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UK at the Crossroad: Why Voters Should Care about a Brexit

shutterstock_130660901 GEDBLog Study BREXIT

As seen from the continent, one would think that a potential Brexit – Britain exiting the EU-  is the hottest topic agitating public debate ahead of the upcoming general election. However it seems that, despite growing concerns in the City, UK voters attach little importance to the Brexit question.

Apathy around Brexit

In a recent YouGov poll, Europe only showed up low on voters’ priority lists, with only 16% of respondents identifying it as one of the most important issues facing the United Kingdom today.

ThePersonalDimensionGEDBlogBrexit

Source:  YouGov.com 

This might seem odd, considering what is at stake. Should the United Kingdom decide to part from the European Union, the economic impact may prove significant. If the United Kingdom exits the EU in 2018, we estimated that, (depending on the extent of trade policy isolation) the UK’s real gross domestic product (GDP) per capita would be between 0.6 and 3.0 percent lower in the year 2030 than if the country remained in the EU. The chemical and automobile industry as well as financial services would face significant losses in case of a Brexit.

 Regional Impact Could be Significant

But if these findings are helpful, catching voters’ attention might require a much more targeted focus. After all, although country-wide economic losses would be mild, there are good reasons to believe that a Brexit could create significant distortions in specific areas of the United Kingdom.

Financial centers would be first to feel the heat. The City of London could be hit hard by the breakup. Most financial firms currently benefit from the EU membership. The financial sector is a mobile one, and striking a deal with Brussels on financial services post-Brexit will be tricky According to the Financial Times, Michael Sherwood and Richard Gnodde (co-chief executives of Goldman Sachs International), European banks could leave “in a very short order” if the United Kingdom leaves the EU. Currently, foreign banks employ 160,000 people in London.

 

And the City is not the only financial center in the United Kingdom. HSBC recently announced plans to move its headquarters to Birmingham, while other prominent banks have long been established outside London. As Boris Johnson pointed out himself, the largest single employer in Bournemouth (a 200,000 inhabitant city in Dorset) is JP Morgan (after the NHS, naturally). “And would JP Morgan be in Bournemouth if JP Morgan weren’t in London? No.”

 

But these potential losses are meager compared to the pain that traditional manufacturing regions could go through. With an economy dominated by car manufacturing and chemicals, the North East could face a significant economic downturn, should tariffs with the EU be increased. The city of Sunderland, at the heart of the North East, generates significant revenues from a Nissan car plant, established here to serve the European single market. While the City of London could reorient itself to after a Brexit, it is unlikely that old manufacturing regions have the capital and skills to do so. Employment losses could thus be significant. The North West, West Midlands and Wales are similarly exposed to a Brexit. Fueled by its trade with the Republic of Ireland, the Northern Irish economy could also witness disastrous losses.

 

 

Services Goods BREXIT GED BLOG

Source: John Springford, “Disunited Kingdom: Why ‘Brexit’ endangers Britain’s poorer regions?”, Center for European Reform, April 2015 cer.org.uk

Exiting the EU gives Britain the weak hand in Trade Negotiations

Of course, it is quite hard to get a precise picture of the damage that a Brexit could cause. If Britain strikes a profitable deal with the EU, then the distortions could be minimal. But our STUDY shows that, following an exit of the United Kingdom, the latter would have a weak hand in the negotiations: While its economy could end up at a real disadvantage, the GDP losses for the rest of the EU are relatively moderate. For example, we estimate that the effect of decreasing trade activities in Germany would be relatively minor with a real GDP per capital drop of 0.1 to 0.3 percent in the year 2030. For the entire remaining EU-27 (withought the UK), the expected reduction in real GDP per capita due to lower trade activity with the UK would fall between 0.1 percent with a soft Brexit, and around 0.4 percent in case of UK isolation. Some regions, such as Paris or Frankfurt, would even gain from a Brexit.

The following graph (generated through our trade visualization tool GED VIZ) makes apparent the UK’s weak position in case of a negotiation with the EU: it is true that the EU runs a trade surplus with the United Kingdom but, while the EU makes up about 45% of the UK exports, only about 10% of the EU’s exports are directed to the United Kingdom. On the whole, there are good reasons to believe that in case of a Brexit, the economic damages listed above would not be offset by new trade agreements with the European Union.

 

 

If Brits are concerned about the economy, then it might be time for them to reconsider the question of a Brexit. Hopefully, combining continental, national and targeted approaches to the issue will help them do so.