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Could a Brexit Hurt the UK Economy?

 7 min read / 

Since the Eurozone crisis occurred, the EU has fallen behind other global economies including China and India. The European Union is suffering from declining productivity and competitiveness, which has sparked a debate as to whether the UK should leave or remain within the EU. Polls have shown that British citizens are split between staying and leaving the EU. The strong debate has begun to create levels of uncertainty for investors and companies operating within the UK. For instance, this uncertainty has negatively impacted the financial hub of London as global banks such as HSBC and Citigroup begin to consider moving away from London to other EU cities. This article will uncover the economic implications for the United Kingdom if they do indeed decide to leave the European Union.

One reason under consideration for leaving the EU has been the level of regulation imposed on the UK by the Union. If UK businesses were not under EU regulation, they would be more likely to benefit from the opportunity to expand in the future, which would enable the nation to enjoy greater employment levels and inward investment. However, even if the UK were to depart from the EU, it still may not be possible to avoid tight regulations. If the UK still wishes to have any form of access to the single market, they would need to comply with EU rules and regulations.

As the UK undoubtedly will want to trade and interact with the EU, they would end up being regulated by the EU without being able to represent themselves. The same can be said for any possible fiscal gains, which would be deducted due to exiting the EU. As the UK is required to contribute towards the EU budget, leaving the EU would present a fiscal gain for the UK. However, this case is the same as before, as the UK would also be required to contribute towards the EU budget if they wish for any access to the EU, regardless if they are a member of the union or not. So, leaving the EU could provide the UK with greater opportunities for organisations and the government, but the extent of such is reduced as an exit doesn’t provide a great deal of liberation for the nation.

The Brexit would cause issues with regards to the free flow of labour across EU member nations. Being part of the EU has enabled more individuals to enter the UK and thus allowing the government to make greater revenue through being able to tax additional working migrants. Judging by the UK’s high level of public debt; greater revenues from taxation act in favour of the nation and thus leaving the EU would negatively impact this. However, more migrants into the UK can place pressure on UK housing availability, which is already in excess demand and so potentially inflating house prices. At the same time, fewer migrants entering the nation can resolve the whole issue of born and bred-British citizens being unemployed due to believing that migrants have reduced the availability of jobs. Nevertheless, it is important to remember that many UK citizens have been able to find employment and in some case higher-paid jobs by migrating to other EU nations and thus benefiting Britain. It is highly unlikely that the EU would allow this same level of labour mobility should Britain exit, which could bring consequences to the economy’s employment figures and debt levels.

Another manner by which employment levels in the UK could be affected by exiting the EU is through export trade. Less trade is likely to occur between the UK and EU nations upon exiting the single union. In turn, UK companies exporting to EU countries may suffer from a fall in business and consequently a decline in profits. Not only will employment levels in the UK exporting sector decline, but also the level of productivity may begin to diminish and thus dampening growth prospects for the UK.

Conversely, it can be said that employment levels in the long run will not be significantly affected, as the UK would still export to EU nations, but now to a small extent as well as still exporting to the rest of the world. However, this is not necessarily a bad impact as the UK’s trade deficit with the EU has been deteriorating whilst at the same time the UK has been enjoying a trade surplus with the rest of the world. By leaving the EU, the UK could reduce the significance of the trade deficit with EU nations and being able to continue to boost their export sector with the rest of the world.

In terms of trade, the Brexit would allow the UK to form free-trade agreements with economies that are dominating in growth, i.e. China. In the past non-EU nations such as Switzerland have formed trade agreements with China. This form of free-trade agreement would benefit the UK by substantially boosting growth as well as raising living standards in Britain to a greater level compared to trading with EU members. However, questions can be asked as to whether China would see the UK economy as a main priority compared to the size and extent of the EU economy. Britain would need to offer appealing trade if it wishes to negotiate with the likes of China, which could be difficult for a small single nation.

Out of all the EU nations, Britain is the largest and most preferred hub for foreign direct investment, but an exit from the EU could change all this. If foreign investors are faced with restricted access to EU members then it could lead to investors moving out of the UK to EU countries. But, the final impact of investment will depend on the type of investment exiting the UK, i.e. it is more difficult to move labour out of a nation compared to machinery. The high level of skilled labour within the UK is another reason why FDI occurs and it would be considerably expensive and unlikely that investors would be able to shift an entire workforce to another country. So, foreign investment in the services industry are likely to be less inflicted than the manufacturing of goods, but the overall level of foreign investment would be expected to decline. This would also reduce the likelihood of any future foreign investment, as the UK would not seem like an attractive home for investors due to a restriction of trade. As the UK has a comparative advantage of trading in services, an overall decline of foreign investment would dampen the significance of the nations comparative advantage.

The UK also holds a comparative advantage in financial services, especially as London is deemed as one of the top financial cities. This advantage could be put at risk if a Brexit occurs UK leaves the EU. The EU can choose to tighten rules and regulations that its members have with third-countries; unless the country follows EU rules, but once again, without being able to dictate the rules being set. Secondly, non-EU banks must set up a subsidiary within a EU nation if they wish to expand into other EU states. If the UK is not part of the EU then London will not be an ideal location for non-EU banks to operate in and so motivating banks to move outside of London as well as deterring future non-European banks from settling into the City of London.

A Brexit would form a sense of trade-off. As the UK is very likely to interact and operate with EU member nations, they will still have to follow certain regulations, which will reduce the extent of any economic benefits available from departing the EU. Following this, overall UK GDP would be expected to decline, unless the nation continues to interact with EU countries to a similar extent when they were part of the EU. Questions can be raised as to whether it is beneficial for the UK to exit the EU, as various economic benefits would be cut short as well as drawbacks such as the decline of investment would haunt the UK, even in the long-run.

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