UPDATE: British voters have spoken. Yet the debate is far from over. Before we enter the next stage of negotiations, it’s imperative to re-evaluate the consequences of staying in or out.
With the polls too close to call, what are the business implications?;
On 23 June, the British public gets to vote on whether the UK should remain in the European Union. The latest polls, carried out on 8 May, show public opinion fairly evenly split with 46% in favour of staying in and 43% in favour of leaving the EU.
A recent poll for the BBC showed that businesses are similarly divided on the issue. The survey among more than 2,200 business people found that 54% said they plan to vote to remain in the EU, compared to 37% saying they will vote to leave. Interestingly, sentiments among business leaders have shifted towards the ‘leave’ camp since February, when remain stood at 60% and leave at 30%.
However, it is worth noting that the international nature of the company impacts on business people’s views on Brexit. Among exporters, 60% is in favour of remaining in the EU compared to 33% in favour of leaving. For companies not exporting, these figures were 43% to 46%, respectively.
This is understandable, as Brexit would result in the UK having to negotiate a new trade agreement with the EU, which will almost certainly increase trade costs for UK businesses. However, quantifying the exact costs of a Brexit is a difficult and complex exercise.
At the London School of Economics, the Centre for Economic Performance has created a model to try and put some hard numbers on the impact a Brexit would have on the UK economy. The model compares the economic consequences in an optimistic and a pessimistic post-Brexit scenario.
In the optimistic scenario, the UK continues to have a free trade agreement with the EU, similar to the agreements Norway and Switzerland currently have. The UK would maintain access to the European single market, with no trade tariffs but a few higher non-tariff barriers arising from different regulations, border controls and so on.
In the pessimistic scenario, the UK is not able to negotiate such favourable terms resulting in larger increases in trade costs. In this scenario, Britain will just be a member of the World Trade Organisation and will have to trade with Europe through this channel, which means British exporters will be faced with trade tariffs as well as non-tariff barriers.
The Centre’s calculations found that in the optimistic scenario, the overall effect of a Brexit on the UK’s GDP would be 1.13%, while in the pessimistic scenario the UK’s GDP would drop by 3.09%.
However, the researchers said these figures are based on a conventional static trade model that does not take account of the dynamic effects of trade on productivity growth. “Recent research has found that dynamic effects may double or triple the size of the static effects. Therefore, [these numbers are] likely to underestimate the costs of Brexit.”
The risks of remaining in the EU
Most commentators have pointed out the potential risks of a Brexit, but a continued membership of the EU is not without risk either.
In a recent report, provider of credit ratings, research and risk analysis, Moody’s Investor Services, highlighted that, despite substantial political and economic reforms over recent years, Europe remains vulnerable to any future crisis.
Greece’s financial troubles continue to be a concern but Europe also faces challenges that extend beyond the economy and financial markets. A solution to the migrant crisis has not yet been found, and years of austerity measures and the EU’s inability to solve the migrant crisis have “fuelled resentment and disappointment with the EU project in some countries,” Moody’s said.
Its managing director and chief credit officer for EMEA, Colin Ellis, explained: “If the EU survives its current challenges largely unscathed, even a ‘small’ future crisis could threaten the sustainability of current institutional frameworks, if it coincided with negative public sentiment and populist political developments.”
By having kept in place border controls and its own currency, the UK may be less susceptible to the euro’s financial woes and the migrant crisis. But if a future crisis hits Europe, all member states will be affected, including the UK, if it continues to be a member of the EU.