EU Brexit: Problems and Consequences

_ Anatoly Bazhan, Head, Economic Research Sector, Institute of Europe, Russian Academy of Sciences. Moscow, 6 June 2018.

As is common knowledge, the UK is expected to finalize its withdrawal from the EU in March 2019. The parties have come to terms on a transition period (presumably 21 months long, until December 31, 2020), when the UK will continue as a Customs Union member, if losing the power to influence its decision-making. This measure is due to the May government’s fears that a rash and rapid pullout from the existing trade system will cause a slowdown in the country’s economic development.

In the meantime, the agreement was criticized by many in the House of Commons, who claimed that even temporary compliance with the Customs Union rules would restrict British opportunities to sign lucrative trade agreements with third countries.

And they certainly know what they are saying, because a continued customs partnership during the transition period means that the UK will have to obey the EU trade policy while being deprived of a right to have its own way deciding on parameters of trade relations with prospective partners.

Brussels for its part has no intention to discuss the details of the divorce until the UK agrees to meet its financial obligations under the EU seven-year budget for 2014-2020. Formally, it does not have to do this after it leaves the EU. But its interest in being granted a protracted transition period makes the British government negotiate with the EU the amount of its contribution, on which the parties are yet to reach an agreement. The majority of experts believe that it is likely to be anywhere between 40 and 45 billion euros as deduced from the difference between the UK’s budgetary plan obligations and its EU assets subject to repayment (such as its stake in the European Central Bank and the European Investment Bank).

However, if the parties fail to agree on the amount, a “hard” Brexit is likely in the form of an immediate pullout in March 2019. Will it be disastrous for the British economy? In my opinion, there will be no disaster. A certain disorganization of trade relations with the EU may occur, of course, because the UK will have to rush the signing of 27 trade agreements with the individual EU countries and separately with Brussels, which might require much time. But we should not expect considerable repercussions since, first, bilateral relations, while they are being sorted out by the parties, will be regulated on the basis of the WTO rules, and, second, the EU does not practice high tariffs for importers and therefore the predicted raising of customs tariffs cannot be significant.

But the hard option may well result not only in higher EU export duties but also in certain benefits. First, the UK will not have to contribute to the EU budget. Second, with the EU guidelines null and void in 2019, the UK will get a tool for regulating its foreign trade balance in the form of its own tariff and non-tariff restrictions on imported products.

Brexit opponents claim that the withdrawal will make the domestic economic situation much worse. But had it been so, the investment activity would have plummeted immediately in the wake of the referendum as investors would seek to channel their money to a more comfortable environment. But in reality, this is not happening. Rather than falling, GDP grew by 1.8% in 2017, [1] with the manufacturing industry developing at a particularly high rate. Private and public investment has risen by 4%.[2] Of course, the growth was due to a drop in the exchange rate of the pound and improvements in the global economic situation, but it has also shown that the Brexit factor does nothing to the investment climate, with investors assuming that the UK is capable of economic development even outside of the EU.

That Britain will not derive tangible advantages from its EU membership is proven by the fact that its average economic growth rates were higher during the 10 years before it joined the European common market (European Economic Community, the EU’s predecessor) than after its accession. Besides, its export to third countries has been rising at a faster rate since the early 2000s than its export to the EU, and this means that non-EU markets have more pull for the British exporters.

Notes:

[1] Time series: Gross Domestic Product: Year on Year growth: CVM SA %. Office for National Statistics (ONS). URL: https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ihyp/pn2 .

[2] UK investment spending leaves G7 rivals trailing. Financial Times. URL: https://www.ft.com/content/90d47ddc-3337-11e8-ac48-10c6fdc22f0.

Source: http://valdaiclub.com/

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