UK gross domestic product (GDP) could be 2.2% lower in 2030 if Britain leaves the EU and fails to strike a deal with the EU or “reverts” into protectionism. That is one of the main findings of a comprehensive new report by Open Europe, the respected UK-based think tank.
It says that in a “best case” scenario, under which the UK manages to enter into liberal trade arrangements with the EU and the rest of the world, whilst pursuing “large-scale” deregulation at home, Britain could be better off by 1.6% of GDP in 2030.
However, a “far more realistic” range, it says, is between a 0.8% permanent loss to GDP in 2030 and a 0.6% permanent gain in GDP in 2030, in scenarios where Britain “mixes” policy approaches.
UK Premier David Cameron has committed to holding an “in-out” referendum on Europe in 2017 if the Tories win May’s General Election.
He hopes to take the steam out of those, such as UKIP, arguing for withdrawal, or “Brexit” as it has become known, by “renegotiating” the terms of Britain’s EU membership.
In its study, Open Europe, which advocates reform of the EU as opposed to withdrawal, looked primarily at the economic impact of Britain leaving the EU.
However, given that Brexit comes down to a “finely balanced calculation”, it says “unquantifiable considerations such as lost sovereignty and democratic accountability may be what in the end determines whether Britain remains a member”.
Open Europe’s study draws on detailed economic modelling, showing that the economic impact of Brexit may “not be as clear cut” in either direction as most previous analyses have suggested.
Instead, it will depend on a number of “tough” decisions in the UK and Europe.
The report, published on Monday, says, “This includes whether the EU itself will embrace reform and British politicians and voters are willing to accept ambitious deregulation and new levels of competition through expansion of free trade.”
Based on economic modelling of the trade impacts of Brexit and analysis of the most significant pieces of EU regulation, if Britain left the EU on 1 January 2018, Open Europe estimates that in 2030:
• In a worst case scenario, where the UK fails to strike a trade deal with the rest of the EU and does not pursue a free trade agenda, Gross Domestic Product (GDP) would be 2.2% lower than if the UK had remained inside the EU.
• In a best case scenario, where the UK strikes a Free Trade Agreement (FTA) with the EU, pursues very ambitious deregulation of its economy and opens up almost fully to trade with the rest of the world, UK GDP would be 1.6% higher than if it had stayed within the EU.
“However,” it cautions, “these are outliers.”
The report goes on, “The more realistic range is between a 0.8% permanent loss to GDP in 2030 – where the UK strikes a comprehensive trade deal with the EU but does nothing else; and a 0.6% permanent gain in GDP in 2030 – where it pursues free trade with the rest of the world and deregulation, in addition to an EU FTA.”
“In none of our scenarios would the cost of leaving the single market and the EU customs union be off-set by merely striking a new trade deal with the EU. Britain will only prosper outside the EU if it is prepared to use its new found freedom to undertake active steps towards trade liberalisation and deregulation. It faces a series of difficult choices.”
The report concludes by saying that “given the difficulty in leaving the EU and the extent of the political and economic challenges the UK would need to overcome to make Brexit work in its long-term interests, it would be foolhardy to leave without first testing the limits of EU reform.”
It says that limiting the areas of EU interference and further market liberalisation would be the “most beneficial” option for both the UK and the EU.
Comment came from Open Europe’s chairman Lord Leach who said, “Brexit is unlikely to be the cataclysmic event some have claimed.
“However, transforming Britain into the deregulated, free trading economy it would need to become outside the EU sounds easy in theory, but in practice could come up against some serious political resistance within the UK itself.”
“The worst scenario is if the UK leaves the EU and then pursues protectionist policies.”
“If the UK puts as much effort into reforming the EU as it would have to in order to make a success of Brexit, the UK and the EU would both be better off.”
By Martin Banks