EU Referendum - the economics of change

Simon Rubinsohn

Chief Economist (RICS)

I have seen so many different estimates as to the impact of Brexit on the UK economy ranging from unrealistically hopeful – that it will lead over time to a 10% increase in living standards – to the downright gloomy, building in an extended period of lost output as a result of a protracted recession.

Europe night sky from space

The truth of the matter is that it is absolutely impossible to make these claims without also making all sorts of assumptions, and not just about our future relationship with Europe.

A leap in the dark

How successful the UK will be in negotiating trade arrangements with the rest of the world in this new environment is anyone’s guess. It would, meanwhile, really be a leap in the dark to assume the likely direction of future government policies and indeed, just how effective these may be. For what it is worth, OECD analysis cast some doubt on the suggestion that either regulatory or employment laws emanating from Brussels are major factors inhibiting British business.

Against that backdrop, it is perhaps not totally surprising that emotion has a strong role to play (if not a stronger one than economics) in the in–out debate. And to be fair, that is not an unreasonable basis around which to consider this issue.

After all, the creation of the original organisation (the European Economic Community) in the 1950s was in no small measure a response to the political turbulence that previously had wreaked havoc through the continent.

Markets hate uncertainty

That said, I find it hard not to be at least a little concerned about the near term consequences of a Brexit vote (whatever the longer term story). Markets hate uncertainty and can, as we have recently seen, respond quite violently and, I would argue, irrationally to newsflow. The evidence from the build up to the Scottish referendum was quite clear with investors choosing to back away from committing to projects in that country in the run-up to the vote – indeed, data from the RICS Commercial Property Market Survey shows a drop in investment enquiries in both the second and third quarters of 2014 (the vote was held in September that year). This flow subsequently reversed and nationalists might argue that this would have been the case anyway once the issue had been decided.

But I really don’t believe that it would have been that straightforward then and I am far from sure it will be should the electorate choose to support Brexit. Untying the UK from arrangements built up over many years and recasting them in new framework may well provide opportunity but it certainly won’t bring certainty or clarity for some time afterwards.

Brave new world

There will be an awful lot of work to do and my hunch, I acknowledge it is no more than that, is that it will on balance encourage businesses and investors to tread warily till they have more visibility on what the brave new world looks like.

Comments (10)

  1. I've been waiting to vote LEAVE for more years than I can count!!

    Robert Eve Robert Eve, 22 February at 14:37PM

  2. The lessons of the Scottish referendum on 18th Sept 214 have hopefully not been forgotten so soon. For those not directly involved the main points are; Apathy leads to real scares with repercussions beyond the short term, Investment confidence takes longer to recover than it does to dent, Leadership, opportunities and influence stem from participation not seperation. Statistics can be misleading and decisions must be taken for the benefit of all our residents regardless of age, wealth or geography.

    Fraser Clearie Fraser Clearie, 22 February at 15:40PM

  3. What would be most useful for the general electorate would be report from an independent body such as the RICS detailing the actual effects on the individual both for and against to encourage voting. Most people, myself included are not able to understand the impact, and therefore general apathy will lead to a no exit or status quo vote. A separate section on the impact on the country as a whole would round the picture off and hopefully encourage a proper debate and vote.

    Andrew Waumsley Andrew Waumsley, 22 February at 16:15PM

  4. On the one hand I can't abide the thought of doing anything promoted by George Galloway. On the other hand I detest over-regulation and petty mindedness, such as European Commission Regulation No. 1677/88, "Class I" and "Extra class" cucumbers which are allowed a bend of 10mm per 10cm of length. "Class II" cucumbers can bend twice as much. Good grief.

    Paul Hargreaves Paul Hargreaves, 22 February at 17:07PM

  5. I fear the doom laden despondent despots of fear aim to keep us vassals in ignorance. "Leap in the dark" "Markets hate uncertainty" . I am certain of a few things:
    1. CAP causes higher prices to British consumers without benefiting farmers
    2. CFP has destroyed our fishing industry and the fisheries we used to sustainably manage
    3. 26 unelected bureaucrats make our laws
    4. Cameron has not won a single vote in the council of ministers for 4 years
    5. it costs £350 million a week to stay in membership
    Put the great back into Britain. Vote Leave - executive summary

