Leaving the EU will be costly, but what is the price of remaining?

Commentary | 03/12/18

David Smith, wrote an insightful piece in The Times this week (Nov 27th) on why leaving the EU will be costly, but what is the price of remaining?


David, who spoke at our annual CCTA conference earlier this month, describes how the endgame of the first phase of Brexit is proving “even messier than feared.” Theresa May, by trying to appeal directly to voters over the heads of MPs who oppose her deal, is adopting tactics that might work in a second referendum, though she has said that she is implacably opposed to that. David’s view, which is shared by many in financial markets, is that “in the end a withdrawal agreement something like hers will be backed by parliament, but it will be a rocky road.” Here’s why:

“Through all the ups and downs of the process, the overwhelming conclusion from economists is that leaving the EU will shrink the economy and make us poorer.The National Institute of Economic and Social Research calculates that under Theresa May’s preferred deal the economy in the longer term — by 2030 — will be about 4 per cent smaller (3 per cent for gross domestic product per head) than if the UK had stayed in the European Union. Garry Young, its head of macromodelling and forecasting, put it well: ‘We estimate the long-run cost of leaving the EU on the government’s preferred deal to be roughly equivalent to losing the annual output of Wales.’

An assessment this week from researchers at the London School of Economics, King’s College and the Institute for Fiscal Studies for the think tank UK in a Changing Europe concluded that GDP per capita would be between 1.9 per cent and 5.5 per cent smaller by 2030 under the proposed deal compared with staying in the EU. The range reflects different assumptions about productivity.

When it comes to forecasts, a consensus view for the short term, including the bodies responsible for the new assessments, was that the economy would be about 3 per cent smaller than otherwise by the end of this decade as a result of Brexit. Such forecasts are exactly on track.

Mrs May and her negotiating team have done well to secure a withdrawal agreement in difficult circumstances. Her aim has been to respect the letter of the referendum with the minimum amount of economic damage. Other options, including leaving on World Trade Organisation terms, would be even more damaging, about double the negative effect, according to the new assessments.

We are nevertheless in the unusual position of a government trying to enact something that it knows is bad for the economy. As time has gone on, so the supposed economic gains from Brexit, a bonfire of red tape, lucrative trade deals and the fantasy of unilaterally abolishing all trade restrictions — a great way of destroying your manufacturing and farming industries — have all been exposed as bluster. We are left with reducing EU immigration, which will damage the economy.

Why would any government do this? David advises: ‘We should not have an idealistic view of politicians, even those such as Mrs May whose overriding motivation appears to be to act in the public interest…Governments also do things consciously that are against their own economic interest. Every modern war has carried a significant economic cost, compounded for recent ones by a large political cost.’

The prime minister also has had the unenviable task of trying to bring together a divided nation, two sides who ‘want their country back’. Brexiteers want a country back that is free from the EU, perhaps one that pre-dates the 1960s, when successive British governments, aware of their error in not joining the European Economic Community at its inception, were desperate to get in. Remainers want back the open, liberal and immigration-tolerant country they thought they had before the vote.

Any Brexit deal has to be a compromise. Mrs May has come up with a set of compromises that does not satisfy either side, but it is hard to see what would. A Norway-style European Economic Area (EEA) option probably would command a majority in the Commons, but would be too close to the EU for many Brexiteers.

We are left, in the end, with a curious cost-benefit analysis. Philip Hammond, interviewed on Radio 4 at the weekend, was asked why a deal should be supported that would leave the economy worse off than staying in the EU, as the government’s own analysis shows. He said: ‘Remaining in the EU after we’ve had a clear referendum decision to leave the EU would be utterly debilitating to our politics. It would completely undermine confidence in the political system and it would leave very large numbers of people feeling let down, betrayed by the system.’”

So the political and economic conundrum continues. Yes, there is a potentially significant political cost attached to remaining in the EU, but there is an equally great economic cost attached to leaving.

Greg Stevens


30th November 2018