Should the UK Leave the European Union?

Published on 09 Jun, 2016

UK to leave EU?

To be or not to be – that is the question.

The United Kingdom will take a long overdue call on the 23rd of June 2016; a decision that could adversely affect its financial future.

While there are several social, political, and economic undertones that will determine the ultimate consensus, the bottom line is that a Brexit could affect big business.


As the debate rages on among citizen groups and policymakers alike, here’s a gist of events leading up to the referendum, and what could be in store for one of the EU’s biggest economies.


Why is the UK Having it Out With the EU?

The UK joined the European Common Market — now known as the EU — in 1973.

The membership’s merits have always been debatable from the outset, and British perceptions of its benefits have always been mixed.

This isn’t the first referendum on its membership with the EU.
The UK held a referendum in 1975, when the popular vote favored staying in the EU.

Nonetheless, there is discontent among the general public over several issues such as the outflow of funds to the EU and the influx of immigrants into the UK, to name a few. In addition, British influence in the organization diluted as the EU’s membership swelled from 8 (when the UK joined) to its current strength of 28.

With growing dissent among British citizens, the Conservative Party’s election manifesto for 2015 pledged to hold a referendum on the UK’s membership in the EU by 2017. The party came to power in 2015, and British Prime Minister David Cameron then set a referendum on membership on the 23rd of June, 2016. While Cameron supports remaining in the EU, particularly after he negotiated certain important issues for the country , several key party members openly support leaving the EU, fueling political tension that’s likely to continue until the referendum.

Should Britain vote itself out of the EU, it’d have to decide on an economic model that best suits its traits. Some of the potential options ahead include:

  • The Norwegian Model, according to which Britain would leave the EU and join the European Economic Area. That would give the UK access to the EU as a single market, with the exception of some financial services. The country would be free from regulations on agriculture, fisheries, justice, and home affairs.
  • The Swiss Model, as per which the UK would imitate Switzerland. While this would mean the UK wouldn’t be a member, it could still negotiate trade treaties on a sector-by-sector basis.
  • The Turkish Model, in which the UK would enter into a customs union with the EU. That would allow it access to the free market in manufactured goods but not financial services.
  • A Free Trade Agreement with the EU; similar to the Swiss model, but with better access to financial services.
  • Leaving the EU outright, and relying on its membership of the World Trade Organization.


What’s the Potential Fallout from this Falling Out?


Membership Fee

Leaving the EU would result in immediate cost savings for the UK as it would no longer contribute to the EU’s budget.

In 2015, Britain paid £13bn and received £4.5bn, recording a total expenditure of around £8.5bn (around 7% of the government’s National Health Service expenditure). Britain would certainly fare well on this front should it decide to leave the EU.


Trade

One of the world’s largest markets, the EU accounts for roughly 25% of global GDP.

A single market with no tariffs on imports and exports between member states, the EU is one of the UK’s biggest trading partners - accounting for 45% of the country’s exports and 50% of her imports.

High volumes of trade within the EU give Britain significant leverage while drawing up trade rules as well. Britain also benefits from trade deals between the EU and other world powers. The EU has also engaged in active negotiations with the US to create the world’s biggest trade area.

Needless to say, there exists a clear quid pro quo between the EU and the UK.

If Britain opts to vote out of the EU, it would encounter trade barriers, higher taxes and stringent trade terms, which would negatively impact its trade numbers.

In addition, the single market provides opportunities for economies of scale, competition, and innovation, all of which enhance productivity, and would be hard to completely replicate through trade outside Europe.


Foreign Investment

The EU is one of the most important sources of foreign direct investment (FDI) for the British economy.

As per recently available data, the EU accounted for around 46% of the UK’s inward FDI.

Firms and investors in various non-EU nations have been using Britain as a gateway to Europe, gaining from the zero-tariff environment and free movement of labor and capital. However, the inflow of FDI from the EU has slowed over recent years, with more investment flowing in from non-member countries.

Inward investment is likely to slow in Britain until the referendum due to the uncertainty of the outcome and its consequences. An exit from the EU could hurt Britain in the short term until it renegotiates tariff and regulation terms. However, being a member of the EU and access to the single market are not the only reasons for firms to invest in Britain. There are other advantages to investing in the UK that are likely to keep foreign investments (and firms seeking a foothold in the country) firmly entrenched. Thus, in the long term, Britain would cope with the initial setbacks and maintain its position as a preferred destination for FDI.


Immigration

As per EU law, Britain cannot deny entry to citizens of another member state. This has led to a significant surge in immigration, particularly from Eastern and Southern Europe.

As per the Office for National Statistics, 942,000 Eastern Europeans, Romanians, and Bulgarians, in addition to over 791,000 Western Europeans, work in the UK. While the pace of immigration led to certain difficulties with regard to housing and service supplies, the net impact has been positive.

Immigration helped solve skill shortages and offset the consequences of an ageing population.

Free movement also provided UK firms access to specialists with skills essential for high value-added industries. Around 63% of the members of the Confederation of British Industry voted in favor of benefitting from free movement. Going forward, estimates hint at the creation of about 1.5 million high-skilled jobs for EU15 migrants in the UK. This clearly showcases the influence of migrants on the UK’s industries and potential workforce.

The impact on immigration following a Brexit would depend on the UK’s future relationship with the EU, as well as on changes to its immigration policy.

If Britain introduces a policy to restrict the number of low skilled workers entering the country, leaning instead toward attracting skilled labor, it could create difficulties for low-wage sectors that are dependent on migrant labor. On the flipside though, this could be a boon to other sectors that face a shortage of skilled labor.

In the medium term, net migration from the EU would decline if Britain was outside the single market, stunting the growth rate for Britain’s labor force. This may lead to higher pressure on wages and inflation, benefiting some workers — but at a hefty cost to some employers.

On the contrary, the UK would be free from certain restrictive regulations of the EU, which may boost the overall flexibility of the labor market and offset some of the cost to firms from lower migration.

Overall, it would be disadvantageous for Britain considering the influence of migrants on its industries as well as the restricted opportunities for its own citizens to work in the EU.


Employment

The effect of leaving the EU on British employment depends on a number of interconnected factors, including trade, investment, and immigration.

If trade and investment decline following a Brexit, jobs would be lost, and vice-versa.

While a decline in immigration would mean more jobs, labor shortages could hold back the economy, reducing its potential for growth.


Political Climate

A Brexit in the current referendum could lead to a political breakdown in the UK.

In light of the fact that several members of his party favor a Brexit, David Cameron’s government may immediately fall and he might have to resign.

Moreover, a positive vote would add fuel to the independence movement in Scotland, as most Scots want to be part of the EU.

In addition, a Brexit would mean the creation of a physical international border between the Republic of Ireland and Northern Ireland, which would be another difficult situation to manage.


The UK’s decision to leave the EU would negatively impact growth prospects considering the country’s strong trade partnerships with member nations, political instability following the Brexit, and an unavailability of skilled labor in high-growth industries.

However the referendum plays out, it’s likely more beneficial for the UK to remain a part of the EU.


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