On June 23rd 2016 the UK voted in a referendum to leave the European Union. Prime Minister David Cameron resigned the morning after the vote and a few weeks later, Theresa May was elected leader of the Conservative Party and new Prime Minister
The process of Brexit has begun although the timing of the decision to invoke Article 50 of the EU treaty remains uncertain
Once Article 50 is invoked, there is a maximum period of two years before the UK finally leaves the EU. The terms of the UK’s new economic relationship with the EU also remain uncertain.
2. The European Union (Single Market)
• As of July 2016, there are twenty-eight member nations
of the EU – collectively known as EU28.
• The EU28 includes Belgium (BE), Bulgaria (BG), Croatia,
Czech Republic (CZ), Denmark (DK), Germany (DE),
Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France
(FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT),
Luxembourg (LU), Hungary (HU), Malta (MT), the
Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT),
Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI),
Sweden (SE) and the United Kingdom (UK).
• In June 2016, the UK voted in a binary referendum to
leave the European Union. This process is known as
Brexit and the UK is expected to leave by early 2019.
3. Key Statistics on the European Union
• These figures are prior to the Brexit vote (June 2016)
• The EU accounts for around 30 per cent of the total value of
global GDP
• Total population 506m
• Live births each year 5.23m
• Largest population - Germany 81 million, Smallest – Malta 0.4
million
• The EU, with 503 million inhabitants, accounts for 7% of the
world population
• Gross domestic product of the EU €13.08tn
• Per capita GDP in the EU €25,500
• Average unemployment rate in the Euro area 12%
• Youth unemployment rate in the Euro area 23.9%
4. Stages of Economic Integration between Nations
• Integration can take different forms: there is deeper
integration as we go down the following list
1. Preferential Trading Area (PTA) e.g. trade agreements
between EU and LDCs
2. Free Trade Area (FTA) – breaking down trade barriers
within group of countries
3. Customs Union (CU) – free trade plus a common
external tariff (CET)
4. Single Market (SM) – built around the four freedoms
5. Monetary Union (MU) – a common currency, one
policy rate and central bank
5. Main Characteristics of the EU Single Market
• The EU single market is built upon four key freedoms:
1. Free Trade in Goods: Businesses can sell their products
anywhere in the EU’s member states and consumers
can buy where they want with no penalty
2. Mobility of Labour: Citizens of EU member states can
live study and work in any other country. The aim is to
improve the mobility of labour.
3. Free Movement of Capital: Currencies and capital can
flow freely between member states and EU citizens can
use financial services in any member state.
4. Free Trade in Services: Professional services such as
pensions, architecture, telecoms and advertising can be
offered in any member state.
6. 28 European Union Member Nations (in 2015)
Joined
EU
Euro Zone
Member?
Joined
EU
Euro Zone
Member?
Austria 1995 Yes Italy 1957 Yes
Belgium 1957 Yes Latvia 2004 Yes
Bulgaria 2007 No Lithuania 2004 Yes
Croatia 2013 No Luxembourg 1957 Yes
Cyprus 2004 Yes Malta 2004 Yes
Czech Republic 2004 No Netherlands 1957 Yes
Denmark 1973 No (ERMII) Poland 2004 No
Estonia 2004 Yes Portugal 1986 Yes
Finland 1995 Yes Romania 2007 No
France 1957 Yes Slovakia 2004 Yes
Germany 1957 Yes Slovenia 2004 Yes
Greece 1981 Yes Spain 1986 Yes
Hungary 2004 No Sweden 1995 No
Ireland 1973 Yes United Kingdom 1973 No
7. Enlargement of the European Union
• The expansion of the EU to embrace more countries has been
perhaps the most important development in Europe in many
years. Since 1957 then there have been six main waves of
enlargement.
• 1973 (UK, Ireland and Denmark)
• 1981 (Greece)
• 1986 (Portugal and Spain)
• 1995 (Austria, Finland and Sweden)
• 2004 (Latvia, Lithuania, Cyprus, Malta, Slovenia, Slovakia,
Estonia, Hungary, Czech Republic, Poland)
• 2007 (Bulgaria and Romania)
• 2013: (Croatia)
• In June 2016 the UK became the first member nation to vote to
leave the European Union
8. Potential Advantages for new members of the EU
• Tariff free access to a single market
of nearly 500 million people
Opportunity to exploit economies of
scale – lower long run unit costs
• Easier to access foreign direct
investment from inside/outside EU
Inward FDI can lift trend growth and
raise factor productivity
• Access to EU structural funds Investment to improve infrastructure
• Better access to EU capital markets
EU companies can raise investment
funds from bond and capital markets
• Discipline of competition from
being inside the EU single market
Intra-EU trade already high for many
new EU countries
9. Enlargement of the EU – Rising Per Capita Incomes
All of the new countries
joining the European
Union have a per capita
national income (PPP
adjusted) lower than
the EU average
But many have
achieved some
convergence in average
living standards despite
the effects of the
recession in 2008-2010
Bulgaria and Romania
are outliers with per
capita incomes less
than ½ of the EU
average.
