Bloomberg View Editorial Board
If it votes to leave the European Union in next month’s referendum, Britain will bear a substantial and lasting economic cost: That’s the conclusion of several authoritative new studies. Campaigners for exit must either refute these findings or say why they don’t matter. Their efforts up to now have fallen far short.
The Vote Leave campaign has cast the referendum mainly as a decision about sovereignty, democracy and immigration – legitimate concerns. But the economic consequences can’t be waved aside. The latest official study, from the Organization for Economic Cooperation and Development follows assessments by the IMF, the U.K. Treasury and others. They all say much the same: leaving the EU would hit trade, weaken Britain’s vital finance industry and reduce inward foreign investment. There’d likely be knock-on effects as well: less innovation and slower growth in productivity.
The OECD report puts the long-term annual cost at between 3 percent and 8 percent of gross domestic product – similar to the Treasury study. The OECD’s central estimate of 5 percent is equivalent to a tax of roughly 3,200 pounds (US$4,700) per household.
Against this battery of official economic assessments, the exit campaign has fielded a pamphlet arguing that Britain’s economy will prosper more outside the EU than inside. The authors make a few good points – saying, for instance, that Britain could adopt a policy of unilateral free trade, rather than trying to negotiate new agreements with all its trading partners, as the other studies mostly assume. They’re probably right that this would give better results.
Yet it’s a stretch to think this improvement, even combined with other optimistic assumptions, would be enough to turn a substantial net economic cost into a substantial net benefit. And by the way, the radical policies needed to yield this better outcome – not only unilateral free trade but also root-and-branch deregulation – are no-hopers in political terms. The European Union isn’t the only thing standing between Britain and the free-market utopia envisaged by some (though by no means all) Brexit campaigners.
Indeed, some of worst-case scenarios mentioned in the official studies seem quite plausible by comparison.
The prospect of much lower inward investment is especially disturbing. Britain is running a big current account deficit, at 7 percent of GDP. If Brexit leads foreign investors to pull their capital out, or even to reduce their rate of new investment, Britain might have to reduce its external deficit by depreciating sterling and severely squeezing imports.
London’s role in international finance is another vulnerability. Some 7 percent of U.K. economic output comes from financial services – 11 percent if you include related legal, accounting and management-consulting services. Bank of England Governor Mark Carney has rightly stressed the risk that Brexit poses to this part of the economy.
The problem for the exit campaign is not just that it is refusing to take these dangers seriously, but that its leading figures have no agreed plan for the kind of trade agreements, if any, they would seek after leaving. Rather than describing a politically viable alternative to EU membership, they offer heroic speculation, and, when pressed for details, start quarreling among themselves.
If this doesn’t change, they will surely lose the vote – or deserve to, anyway.
© 2016, Bloomberg View