On Monday morning, British Prime Minister David Cameron formally announced June 23rd as the date of the referendum vote on whether or not the UK should resign from the European Union. The prospect of withdrawal, a possibility which has come to be known colloquially as a Brexit, has left many wondering whether or not leaving the EU is in the best economic interests of the United Kingdom.
The Advantages of EU Membership for Britain
The prime advantage of EU membership put forward from the economic standpoint is the ability to participate in the European Common Market, a free trade zone that prevents the imposition of tariffs or import duties on goods sold between member states. From this perspective, however, it is important to evaluate the total volume and the balance of trade that Britain does with its fellow EU member nations. While British exports to the EU have grown more slowly than total exports to non-member countries, they are still substantial, coming in at well over £200 billion annually. The critical point, however, lies in the balance of trade between the UK and the European Union, which at present puts Britain in a trade deficit (importing more from EU member countries than it exports to them). Trade deficits, as a rule, are a poor economic indicator, as they show that more capital is being spent on overseas goods and services than is made up by selling goods into external markets. While a trade deficit with the EU member states is still not a positive matter for Britain, it is buffered by the existence of the free trade zone of the common market. In the event of a Brexit, an external tariff would be charged on British goods against those importing them into the European Union, making the goods more costly overall and increasing Britain’s existing trade deficit with the member states (presuming, of course, that imports remained more or less stable).
Another critical advantage that Britain holds over other members states of the EU is its status as specially exempt from the adoption of the euro as its currency. Only it and Denmark hold this exemption, while all other members have agreed to the adoption of the common currency. The euro has reliably weakened against the dollar over the course of the past two years, dropping from roughly 1.4 USD/EUR in 2014 to its current rate of roughly 1.1 USD/EUR, a drop of 21.4 percent. By comparison, the GBP (British pound sterling) has dropped from trading at roughly 1.7 USD/GBP to a current rate of 1.4 USD/GBP in the same time frame, a loss in value of just 17.6 percent. While these numbers have more to do with a resurgent dollar than with any inherent flaw in the economies of either the EU or the UK, it is critical to note that the GBP has fared better against the dollar, giving the UK increased currency buying power in comparison to the rest of Europe. This currency parity trend is only likely to become more defined over the next several years as the European Central Bank continues to pursue currency policies such as the offering of negative interest rates which are expected to weaken the euro. While the Bank of England has pursued its own version of quantitative easing, it has not been so aggressive as the ECB.
Advantages of the Brexit
Though the previous points seem to make a compelling case for the UK’s continued membership in the European Union, there are economic advantages to the idea of a Brexit as well. One such advantage is that Britain would no longer be bound to certain requirements regarding benefits paid to migrants from the EU. However, the impact of this has been substantially overstated. A study conducted by the Migration Observatory, a project curated by Oxford University, found that the net fiscal impact of migrants in Britain was less than one percent of GDP. While such benefits can still prove costly to the British government and, by extension, to taxpayers, the terms recently agreed to by EU leaders at the urging of David Cameron allow a seven year break period on these benefits. The terms were part of an agreement that Cameron hopes will convince the British public to vote to remain in the EU.
One argument has been put forward for the Brexit’s merit that is well worth mentioning, but that makes questionable assumptions. Proponents of a Brexit rightly point out that the EU has historically pursued internal protectionist policies that have prevented member states from fully capitalizing on the ever-more global economy. If Britain were to replace the free trade of the EU with similar terms in an alternate larger market in which it did not experience a trade deficit, the potential for economic growth could be great. The problem with this argument, from the standpoint of many economists, is that it relies on a hypothetical circumstance that does not currently enter into Britain’s economic reality. It also only impacts Britain in the long-term, as such trade agreements can take years to negotiate and finalize.
Conclusion: Is a Brexit Economically Beneficial?
Based on purely economic factors, a Brexit would likely have mildly negative short to mid-term effects on the British economy, with long-term impacts indeterminate because of the many possibilities that the post-Brexit period would bring. Trade imbalance with EU member states would be almost certain to rise slightly owing to the application of external tariffs. Remaining in the market, on the other hand, leaves Britain with increased buying power over its fellow states and a set of special terms under Mr. Cameron’s agreement that would solve one of the major problems of migrant benefits.
Of course, more issues than economics are involved in the decision British voters face this summer. To many Britons, the question of whether or not EU membership limits British sovereignty is just as important. Economically, however, a Brexit seems to have little to offer Britain.
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