At Last, Something About Brexit Everyone Can Agree On
(Bloomberg Opinion) -- Who says economists can’t agree? In recent days, four reports evaluating the long-term economic impact of Brexit have been published, and they are remarkably consistent on at least two things. First, Theresa May’s deal will hurt the economy over the next decade or longer; and, second, exiting with no deal would be significantly worse.
Ironically, that relative economic clarity may muddy the political waters. It gives all sides ammunition to attack the prime minister’s unpopular deal. It’s not clear anyone listens to experts anymore, but these first attempts to judge the divorce on its economic merits deserve careful consideration by lawmakers. If members of parliament reject May’s deal on Dec. 11, they will have to pick a different course. Those decisions will not be made solely on the economic forecasts, but they will undoubtedly play a role. These studies make it much harder for Brexiters to claim that the best alternative is leaving without a deal.
That option looks awful in light of a report released by the Bank of England on Wednesday. It warned that Britain would face the deepest economic slump since World War II if the country left without a deal. In the worst-case scenario, GDP would contract by 8 percent within a year, the pound would drop by 25 percent, property prices would plunge, and unemployment would rise to 7.5 percent. May’s proposed “economic partnership” would still deliver lower growth than remaining in the EU — the hit could be much as 3.75 percent — but it would be better than the central bank’s November growth forecasts.
The BOE isn’t alone in warning about the fallout from a no-deal Brexit. The U.K. government’s own study, also published on Wednesday, found that GDP would be as much as 10.7 percent lower in 15 years in the worst-case scenario.
It’s not just about growth. The economic papers published this week delivered warnings on immigration, trade and services as well. Here’s my brief takeaway:
- Restricting immigration would hurt economic growth in every Brexit scenario, according to the government’s own paper.
- But lower immigration rates wouldn’t translate into more wealth for those in the U.K. Research by the National Institute of Economic and Social Research shows the relative declines in GDP per capita compared to remaining in the EU.
- On trade, the chart below shows how the damage is likely to increase as Britain moves further away from enjoying full access to EU markets. The services part of the economy would be worst hit because it isn’t well-covered by World Trade Organization rules. May wants to keep the U.K. in a customs union with the EU — the so-called Irish backstop — before leaving for a free-trade agreement with the bloc, something that would introduce some frictions to trade. The “no deal” scenario in the chart assumes an orderly exit to WTO terms, with mini-deals reached to keep essential goods moving. A disorderly Brexit, not shown, would come with even greater costs.
- Trade deals are unlikely to make Brexit worth it on economic terms: Trade agreements with countries from the U.S. to China would only mitigate Brexit’s impact on U.K. GDP by 0.2 percentage points, according to the NIESR. That stands as a rebuke to Donald Trump’s warning that May’s deal might mean forgoing the prize of a U.S. trade deal.
For any Brexiters holding out the hope the EU would come to the U.K.’s rescue because it too has much to lose from not reaching a deal, an analysis this week from the Center for Economic Performance offers little encouragement. It shows a massive gap in losses — both under a no-deal scenario and under May’s deal — between the U.K. and other EU countries. They can much more easily afford the hit. The one exception is Ireland. It would lose out far more in a no-deal exit. That may suggest that the republic would, in the event that no deal becomes likely, ask the European Commission to find mitigating measures — but there is no guarantee those would please Brexiters.
Of course, the caveats in all these papers are long. The future trade relationship is, at present, confined to just 26 pages of vague language in a non-binding political declaration.
Then, there’s the electorate. Will the broader public care about any of this? “That’s your GDP, not mine,” was the rejoinder of many to the warnings Brexiters once decried as scare-mongering. There are already echoes of those Project Fear claims today. But they may ring a little hollow this time.
One reason is that the experts were right. While the predicted recession didn’t materialize, the overall conclusion that a leave vote would cost the economy proved remarkably accurate; a number of economists have calculated that the U.K. has given up at least 2 percent of GDP since then and under-performed other major economies.
Should this come to a popular vote — and momentum is building behind one — it’s not clear that the economic warnings will be ignored the way they were the first time around. Attitudes toward immigration, a key factor in the 2016 vote, have softened, which might make voters more receptive to other arguments. Immigration from EU member states has declined dramatically since the referendum, leaving the National Health Service struggling to recruit nurses and other staff.
For many who believe the long-term interests of the U.K. lie outside the EU, the costs set out in these studies don’t really matter. For them, leaving wasn’t about economics but taking back sovereignty. May’s deal falls well short of that ambition. Ultimately, the government’s challenge is to balance the clear desire by many for more control against the painful costs of a more distant relationship with Britain’s largest trading partner. If it goes to a popular vote, Brexiters will have a harder time making the case that the price is right.
--Elaine He contributed graphics.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Therese Raphael writes editorials on European politics and economics for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.
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