a Free Trade Agreement (FTA) like that between the EU and Canada (CETA), the losses are in general expected to be halved.

If the UK remains in the single market or the customs union, the GDP losses induced by a WTO scenario could be even more contained.

Most of the economic loss for the UK under a WTO scenario may disappear both in the backstop provided by the Protocol on Northern Ireland and in the free trade area for goods and the FTA for services implied in the Political Declaration.

By Patrick Bisciari, economist at the National Bank of Belgium.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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