10. Intra-Regional Trade within the EU
• The EU is a customs union and also a single market
• This means that the EU levies duties on imported goods and
services. But there is free trade within the market. This causes
a rise in intra-EU trade.
• A recent EU report found that Intra-European trade currently
accounts for 17% and 28% of world trade in goods and services
respectively
• Taking services as a separate case, over 30% of intra-European
trade in services is in the travel industry, followed by transport
(around 20%) and insurance and finance (10%).
• Health care remains largely within national borders. There has
been some increase in the demand for and willingness to pay
for “health tourism” services (especially treatments that are
cheap in Eastern Europe) but little investment by multinational
health care businesses in different EU countries.
11. Index of Relative Per Capita Incomes in the EU
0
50
100
150
200
250
300
Luxembourg
Ireland
Netherlands
Austria
Denmark
Germany
Sweden
Belgium
Finland
UnitedKingdom
France
EU(28countries)
Italy
Spain
CzechRepublic
Malta
Slovenia
Cyprus
Portugal
Slovakia
Estonia
Lithuania
Greece
Hungary
Poland
Latvia
Croatia
Romania
Bulgaria
2004 2014
13. Aspects of Brexit
High levels of Intra-
EU Trade
Extent of UK
dependency on EU
Investment and Jobs
Intra-EU Labour
Migration
EU Rules &
Regulations
Environmental
Policies including
carbon trading
Real Wages / Living
Standards inside &
out of the EU
14. UK and the EU – Three Recent Research Reports
Report Source Key Findings Useful evaluation argument
Open Europe
Report
(2015)
• Between a 0.8%
permanent loss to GDP
in 2030 and a 0.6%
permanent gain in GDP
in 2030
• Economic impact of Brexit not clear
cut in either direction
• Norwegian’ and ‘Swiss’ models of
EU association are not suitable for
the UK post-Brexit
Centre for
Economic
Performance (LSE)
(2014)
• Leaving the EU would be
likely to impose
substantial costs on UK
economy and would be a
risky gamble
• Negative effect on growth greater
than benefit of reduced EU fiscal
contribution
• Much depends on the scale of non-
tariff barriers if UK leaves EU
Confederation of
British Industry
(2013)
• Net benefit arising from
EU membership is
somewhere in the region
of 4-5% of UK GDP
• Britain does not face an ’either/or’
choice – it needs to maximise trade
with existing large markets at the
same time as building links to new
markets
15. UK Trade Balances in Goods and Services with the EU
The UK runs a trade surplus with countries such as Ireland but very large trade
deficits with countries such as Germany and Spain. Can you explain why?
Source: Office for National Statistics
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
UK trade in goods and services balance with selected EU countries,
2003 to 2014, annual balance, £ billion
France Germany Ireland Netherlands Spain Rest of EU
16. Brexit – The UK’s decision to leave the European Union
• On June 23rd 2016 the UK voted in a referendum to leave
the European Union.
• Prime Minister David Cameron resigned the morning after
the vote and a few weeks later, Theresa May was elected
leader of the Conservative Party and new Prime Minister
• The process of Brexit has begun although the timing of the
decision to invoke Article 50 of the EU treaty remains
uncertain
• Once Article 50 is invoked, there is a maximum period of
two years before the UK finally leaves the EU
• The terms of the UK’s new economic relationship with the
EU also remain uncertain
17. Brexit – EU v EEA, Customs Unions and Free Trade Areas
18. Angus Armstrong on UK Trade Policy in a Brexit World
• “Trade policy is no longer just about reducing import tariffs
and subsidies to unprofitable industries; it is common
standards and regulation, property rights and investment
protection, infrastructure and communications, and the free
movement of ideas and human capital.”