    "Exiting from the EU should be used as an opportunity to embrace
    openness. The UK should pursue free trade agreements with major
    trading nations such as China, the USA and Russia and deepen its
    engagement with organisations such as the G8, G20 and OECD. In
    Europe, a priority must be to secure open trade relations, ideally by
    membership of the European Free Trade Area, though remaining outside
    the European Economic Area. Bilateral strategic relationships with allies
    such as Australia, Canada and France, as well as emerging powers in
    Asia and Latin America, should be cultivated.
    Domestically, a ‘Leaving the EU’ Bill should be brought forward rapidly,
    to implement the legal secession from the EU two years after activation
    of Article 50 of the Lisbon Treaty. Separately, a ‘Great Repeal Bill’, based
    upon the Public Bodies Act (2011), should be enacted, bringing about
    within three years the comprehensive review and, where appropriate,
    repeal, of regulation of EU origin with the aim of lessening the bureaucratic
    burden on business, the public sector and third sector. Administratively,
    the Government will need to strengthen its capacity in a wide range of
    areas from trade negotiations to anti-trust enforcement. Current levels of
    funding from the EU to sectors and regions should initially be maintained
    domestically, including in agriculture, to prevent economic shocks whilst
    the surplus should be recycled to help pay down the deficit. Measures
    such as tax breaks and supply-side incentives would help preserve the
    UK’s position as the number one inward investment destination in Europe.
    The outcome would be to accelerate the shifting pattern of UK’s exports
    and total trade away from the EU to the emerging markets, where
    the majority of the world’s growth is located. A more business friendly
    regulatory regime and the new security of the City of London from
    European interference will enhance competitiveness and compensate
    for the partial loss of access to European markets. The total long-term
    impact is estimated to be between -2.6% and +1.1% of GDP, with a best
    estimate of +0.1%. Although the years immediately surrounding the
    exit are likely to feature some degree of market uncertainty, if the right
    measures are taken the UK can be confident of a healthy long- term
    economic outlook outside the EU"
    Thanks to the IEA
    Oliver Harwood.

    Oliver Harwood Oliver Harwood, 22 February at 21:11PM

  6. Whatever the 'out' rhetoric may be, it is hard to believe that the arrival of Toyota in Derby and Nissan in Sunderland, for example would have happened if the UK was not a member of the EU. it is hard to believe that Nottingham, Sheffield and Manchester would have the public transport infrastructure they have now if the UK was not a member of the EU. We may not like all of the petty things that the EU drop on us from a seemingly greater and greater height but surely the EU has given us wider horizons and brought improvement to communities through both direct investment and inertia.

    Stephen George Stephen George, 22 February at 21:40PM

  7. Regardless of any economic impact the big plus of a Brexit is recovering our British sovereignty from the faceless unelected elite in Europe. These people have not even begun eroding our freedoms. If we vote to stay in it will later take all-out war to achieve independence. Having become self-governing once again we can get rid of rules about how bendy a cucumber is and will be free to discover new markets. We will also be able to decide who receives social benefits and which foreign criminals can be deported instead of having our rational social and legal systems perverted by the EU. Apathy is not an option.

    Philip Clarke Philip Clarke, 23 February at 04:32AM

  8. In response to Mr George
    1. We could maintain all the EU subsidies paid for infrastructure, regional development etc etc (including farming and forestry) and still save £10 billion per annum (Net of receipts under the CAP, EU regional funding, and the budget rebate, the Government contributed £10bn to the EU in 2012 (House of Commons Library:Leaving the EU (2013) – Research Paper 13/43).

    2. Whilst there will be some uncertainty in the two year period under EU law allowed to resolve exit issues, the outcome is certain to involve a free trade arrangement with the EU 26 (given they export much more to us than we to them and would not want tariff barriers against their products) , most likely as a member of EFTA. I see no reason why international investors in an outward looking country with free trade access to the EU market would not think the UK a great place to invest.

    Oliver Harwood Oliver Harwood, 23 February at 13:33PM

  9. I agree that the RICS should have a balanced review of the professional impact of this potential change. Please can this be issued with pros and cons (and the scale of these elements) very shortly.

    Andrew Thomas Andrew Thomas, 24 February at 14:12PM

  10. It is interesting the Scottish Independence referendum being mentioned in this article. One foreseeable consequence of a Brexit is a second Scottish vote with a different result, meaning a great uncertainty is will there be a United Kingdom? And as stated above, markets hate uncertainty.

    Anthony O'donnell Anthony O'donnell, 5 March at 17:19PM

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