Nicholas (nwhyte) wrote,

An Assessment of the Economic Impact of Brexit on the EU 27

Second section of third chapter (actually section 3.1, on the European Economic Area):
In economic terms this would be close, but not identical, to the status quo for a full member state that is not a eurozone member, with full inclusion in the single market for all four freedoms, and compliance with all ‘EEA-relevant’ regulatory legislation by the EU. But it excludes membership of the EU’s custom union, as well as agricultural and fisheries policies.

In the EEA all new or amended EU legislation has automatically to be taken on board by the non-EU EEA states.

Dispute settlement is by a special EFTA Court, which however cannot deviate from the rulings of the European Court of Justice.

Budget contributions are made, which are substantial, but significantly less than for EU member states (see section 1.5 above).

On the free movement of persons it may be noted that Liechtenstein was allowed to retain a quota regime for immigrants including from the EU, but this is unlikely to be considered a relevant precedent for the UK.

There is the theoretical option to add a scenario in which the EEA would be combined with membership of the EU’s customs union (1.1 EEA + customs Union). In economic terms this would be a model very close to the status quo. The present EEA non-EU member states do not want this, because they value their freedom to make their own trade deals with the rest of the world. The UK clearly excludes this scenario, so it is not further pursued here.
This is a report from March this year (little has changed in the six months since), pulling together the economic stats for the EU and the UK, and looking at the existing forecasts for the impact of Brexit on their respective GDPs. The authors do not try their own forecasting, but do discuss the gaps in existing forecasts. The whole thing is 60 pages, only 30 of which are the actual report (the rest is cover matter and annexes) so relatively easy to digest. It was prepared by my former colleageus at CEPS for the European Parliament, and can be downloaded for free here.

I'm familiar with the basics of the situation as most sane people accept it. To summarise the summary of the summary, "All available studies concur that a significant disruption of trade links will impose economic costs on both sides. However, the EU27 would bear only a disproportionally [sic] small share of the total cost." To dig a bit more into the detail,
The trade in both goods and services between the UK and EU27 is very substantial: €306 billion of exports of goods by the EU27 to the UK, versus €184 billion of imports, and thus a large surplus of account of goods alone (all data here and below for 2015). In terms of % shares of GDP, the EU27’s exports to the UK amount to 2.5% of GDP, whereas the UK’s exports to the EU27 amount to 7.5% of its GDP... For services the amounts are also large: €94 billion of exports by the EU27 to the UK, versus €122 billion of imports, and thus a surplus in this case for the UK (although here the statistics are not so reliable, with big differences seen in the ‘mirror data’ for the same items collected by the EU27, which would cancel the UK’s surplus).
There were some surprises for me in the detail. The biggest exporter of goods to the UK among the EU27, as measured by %GDP, is not Ireland but Belgium, with the Netherlands in a close third place. Of course this may be due to the importance of Antwerp and Zeebrugge (and Rotterdam for the Netherlands) as a port from which goods are shipped to or from other EU27 destinations. My comment: it's interesting and instructive that we have seen absolutely no discussion in the Belgian press (let alone in the British press) of the possibility of Belgium pushing for a softer line on Brexit out of selfish economic interest.

Sectorally, machinery and transport equipment is the biggest, accounting for 34% of UK->EU27 trade and 41% of EU27->UK trade, with road vehicles alone respectively 10% and 19% - my comment: the importance of the UK to the German car market is not a myth, which is why the German car industry's failure to rally round the Union Jack should be taken very seriously by observers. The second biggest sector is chemicals, at 18% of UK->EU27 trade and 17% of EU27->UK trade.

The statistics on trade in services are not completely unreliable: "the Belgian services deficit with the UK is recorded to be €1.8 billion according to UK data, whereas the Belgian data suggest the deficit to be only €0.1 billion. The biggest divergence is in the case of Ireland, where according to UK data the UK has a large surplus of €6.1 billion, whereas according to Irish data it is Ireland that enjoys an even bigger surplus of €11.5 billion." However it's fairly clear that the UK has a trade surplus on financial services of ~€20 billion, a deficit in tourism and travel of ~€10 billion, and everything else more or less balances. For FDI the figures are even more murky, distorted particuarly by special purpose entities in the Netherlands and Luxembourg.

There is a good analysis of the different relationships that third countries have with the EU. The authors come down where the consensus currently is in Brussels (and, I hope, in London): that a "successful" outcome to the Brexit negotiations will be a strategic partnership (as the EU has with major geopolitical powers) and a comprehensive free trade agreement (as the EU has with applicant and aspirant countries, though starting from the other end as it were). They note that the four freedoms are not in fact indivisible when applied to Eastern countries, who do not benefit from freedom of movement (and the Liechtenstein point was also made earlier). My comment: since the UK still doesn't seem to know what it wants in terms of freedom of movement, this hardly matters.

On the impact of Brexit, the findings are very clear.
There has been a considerable amount of quantitative modelling work done on various Brexit scenarios by both official institutions (UK Treasury, OECD) and independent economists. These all cover ranges of scenarios in the optimistic-pessimistic spectrum, including the spread between the EEA and WTO scenarios highlighted above... Nonetheless the modelling work has produced a cluster of relatively consistent results. The main story is one of economic losses by both parties, but disproportionately between them in money amounts in a ratio of around 1 to 2 or 3 for the UK and the EU27 respectively. In terms of percentages of GDP the losses for the EU27 would be about 10 to 15 times lower given the 1:5 ratio in the GDP of the UK relative that of the EU-27.

  • For the EU 27 the losses are virtually insignificant, averaging between 0.11% and 0.52% of GDP for the optimistic versus pessimistic scenarios respectively. These amounts are modelled as the totals cumulating up to 2030, so the annual average losses would be of the order of 0.011% to 0.052 % of GDP.

  • For the UK the losses average between 1.31% and 4.21 % of GDP for the optimistic and pessimistic scenarios respectively, or 0.13% to 0.41% of GDP annually. Among the different models it is also notable that the losses for the UK are higher than average in the case of two models (OECD and UK Treasury) that capture negative impacts on foreign direct investment (FDI), which is redirected in some degree away from the UK into the EU 27. In their pessimistic scenarios the losses cumulate to about 7.5% of GDP, or 0.75% annually, which are highly significant amounts macroeconomically. This FDI effect is not however reflected in models estimated for the EU27, and so implies that there might need to be some adjustment to the results reported above for the EU27.

Ireland of course is hit particularly hard, since its economic relations to the UK are almost a miniature version of those of the UK to the rest of Europe; Malta and Cyprus are also hit disproportionately (as is Belgium, noted above). My comment: smart UK diplomacy would have spotted this and tried to get Ireland (and the islands) on side with the British policy from the beginning. However, it's much easier in the short term to alternate between ignoring them and patronising them.

The Open Europe analysis of the impact of the UK unilaterally dropping all trade barriers post-Brexit is also considered, to be dismissed.
The world has seen three such cases: Singapore, Hong Kong and Georgia. But these are all small countries, with very high concentrations in Singapore and Hong Kong of financial and other services, somewhat similar actually to the place of London as regional and global service centres. However in the British case, beyond the 10 million people in cosmopolitan London, there are another 50 million people with different interests. This is a clue why the scenario does not attract political support in the UK, even if the simulation postulates that it would be beneficial.
Basically this is a good, clear-eyed summary of the state of economic forecasting, which is honest about the deficiencies of knowledge and data. Well worth a read, as a base point from which to judge the veracity of newspaper headlines and Brexiteer wishful thinking.

Tags: bookblog 2017, eu

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