• The UK faces three key tasks following the referendum:
1. On leaving the EU the UK must renegotiate its WTO
membership agreement
2. UK has to enter into a new governance arrangement with
the EU
3. UK has the opportunity to strike new trade agreements
beyond EU
• Angus Armstrong, (July 2016)
19. A Future Outside of the EU – the Norway Option
• The so-called Norway option allows for the free
movement of goods, services, capital, and people
• But Norway has no formal input into shaping the rules of
the single market although all new rules must be adopted
• An annual fee is paid by Norway for access to the EU
single market
• Under the Norway option, all UK banking and financial
service regulation would be ‘mutually recognised’ as good
enough, and thus all EU members would have to
automatically grant full access to UK-based firms
• Norway option does not include free trade in food, or
participation in EU agriculture subsidies (CAP) or in the
EU’s regional policy, and nor does it require Norway to
adopt EU trade policies with respect to non-EU nations.
20. A Future Outside of the EU – the Canada Option
• The Canada option means free trade in most industrial
goods and some liberalisation of services and investment
flows, but no automatic right for Brits to work in the EU or
for EU citizens to work in Britain.
21. A Future Outside of the EU – Joining EFTA
• EFTA is the European Free Trade Area
• EFTA membership provides the UK with less access to the
Single Market beyond goods trade
• Switzerland is the most prominent EFTA member and is
required to strike bilateral treaties with the EU to secure
access to the Single Market for specific services only.
• In 2014 the Swiss voted in favour of restricting migration.
The EU has made it clear that this is incompatible with
access to the Single Market.
• Switzerland makes a smaller per capita contribution to the
EU budget than Norway in the EEA, to reflect the lower
level of market access.
22. A Future Outside of the EU – Joining EEA
• EEA is the European Economic Area
• As a member of the EEA, the UK would remain part of the
European Single Market
• This would mean there would be no import tariffs or other
new border measures on UK-EU trade
• With EEA, the UK would continue to adopt all the EU’s
economic regulations, keeping non-tariff barriers between the
UK and the EU at a lower level than if the UK leaves the Single
Market
• After joining the EEA the UK would no longer be part of the EU
Customs Union, meaning it would face some new non-tariff
barriers on its trade with the EU, such as rules of origin and the
threat of anti-dumping duties.
• The UK would also be free to seek its own trade deals with the
rest of the world.
23. A Future Outside of the EU – The WTO Option
• WTO is the World Trade Organisation
• UK would not need to follow EU standards and regulation,
but it will be completely out of the EU single market.
• It would face the EU’s common external tariff on goods
and services
• Gains in having more control over migration policy and
freedom to trade with rest of the world including
establishing free trade agreements with major economic
powers and emerging / developing countries
24. A Future Outside of the EU – Unilateral Free Trade
• Unilateral free trade is the option favoured by a group
called “Economists for Brexit”
• This involves leaving the EU Single Market
• Elimination of EU trade barriers on imports – pressing for
global free trade
• Control of borders to support migration control
• Democratic control of UK laws and regulations
25. A Future Outside of the EU – Likely EU Tariffs
• If the UK leaves the EU without negotiating a fresh trade
deal with the remaining 27 member nations, then the
most likely scenario is that the EU’s most-favoured nation
(MFN) tariffs would be applied
• If the 44% of UK trade in goods that go to the EU were
carried out on an MFN basis, around 16% of UK exports to
the EU27 would face tariffs exceeding 7%, of which half
would be motor cars, which would face a tariff of 10%.
• The average MFN tariff levied by the EU is 5.3%
• The EU has preferential trade agreements with countries
such as South Korea and Israel. These countries have less
liberalized MFN policies are less liberal than the EU. The
average MFN tariffs that they would face vary from under
5% (Israel) to 17% in South Korea.
26. The Importance of Passport Rights in Financial Services
• Passport for banks and financial firms allows firms
authorized by any EU Member State (MS) to establish
branches or provide cross-border financial services in
other MS
• If a post-Brexit world means the UK loses passport rights:
