By Molly Shutt, Transatlantic Economy Analyst
Viewed as a political move to recapture the far-right, in 2013 British Prime Minister David Cameron guaranteed a public referendum on Britain’s European Union membership in 2017, if his party wins the general election coming up on May 7th. This move reignited the longstanding internal debate over UK-EU relations, and will continue to dominate the political scene for two years if the Conservatives win. The UK has been a member of the EU since the Maastricht Treaty in 1992, though it negotiated an opt-out of the single currency and often sets limits on Brussels’ reach. For instance, Cameron rejected new EU budget mandates, implemented in response to the financial crisis, in 2011.
If such a referendum were to reach a public vote, the outcome is tough to decipher. While a recent Opinium/Observer poll estimated that 51 percent of Britons would vote to leave the EU, signs of economic recovery on the continent are boosting support within the UK to stay. After the vote to leave or stay, Britain would have to renegotiate its relationship with the EU, which could take on a few different forms – all would have serious economic and political ramifications for the country. While the stir about such an event creates much speculation, the following evidence suggests that remaining in the EU is best option for Britain.
Post-Brexit Options
If the British electorate chooses to dissociate itself from the EU in 2017, relations with the island’s primary trading partner would need to be redefined. There are four main choices, according to the Institute of Economic Affairs, and as summarized by The Telegraph:
“[The] UK could become a member of the European Economic Area (whose non-EU members are Iceland, Liechtenstein and Norway) and the European Free Trade Association (which also includes Switzerland); it could become a member of the EFTA but not the EEA (which is described as ‘somewhere between the positions of Switzerland and Turkey’); it could work to develop a global free trade association; or it could try to develop closer trading partnerships with the Commonwealth and wider Anglosphere.”
All of these potential arrangements would increase barriers to trade with most of the continent. If British citizens vote to leave the EU, a watered down relationship with the continent would hurt British business and undermine relations with the Union.
Economic Implications
The economic argument set forth by proponents of continued EU membership largely hinges on the fact that the EU is the UK’s top trading partner, and that tariff-free access to the EU market and coordinated regulation warrant membership. On the other hand, the appeal for leaving stems from an interest in regaining economic autonomy back from Brussels and the possibility of expanding into other markets. Most business leaders prefer to stay in the EU, as access to the European market far outweighs the possibility of new frontiers. In fact, a recent study from the Centre for European Reform contends that the most economically vulnerable regions to a Brexit are manufacturing areas such as the West Midlands and the Northeast, where opinion polls also report the highest euroskepticism. Specifically, the tariffs the EU would place on British exports would amount to 197 million pounds, mostly on car manufacturing. This and other projections suggest that the grassroots political support for a Brexit reflects more emotional reasoning than economic self-interest.
While the robust British financial center occasionally laments the burden of European regulations, experts predict that a break from the EU, which is the UK’s primary financial customer, would result in strained relationships and a tangible, negative impact on the overall economy. Specifically, one study estimates that despite saving 0.4 percent of GDP in contributions to the EU budget, Britain could lose as much as 14 percent of its GDP – suggesting that a Brexit would be significantly more damaging to the UK than it would be to the EU.
Political Implications
The political fallout of a Brexit would be complicated and far-reaching. Leaving the EU would jeopardize British influence within the Union, leading to deeper isolation and costing Britain its say in the Transatlantic Trade and Investment Partnership negotiations and its role as a key partner of the U.S. in Europe. A Brexit might also weaken the EU by emboldening euroskeptic moves on the continent. Gibraltar and Scotland, moreover, have expressed plans to remain in the EU regardless of Britain’s decision; though Ireland questions its place in the EU if the UK were to leave its current agreement. With the fall of the euro’s value, Germany’s growing influence on the continent, and concerns about Greece’s future in the Union, it could be in Ireland’s interest to follow Britain out rather than staying in the EU and the Eurozone. Citing Britain’s place as Ireland’s top trading partner and as the third largest economy in the EU, and the Irish link to the U.S., the argument follows that Ireland would still have those economic relationships if it decides to leave continent behind. In this case, a Brexit might yield more influence over the unraveling of EU ties than a Greek exit would.
Elevate the Debate
British political parties and non-governmental organizations on the left and right that support continued membership must press the British populace to reevaluate their motives for pushing to leave the EU. If they are based on economic evidence, which is possible given the fluid and hypothetical nature of the situation, then a vote to leave could be warranted; however, if their motives are based on a belief that disassociating from the malaise of the euro and complete economic autonomy will deliver better results, voters should reconsider. Cameron and the Conservative party should take greater account of the geopolitical ramifications of accidentally cutting ties with the EU, from compromising counterterrorism coordination to complicating the lives of millions of Britons living and working in the EU and vice versa. Ultimately, diminished UK-EU relations would destabilize markets and hurt the British economy.