The recent accidental leak of the information that the Bank of England is preparing for the consequences of Britain’s potential exit from the European Union (Brexit) — following the referendum on the issue in 2017, as promised by the newly reappointed Prime Minister David Cameron before the May 7 general elections — has sent ripples through the British establishment. As the pro-stay and pro-exit sides passionately peddle their arguments, ordinary voters are confused about how and to what extent Brexit will affect the British economy and Britain’s place in the world.
Cameron’s Conservative Party has always been in a constant tug of war between the anti-EU and pro-EU factions. The anti-EU faction — which includes the Eurosceptic Tories, including the 1922 committee in the parliament — wants Britain to pull out of the EU so it can reclaim the sovereignty lost to Brussels and to save the more than 11.3 billion pounds (2013) in net annual contribution. Cameron promised that he would renegotiate the treaties with other members and hold the in-out referendum partly to placate his pro-exit party colleagues and partly to prevent the erosion of traditionally Tory votes to the rising anti-EU and anti-immigration UK Independent Party.
Now that Cameron has won a simple majority in the parliament, he is under obligation to deliver. There is even demand from some quarters to advance the vote to 2016 to reduce the time of uncertainty created by the referendum, which has motivated investors to reach their investment decisions.
Uncertainty is certainly there. The Labor Party and the Liberal Democratic Party remain staunchly pro-EU. In a mirror effect, the business community is also divided. According to a survey by the British Chambers of Commerce, 57 percent business people support Britain remaining within the EU and 28 percent leaving it if London can sign a free trade deal with the EU; otherwise, they think, leaving the EU would be a net loss for Britain. Think tanks and political pundits in the media have been singing their own biased tunes.
While investors will hold back their decision until this uncertainty is cleared, ordinary voters are understandably confused. Though there is still time to generate and disseminate unbiased information on the potential impact of Brexit, the example of the Scottish referendum last year does not give much room for optimism. As we recall, in the run up to the Scottish referendum, the pro-union and pro-independence sides churned out their own biased songs, even though the voters deserved dispassionate analyses.
Although it is impossible to objectively assess the full impact of Brexit until it happens, if it does, there is some reasonably impartial analysis out there already about the potential impact of Brexit. However, a high-pitched and sentimental political propaganda had drowned that information. Such analysis is not receiving enough time in the media and enough attention in public discourse. In an effort to make some sense of this passionate political discourse, here is what I have understood so far.
Brexit will affect all aspects of British life, but it will be felt more acutely in immigration, trade and investment, and Britain’s place in the world. On immigration, it will free Britain from the EU rules on freedom of movement and national treatment across members of the union, allowing it to reclaim its sovereignty to control its borders. It can decide who comes into the country and who can claim benefits here. However, EU members will do the same with respect to Britons. It would be a two-way street.
There will be no significant savings for Britain in its welfare bill. According to government estimates, 2.34 million EU nationals live in Britain and 1.8 million Britons in other EU countries. Nearly 65,000 EU nationals claim benefits in the United Kingdom whereas 30,000 Britons claim the same in other EU countries. Yet more Britons claim benefits at least in nine EU countries than their nationals in Britain do. Therefore, the savings will be insignificant.
However, there will be hassles in the trade and investment area. The effect of Brexit of trade and investment would be negative in the immediate future. The economists at the Centre for Economic Performance has calculated that the UK could “suffer income falls of between 6.3% to 9.5% of GDP, similar to the loss resulting from the global financial crisis of 2008-09,” in its pessimistic scenario and if a free trade agreement (FTA) is signed with the EU, “losses would be 2.2% of GDP.” That indeed is a major loss.
John Springford and Philip Whyte of the Center for European Reform say, “. . .the City would not collapse in the event of an EU exit. . .” But some activity would be lost if Britain left the EU; and the costs of an EU exit would outweigh the (largely illusionary) benefit of sovereignty.”
The Center for European Reform, The economic consequences of leaving the EU (2014) concludes, “Eurosceptics are wrong to say that the EU offers little market access for a good deal of red tape, or that it constrains Britain’s trade with fast growing economies outside Europe. . . If it leaves the EU, the UK will have to negotiate terms. Britain will face an invidious choice: access to the single market, but less influence on the rules that govern it; or freedom from the rules, but loss of access to the single market.”
Indeed, it will take time for Britain to sign free trade agreements with 25 EU countries if the voters decide to pull out of the economic group. Besides, it will lose the ability to influence EU decisions in its favor from inside. The sectoral impact on the economy will vary. For instance, the financial services and automotive industry will suffer loss — banks, hedge funds and automobile firms will seek to relocate to the continent over time to reap the benefit of the borderless continental market.
Finally, while the UK will remain a medium-sized power in the world as long as it continues to invest in its military at the current levels, it will not be able to project its strength regionally or globally without coat-tailing the United States or France and Germany. London will lose its strategic value for Washington, which will rather be with the grouping of 27 EU countries than with Britain if they differ in their policy or priority. National interest often outweighs cultural and linguistic links in international relations.
One thing is clear. Whoever is arguing one way or the other are making just educated guesses. No EU has left the group so far for a reliable frame of reference to ascertain the comprehensive and factual impact. Switzerland and Norway are woefully imperfect proxies to draw any conclusion from, because they have never joined the EU. They are dating for mutual company and benefits, while Britain will be divorcing after marriage. There is a humongous difference between the two.
Therefore, it is wise for the Bank of England to chalk out a comprehensive plan based on unbiased analyses to deal with the consequences Brexit. I am sure BOE will share its findings when the plan is completed, which should be well ahead of the referendum, so that the voters can make up their mind before they step into the voting booth.