1. Financial service businesses in UK would need to
establish subsidiaries in EU increasing funding costs
2. Exports of financial services from the UK to the EU might
fall
3. There would also be an indirect effect associated with
lower exports, e.g. reduction in legal advice services
4. Migration of financial firms away from the UK – leading
to lower inward FDI and a loss of financial services jobs
27. Will London retain competitive advantage in services?
• Pre-referendum, many argued that London’s pre-
eminence as a global / EU centre for financial and related
business services could be threatened by Brexit
• Impact depends crucially on the Brexit deal that is
eventually negotiated
• London retains many strengths:
1. Large pool of highly skilled labour including critical mass
of knowledge on financial services, accounting and law
(comparative advantage based on strong human capital)
2. Language, strengths of the UK legal system and a highly
convenient time-zone
28. A Future Outside of the EU – Overview of some Options
EEA
(Norway)
EFTA
(Switzerland)
Customs
Union
(Turkey)
World Trade
Organisation
Option
Migration controls ❎ ❓ ✅ ✅
EU budget contribution ❎ ❎ ✅ ✅
Compliance with EU rules ❎ ❓ ❓ ✅
Free to negotiate with
third countries ❎ ✅ ❎ ✅
Passporting rights ✅ ❎ ❎ ❎
Direct access to Single
Market ✅ ❎ ❎ ❎
Import tariffs? ✅ ✅ ✅ ❎
29. EU Countries likely to be most affected by Brexit
Country
Trade with UK
measured as
% of GDP
% of
investment
from the UK
Comment
Netherlands 7.6% 27.6%
Closely aligned in many EU
policy debates; favours
liberalisation of EU
Ireland 11.8% 7.5%
Most deeply integrated with
the UK, only country with
land border
Germany 2.8% 2.4%
High total value of trade, UK
leaving increases political
power of French
Spain 2.5% 6.0%
Around 800,000 UK expats
living in Spain, big tourism
trade linkages
30. Brexit – UK’s Net Contribution to the EU Budget
Forecasted net UK contributions to EU budget from 2014/15 to 2019/2020 (in £m)
9,054
8,385
10,178
8,049
8,908
9,374
0
2000
4000
6000
8000
10000
12000
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
NetcontributionsinmillionGBP
31. Possible Short-Term Impact of Brexit on the UK
Economy
Impact Comment
Weaker exchange
rate (depreciation)
Sterling fell sharply against US dollar and Euro in wake of Brexit vote
Higher prices for imports
Over 50% of UK imports come from EU, about half of which are
intermediate goods such as component parts
High current
account deficit
External deficit of more than 5% of GDP requires strong net inflows of
capital on the financial account – perhaps harder post-referendum
because of macroeconomic uncertainty
Short run real GDP
growth
Expected to take possibly two years to negotiate EU exit terms
Steep fall in business and consumer confidence
Weak demand in supply chains suggest businesses are being cautious
Housing market Fall in confidence may dent mortgage demand
Possibility of decline in overseas demand although weaker pound
increases real purchasing power of US dollars in UK property market
Unemployment Unemployment tends to be a lagging indicator of the economic cycle –
a month after Brexit, the UK unemployment rate fell below 5%
32. Impact of Brexit on Developing Countries
Trade
Foreign
investment
Economic
growth
Aid
Migration and
remittances
Global
collaboration
Brexit is likely to have some significant effects on developing countries over time.
Much depends on the nature of the Brexit deals that the UK makes with the EU
and other nations + the impact of Brexit on UK growth and government finances.
“The UK’s vote to leave the EU comes at a time when many developing economies
are already facing multiple shocks: lower oil and commodity prices, a stronger US
dollar and a slowing Chinese economy.” Source: UK ODI Report, July 2016
33. Aspects of the Impact of Brexit on Developing Countries
Slower UK growth
& weaker £
Contraction in
exports to UK from
developing nations
Countries such as
Bangladesh &
Kenya most
affected
Migration flows are
uncertain - possible
short term rise
Fall in external
value of £ reduces
value of
remittances
South Africa,
Uganda, Nigeria
especially affected
UK aid was $18.7
billion in 2015 -
falling £ cuts the
real value
10% of UK aid flows
through the EU
Key is whether the
UK maintains their
0.7% of GNI aid
target after Brexit
34. Changing Relative Per Capita GDP for EU - 2003-2013
Index (EU28 =
100)
GDP (PPP) 2003 GDP (PPP) 2013
Index (EU28 =
100)
GDP (PPP) 2003 GDP (PPP) 2013
Austria 127 128 Italy 112 99
Belgium 123 119 Latvia 45 64
Bulgaria 33 45 Lithuania 48 73
Croatia 56 61 Luxembourg 240 257
Cyprus 94 89 Malta 82 86
Czech Republic 77 82 Netherlands 133 131
Denmark 124 124 Poland 48 67
Estonia 52 73 Portugal 78 79
Finland 115 113 Romania 29 55
France 111 107 Slovakia 53 75
Germany 116 122 Slovenia 82 82
Greece 93 73 Spain 100 94
Hungary 62 66 Sweden 127 127
Ireland 141 130 United Kingdom 123 109