Nobody Wins with BREXIT

Since the threat of a Grexit has been averted for the time being, a possible exit of the United Kingdom (UK) from the European Union (EU) poses the next danger for European integration. In our study “Costs and benefits of a United Kingdom exit from the European Union” from April 2015, we analyzed the static effects of a Brexit. We were able to show that due to less cross-border trade activities all 28 EU countries would suffer from lower economic growth. Now we calculated the dynamic growth effects of a Brexit. Again, all 28 economies would be faced with lower growth rates. Growth losses would be even larger than in the case of static effects only.

Different scenarios of a Brexit

Nobody knows how the economic relations between the UK and the EU would be organized after a Brexit. Therefore, we worked with two scenarios in our simulation calculations.

Best Case Scenario

In the most favourable case for the UK (“Best Case”), the UK loses its privileged trade access to the European market, but remains a member of the European Economic Area (such as Norway) or a de facto member (such as Switzerland, which adopts most of the acquis communautaire).

Compared to the static effects, dynamic welfare losses are larger for all countries. In the static “Best Case” scenario, the loss of real GDP per capita in the UK corresponds to 0.6 percent. In the dynamic “Best Case” scenario, we calculate losses ranging from 2.0 to 5.9 percent, depending on the estimated dynamic effects of less trade.

Worst Case Scenario

In the most unfavourable scenario (“Worst Case”), the UK exits the EU without negotiating any new trade agreement with Europe. Furthermore the UK also loses the preferential access to those countries, with which the EU has signed and ratified bilateral free trade agreements (such as, for example, with Mexico).

Compared to the static effects, dynamic welfare losses are larger for all countries. In the static “Worst Case” the calculated loss of real GDP per capita reaches 0.3 percent in Germany. In the dynamic “Worst Case”, losses range from 1.2 to 3.5 percent.

Which countries would lose the most from a Brexit?

In our static analysis, the country which would suffer most from a Brexit is the UK. The next five countries with the largest losses in real GDP per capita are Ireland, Luxembourg, Malta, Cyprus and Belgium.[1]

In the dynamic analysis, we come to the same conclusion. Due to the fact that we are working with two scenarios concerning the reduction of cross-border trade and three estimates concerning the extent of dynamic effects on real GDP per capita, our dynamic analysis reveals large range of results. As always in configurations of this type, the truth is likely to lie somewhere in the middle of the interval spanned by the estimates.[2]

The Biggest Losers: Ireland, Malta, Belgium, Cyprus and Luxembourg

Figure 1 provides a graphical illustration of economic losses for the EU countries. It shows that Ireland would lose almost as much as the UK from a Brexit. This is due to the simple fact that the Irish and the British economies are very closes integrated, with Ireland depending very strongly on exports to and imports from Britain. However, Malta, Belgium, Cyprus, and Luxembourg (not shown) would also lose substantially from the Brexit. The exact reasons for this differ country-by-country, but they have always to do with a large degree of dependence on the British market.

Malta and Cyprus are islands that have historically very strong ties to England. The UK is Cyprus’ second most important trade partner (after Greece) in goods trade, and its most important one in services trade. Malta depends less on bilateral trade with Britain, but it is very vulnerable to lower trade volumes since it depends a lot on its shipping industry.

Conclusion

Analysing the dynamic effects of a possible Brexit once again shows that a British withdrawal from the EU would have negative economic consequences for all 28 EU countries, especially for the UK itself. As we said in April this year: A Brexit would be a losing game for everyone in Europe.

Dr. Ulrich Schoof, Bertelsmann Stiftung, Gütersloh, senior project manager.

Dr. Thieß Petersen, Bertelsmann Stiftung, Gütersloh, senior advisor.

Prof. Gabriel Felbermayr, Ifo Institute and LMU, Munich, economics professor.

[1] Static effects of a possible Brexit refer to the welfare losses due to less cross-border trade between the UK and the remaining 27 EU countries. A reduction of international trade reduces the economic advantages of international division of labour. Hence there would be less economic growth.

[2] Dynamic effects are related to the fact that a decline in cross-border trade reduces the pressure from international competition. Consequently, companies have less need to improve their productivity through investments and innovation. Decreasing progress in productivity reduces the long-term rate of economic growth and hence diminishes the growth of real gross domestic product (GDP) per capita.

Do not miss our animated video on The Costs of Leaving the EU due to a Brexit