Leaving the EU

 

Departure from the European Union obviously carries with it micro- and macro-economic effects. Only one country has so far left the union (the UK) but others may choose to do so in the future. As a general rule, prediction is not predictive; circumstances and contexts apply. The terms on which a state might leave matter. Nevertheless, there are things which all governments and voters contemplating such a move might bear in mind.

The EU is a customs union and contains a single market. A customs union, by definition, creates one tariff on imports around the zone, and a single market ensures smooth trade, a common baseline of standards and regulations, and the free movement of capital, products, goods and services, people, and investment.

Any state which left such an arrangement would, even with a comprehensive trade deal, become a third party. It could no longer influence the tariff decisions of the bloc after a transition period, and would without a deal have to pay the import tariffs. This would impact upon a state’s supply chain and costs. The EU, however, is a member of the WTO and does adhere to global standards, as presumably would a state that has left. This might make agreements to standardise goods and services for trade between the EU and its former member easier, but it would still require complicated arrangements if the new non-EU state decided to also produce items under different standards for the rest of the world.

It would be likely but not guaranteed that a state which left the EU could sign agreements with other third parties that the EU has agreements with on the same terms. It would be slightly more difficult to sign different agreements with those third parties—a food deal with Australia or the United States, for instance—and maintain open trade with the EU if EU standards were different. This would require expensive duplicative inspection mechanisms to make sure that one sort of product were not confused with another in the single market. It would matter particularly if the new ex-EU state had a land border with other EU states which was difficult to police.

The end of the single market could also affect inward migration. In the case of the UK, which had, and has, an historic productivity problem, this might be particularly evidence in the hospitality, construction, and technology industries. Cheaper and younger foreign labour would become scarcer and more expensive, and so firms would have to concentrate on training or retraining domestic workers. There may also be pressure on government to make immigration deals with third parties which contained highly trained but cheap labour.

There would be a definite impact in the short to medium term on supply chains and ‘just in time’ low-warehousing production, as sourcing and transporting materials from the EU to the new state would become more difficult and subject to everyday delays as well as potential disputes. It is not impossible that regulatory differences would lead to more, rather than less ‘red tape.’ As noted above, however, WTO rules, regulations in place, and existing and new trade deals could change the impact of departure from the EU on companies, though this is likely to matter more in the long term as firms adapt or move.

Leaving the EU has different implications for the UK, some parts of Scandinavia, and Western European economies than others. This is because the former group might find themselves able to sell globally, and to make trade deals which lower import costs. They would nevertheless be faced with a need to improve productivity and lower wages and possibly living standards, as they would be competing with East Asian, African, and North American economies with lower costs.  This could encourage investment in capital and cheaper labour at the expense of older workers, leading to more structural unemployment and inequality. The possible lowering of house prices and rents consequent upon fewer people entering the economy for the long term is not guaranteed to materialise, as property might become a safer investment than companies, and the decline of markets or pension funds might encourage those who already own assets to purchase more, driving up housing costs.

Finally, if a state left the EU, and did not have access to some wholly new form of energy or technology or reason for others to invest in it, it would probably experience a large fall in the exchange value of its currency. This would boost exports, but make imports more expensive. No EU state enjoys self-sufficiency in resources, and nor does the UK. During the crisis of the twenty first century, occasioned by the events of 2008, strains in the eurozone, and covid, states like Italy, Greece, and Portugal were able to weather harsh ‘internal devaluations’ and market falls by trade, investment, and support from northern European states. Such support would probably not be available to the UK.

The EU was the UK’s largest single trading partner, and remains so. Despite nearly 60% of UK trade going elsewhere, 44% of exports and 53% of imports in 2017-18 went to or came from the EU. An overall trade deficit of £67 billion with the EU was accompanied by large global investment in the UK as a base for the EU market.

Despite these figures, in the years since 2017, the last two of which were marked by the covid crisis, the UK has not experienced a significant fall in living standards and has in fact, adjusting for covid seen higher growth than most European states (Ireland, which is in a complex relationship with the UK including a common travel area has done even better.) The UK has also been able to attract new investment in the car industry for export, and to make trade deals with a variety of other countries on terms more favourable than were available when the UK was in the EU.

The UK does not show signs of closing the gaps between rich and poor or avoiding inflation. In addition, in the years since 2016, there have been massive injections into the economy from PPI repayments by banks, government furlough schemes, the anti-covid PPE scheme, and the business bounce back loan scheme, as well as increased government spending compared to the years between 2008 and 2016. There is also evidence of an imbalance in savings between poorer and middle-class households, rising cost-push inflation, and an unsustainable rise in the national debt which has been balanced in the short term by a flight to safety in a difficult world economy.

The EU, WTO, and existing financial regulatory reforms such as the Financial Services Act, might allow the UK to continue with a financial specialisation, but domestic pressures to develop the ‘Northern powerhouse’ and reorient policy and workers away from the city of London, might mean that the UK deprioritises the financial sector. In addition, the example that the UK offers of an exit from the EU is neither a smooth nor a completed one.

The Irish border protocol for example, is contentious, and requires the UK either to maintain full EU standards, pursue a hard border in the north of Ireland, or an internal sea border between Great Britain and Ireland, in order to maintain the viability of standards and regulations as they apply to products and workers ‘leaking’ across the existing border. Transport services and logistics have begun to divert from Ireland directly by ferry to the continent, bypassing the UK, and UK firms are not seeing a boom In deregulation.

These problems would be compounded for any other state choosing to leave the EU, and suggest that most would not do so. If a European state or number of states became dissatisfied with the EU, the likelihood is much more for inertia—a modern version of the ‘eurosclerosis’ of the nineteen seventies, and possibly some slippage from the eurozone but maintenance within the single market and customs union—than for any radical break.