The economic impact of the EU referendum
- Wednesday, May 17, 2017
Our decision will have far reaching economic impact spanning future generations
An in/out referendum on the UK membership of the EU will take place by the end of 2017 but possibly as early as the summer of 2016. This referendum will be very important and may not be that far away. Our decision will have far reaching economic impact affecting ourselves and future generations.
The key foundation of the EU is the single market, one which promotes the freedom of movement of goods, services, people, and capital. The underlying belief is that a single market helps to underpin prosperity, by fostering competition and ensuring efficient allocation of resources. The single market is assisted by the use of a single currency in 19 of the 28 member states.
Despite these founding principles the process of creating a single market in all sectors of the economy is by no means complete. The Euro has been under stain for several years and recently the free movement of labour has also come under pressure. Passport and border controls have been abolished in the Schengen Area, which comprises of 22 of the EU member countries along with Iceland, Lichtenstein, Norway and Switzerland. However Germany has recently brought back border controls with Austria after large numbers of migrants from war torn Syrian travelled from Hungary via Austria into south Germany. The UK along with Ireland negotiated to opt out of the Schengen Area.
The UK Currently accounts for 12.5% of the EU population and 15% of its GDP. We import 9.3% of EU imports and export 6.3% of all EU exports. We are the fourth largest net contributor to the EU budget after Germany, France and Italy.
In the last financial year 2014/15 the UK’s net payment after rebates and EU receipts was £9bn about 0.46% of UK GDP. It is expected to stay at £9bn for the next few years.
Some exponents of a UK exit from the EU claimed in September 2013 that the true cost of EU membership is somewhat different. The full indirect costs were assessed and they overshadow the direct costs substantially. If added to the direct costs, the cost of lost jobs due to immigration, waste, regulation, resource misallocation, fraud and corruption that would mean that the figure rises to a massive 11% of GDP. These figures are, as one might expect, disputed by the pro EU campaign. It should be remembered that these costs do bring benefits to the UK and balancing the two is the assessment that needs to be made in order to come to a reasoned judgement.
The share of UK trade with the EU has been declining in recent years but it is still our largest trade partner. Just over 45% of UK exports went to the EU while 50% of imports came the other way in 2014/15. The UK has a growing trade deficit with EU countries but a growing trade surplus with non EU countries. An argument is often made that the UK is hampered in taking advantage of trade outside the EU by virtue of the fact that the EU negotiate on behalf of all members, the trade and tariff terms with the rest of the World.
The strength of the UK trade with non EU countries may counter that argument.
In the 10 years prior to the UK joining the EU in 1973, the UK GDP per capita was weaker than the average of the EU. It has been consistently stronger than the rest since membership in 1973 according to Thomson Reuters. It therefore seems hard to argue that membership has effected growth.
The Conservative government’s objective appears to be to secure enough changes in EU law, regulation and practise that would enable the Prime Minister to go to the country with the proposal that the changes negotiated would change the character of the EU sufficiently to justify continued British membership.
The changes sought are in four main areas.
First, a curb on the rights of immigrant workers to receive UK welfare payments. A four year waiting period before in work benefits are available and the removal of jobseekers benefits if not in work are the conditions sought. Germany and Spain are both seeking similar tightening up of immigrant benefit entitlement. Progress on this issue seems possible.
Secondly, The UK wants to be excluded from the EU objective of “ever closer union”. Other EU members outside the Eurozone are sympathetic to this objective. By contrast the members of the Eurozone do need ever closer union if the Eurozone is to avoid the kind of crisis that has bedevilled the currency over the past five years.
Thirdly, The UK is seeking general improvement in the overall competitiveness of the EU including greater cost cutting and accountability. Germany is particularly sympathetic to this cause.
Fourthly, Ministers are concerned that the 19 Eurozone countries will use majority voting in the 28 member EU to change rules to the detriment of non-euro nations. This is especially relevant to financial regulation and the City of London. The UK is seeking binding principles to ensure this does not happen. Unfortunately for Mr Cameron any new rules have to be part of treaties and will not be completed before the UK goes to the polls.
There are a range of Brexit scenarios, all with different implications to the UK economy. In September 2015 four economic studies from independent research institutions made predictions that leaving the EU would have a negative impact on UK GDP growth. Each of the studies used different time periods but all had a similar conclusion.
Financial markets, are for the time being, ignoring the risk of a Brexit as so much is still yet to be negotiated. Apart from by the end of 2017 there is little indication as to when the referendum will take place and which post Brexit option the government would take.
Morgan Stanley has recently published a 75 page report modelling the impact of the referendum on the UK economy. They have called a 35% probability of a leave vote and a 50% probability of a very close vote. They also predict that UK growth would fall to 1% in 2017/18 and inflation would rise to over the BoE target of 2% with the Government having to cut interest rates to revive the recovery.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.