Socio-Economic Consequences of Brexit

The following post was written by Lucas Guimarães, a senior coordinator of Students for Liberty in Brazil. Lucas is also a specialist in International Relations from the Federal University of Brasilia and holds a degree in International Relations. He currently works at the National Committee for Refugees (CONARE) of the Minister of Justice.

Since the United Kingdom (UK) decided to become a member of the European Union (EU) in 1973, GDP per capita of the UK has doubled, outpacing other prosperous non-EU English-speaking countries. In the referendum held on June 23, 2016, the UK voted to exit the EU in a move known as Brexit. The persistent adverse consequences of Brexit can be detrimental to the UK’s economy. Germany`s Finance Minister, Wolfgang Schäuble, has expressed concern that Brexit could “jeopardize financial market stability”.

The outcome has brought an uncertainty elsewhere. Financial markets have increasingly begun to raise prices in anticipation of Brexit. Economic unpredictability has boosted and started to affect the confidence and business investment, threatening a decline in UK growth. Uncertainty about the UK’s relations with the EU, and notably about any future trade agreement would trigger a retrench among them.

CEP POLICY ANALYSIS considered two scenarios. The optimist case: the UK remains a member of the EEA- European Economic Area (like Norway and Switzerland), in which case it will continue enjoying the same access to the EU’s internal market. Even though, most commenters argued that, as a strong former-member, the UK wouldn’t be able to negotiate very encouraging terms. The “pessimist” scenario predicts an increase in trade costs.

There are some reasons to believe why costs may increase in a post-Brexit scenario: first, higher tariff barriers between the UK and the EU; second, higher non-tariff barriers to trade (emerging from different regulations, borders controls, etc.) between the UK and the EU; and last but not least, the UK won’t be involved in the coming EU negotiations concerned with further integration and lower non-tariff barriers.

The pessimist scenario will put an end to the UK’s right to access the internal EU market as well as it will terminate the corresponding obligation to offer unrestricted access to its own market. Hence, the flow of the UK’s goods and services will initially be governed by the World Trade Organisation rules, facing a situation involving higher tariffs and some obstacles in the access Single Market.

Open Europe’s report (2015) stated: “The UK’s GDP could be 2.2% lower in 2030 if Britain leaves the EU and fails to strike a deal with the EU or revert into protectionism”. Hence, the best alternative for the UK is to pursue liberalizing free market and de-regulation policies, which are what most economists recommend.

In these circumstances, a report by Chris Giles and Emily Cadman (2016), FT. 03.01.2016, explained “there are few issues that unite UK economists and Brexit is one of them: they overwhelmingly believe leaving the EU is bad for the country’s economic prospects. In the FT’s annual poll of more than 100 leading, the economists expressed their concerns that Brexit wouldn’t enhance UK growth in 2016. Despite this fact, a period of adjustment, could bring a weaker Pound Sterling and higher unemployment, but nobody knows how long it will last, and how harshly streamlining of the public sector would accompany the rebuilding of private economy.

Nevertheless, uncertainty weakens not only the economy but to some extent has political and constitutional issues. What will happen to Scotland? What are the implications with Northern Ireland and its borders with the Republic? What are the consequences to Gibraltar? Would this trigger the country’s fragmentation?

Scotland voted to remain part of the UK in 2014 but Brexit hasn’t gone well with Scotland. The majority of the votes in Scotland were in favour of the UK staying in the European Union and there is a huge resentment among Scottish political leadership which can lead to another referendum.

The tough scenario outlined by the British Prime Minister, Theresa May, confirms the previous concern about the position and rights of EU workers currently in the UK. Between 2001 and 2011, EEA immigrants contributed 34% more than they took out of the UK fiscal system, with the net fiscal contribution of about £22·1 billion. However, many “Leave” campaigners complain that the free movement of people caused unemployment and pressure on the National Healthcare Service (NHS).

For example, echoes of claims of the “Leave” campaign says that Brexit would free up £350 million (US$500 million) a week that could be spent on the NHS and other public services. It is simply false. This stance is considering Britain’s gross contribution to the EU; when Britain gets money back the account shows less than £161 million a week. The reality proves that United Kingdom is completely in charge of its public spending; the UK government paid around £8.8 billion to the EU budget, which represents slightly more than 1% of its total public spending of £735 million, in 2014-15.

Finally, the majority of economic analysis and the opinions of many commenters point out that the UK can survive and might even thrive as an independent player outside the EU. The economic costs of exit might not be great, and there could be more benefits in the long run, under some presumptions. However, Brexit carries a risk for both Europe and the UK. Economic migration will continue to depend on the relative growth and its relation to the number of immigrants. Following the referendum result, the effects of Brexit might also lead to the fragmentation of UK.

As the EU President Donald Tusk has said: “united we stand, divided we fall”. Brexit shouldn’t be handed for breakaway tendencies and the benefits of collectivity, reciprocity and interdependence should be seen and emphasised by all nations allied for creating a global economic well-being.