In recent weeks the economic consequences of either result of the upcoming EU referendum have been brought up by both campaigns. Remain have raised the possibility that a leave vote would lead to a recession while Leave have been describing the possible bilateral trade deals that would be possible with non-EU states. As with much of the campaigning, the results of the referendum are at best educated guesses, but several organizations both in the UK and Europe have attempted to clarify the current costs and benefits of our current EU membership as well as possible changes to our economic status if we were to leave. A full description of the level of economic cooperation between the UK and the EU is more suited to a book than an article. Similarly the reports referenced in this article are long and in depth. What follows is an overview of the findings of several reports held up against the possible outcomes of the referendum vote.
What do we gain from the EU now?
It is safe to say that the UK is heavily entangled with the EU in financial terms. According to the Centre for European Reforms analysis EU trade contributes 9.8% of the UK GDP. That’s more than any single English region apart from London and the South East. If one compares the value of EU and Non-EU trade; in 2015 the UK’s trade with the EU amounted to a gross worth of £346 billion as opposed to £43 billion earned through trade with China. Naturally, trade with our closer neighbours which has been going on for longer would account for more income but the difference is still significant. But the value of overseas trade isn’t the only way in which the country is tied to the EU. In monetary terms the City of London, financial capital of Europe, has a very positive relationship with the European single market. According to the Organization for Economic Cooperation and Development the Eurozone is a larger market for lending – that British financial institutions can take advantage of – than its size would suggest.
The UK is tied to the EU in trade and financial terms but there is also the loss of GDP that the EU budget contribution causes. It is true that the UK gives more to the EU than it gets back. In 2015 the UK paid a net of 8.5 Billion pounds to the EU. That’s a payment of 18 billion pounds, minus 5 billion in our yearly rebate and 4.5billion spent on the UK by the EU. If this were removed the UK would save the equivalent of 0.5% of its GDP by leaving the EU budget contribution. It’s true that in the simplest cost-benefit terms, without the consideration of wider consequences a removal of the EU budget payments would be beneficial to the UK. We’d stop paying out a large sum of money every year.
In terms of the EU affecting British trade another common complaint against the EU is overregulation crippling trade. In reality the level of regulation on British trade is fairly minimal. According to the OECD, Britain has the second least regulated product market in the developed world. Another EU member state, the Netherlands, has the most regulation. In an investigation into the effect of EU regulations the CER discovered that the effect of regulations is less than could be assumed. The two studies they reference, performed by Oxford Economics and by PricewaterhouseCoopers, predicted that the amount saved through the removal of current EU trade regulations would actually be more than offset by the new restrictions that would be erected under a new trade deal (more on that later). Finally there is some suggestion that a departure from the European Union would allow us to pursue closer trade links with other partners. The level of outside trade to the EU compared to other states has already been discussed. However the CER could not find any evidence that the EU impedes wider trade. They use the example of Germany and their trade deal with China. China is Germany’s second largest trading partner after the rest of the EU.
A post EU trade deal?
It would be unreasonable to say that all of our EU trade would be cut off overnight if we vote to leave. However the terms of our access to the European single Market would be changed in some way by a political departure from the European Union. That fact is inescapable. The idea that the UK is restricted by EU regulation is, as discussed above, questionable. The OECD cites studies carried out by Oxford and the London School of Economics, both of whom suggest that deregulation of trade would produce minimal boosts to GDP, .1% and .3% respectively. Weighing those figures against the fact that we would receive access to the single market under stricter terms than we do now it seems unlikely our trade relationship with Europe would benefit from an exit. The question of whether we would be able to generate the same kind of income from outside trading partners as we currently do from Europe is, to some degree, speculation. However, considering the fact that there is very little stopping us from trading outside Europe now it’s hard to envisage a massive outside trade deal materialising just because we left the EU. The EU budget contribution is a sticking point but again, the OECD predicts that we would save the equivalent of .5% of our GDP by ending that. However we would still have to pay to access the single market, meaning that money would definitely not be funnelled into the NHS or schools or anything like that.
The study carried out by PwC is, if anything, even more critical of the UK’s economic potential outside the EU. They include conclusions that a free trade agreement with Europe and the wider world wouldn’t bring in as much as access to the single market does now. They also examine the possible alternative trade agreements that could be set up in its stead. The two possibilities they examine are a Free Trade Agreement or an agreement set up under the guidelines of the World Trade Organization. Their prediction is rather alarming, a loss of between 50 and 100 billion pounds by 2020 which would be felt up to 2030. Another area which they claim a leave vote would be harmful is in employment. They predict an 8% rise in unemployment over 4 years.
Employment and Migration
The Institute of Chartered Accountants in England and Wales have carried out an analysis of the effect of EU migration on British GDP and employment figures. In contrast to the other studies mentioned their aim was not to offer a conclusion on the effect of a departure from the EU but rather to establish the effect of EU migration on employment within the UK. According to their figures EU nationals account for 6.4% of Britain’s workforce. In terms of their economic contribution they found that workers from the EU are less likely to claim in-work benefits than UK citizens and are more likely to be self-employed. They also state that proportionally the share of unemployed working age population is lower for EU nationals than UK nationals. They do also note that there is still a significant non-management skill shortage in certain industries, construction especially. Considering the combination of the continuing skill shortages, the trend for EU nationals to have better qualifications and the aging population it appears as though certain industries will rely more on workers sourced from abroad.
Looking at wages and benefits a little closer, the OECD found that EU workers do tend to benefit from tax credits but are far less likely to claim out of work benefits. By the CER’s estimation the wages of low skilled British workers have been depressed by .8% since 2005. That is a minor decrease over a 10 year period. By contrast, the institute for Fiscal Studies report that changes to taxes and benefit cuts will reduce the wages of the poorest tenth of the population by 10.6% and if we changed the rules regarding free movement of people, inhibiting the ability to fill skill shortages that may increase further as taxes are raised or spending is cut further. That’s certainly the forecast from PwC who say the UK leaving the EU could see unemployment rise by up to 8% in 4 years. A final point raised by the CER is that, as cynical as it sounds, the effects of an aging population are at least somewhat mitigated as retirees leave the country. It’s definitely easy for them to do so thanks to free movement.
Economics is a wonderfully frustrating mix of speculation and statistics. Estimating the economic effects of leaving the EU is impossible to do with one hundred per cent certainty. Nonetheless it is possible to estimate the value of our continued membership. We can also make at least an educated guess as to what economic changes would come about after a leave. In basic terms, in spite of the claims of Vote Leave we do receive a net benefit from EU membership. It would be detrimental to the UK economically to leave a Union. The common line from both campaigns has been criticism of the other for “fear mongering” and it’s certainly a valid claim. These figures and conclusions are not meant to be a scare tactic and they certainly aren’t prophesizing economic Armageddon. However, the conclusion offered by these studies is that the economic impact of an exit would be negative and visible.
Over the coming weeks, we will be publishing several pieces related to the EU referendum. They will cover as many topics as possible and will be a mix of data-driven analysis and commentary. This was the first. If you found it helpful, please keep an eye out for the next installment!