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Brexit

Brexit in seven charts the economic impact


How growth, trade, migration will be aected by a split with the EU

JUNE 27, 2016 10:10 PM

by: Chris Giles, Economics Editor

ThequestionofhowBrexit(http://www.ft.com/eureferendum)willaffecttheUK
economyisoneofthecrucialissuesnowthatBritainhasvotedtoleavetheEU.Thefallin
sterling,theslideinstockmarketsandthefreezeininvestmentareallindicationsthatthe
shorttermimpactwillbeserious.
ButthebiggerquestionishowbreakingupwithBrusselswillaffecttheeconomylonger
term.
Millionsofwordsonthetopicincludingeconomistsmajorityviewthatleavingthebloc
willslowgrowthandtheLeavecampaignscounterargumentsthatBritainwillprosper
couldbereplacedbysevencharts.
ThesesumuptheargumentsoverwhatbreakingupwithBrusselswillreallymeanforjobs,

growthandpublicfinances.

The EU was good for Britain

TheUKusedtobethesickmanofEurope.Itsannualgrowthinprosperityimprovedfrom
bottomoftheleagueamongtheG7leadingeconomiesbeforeitjoinedtheEuropean
EconomicCommunitytotopspotinthe43yearsafter1973.Thisdoesnotprovethat
becomingamemberimprovedBritainsinternationalperformance.Itdoes,however,allow
theRemaincampaigntoarguethatmembershipdidnotpreventUKnationalrenewal.
Alternativeexplanation
EconomistsfromtheLeavesidewouldpointoutthattheabsolutegrowthrateswerelower
after1973thanbeforeandthatthemainreasonforBritainsimprovedperformancewas
MargaretThatchersreforms,notEUmembership.
Assessment
Splittingcorrelationfromcausationisdifficult.Allcountriesgrowthslowedafterthe
postwarsurgepeteredout.But,giventhedramaticimprovementinBritainsposition,itis
nearlyimpossibletoarguethattheEUstoodinthewayofBritainpullingupitssocks.In
themostdetailedassessmenttodate,professorNickCraftsofWarwickuniversity,Britains
leadingeconomichistorian,estimatesthattheEUdirectlyraisedUKprosperitybyabout10
percent,largelyduetoincreasedcompetitionandbetteraccesstothesingleEuropean
market.

What trade deals will replace EU membership?

What trade deals will replace EU membership?

WhatwillanewministryoftradehavetodoafterthecountrybreaksoffwiththeEUto
replacecurrenttradingrelationships?Signadealwiththeremaining27membersofthe
EU,cometoanarrangementwithabout50additionalcountrieswithwhichtheEUhas
preferentialdeals,oralltheremaining161membersoftheWorldTradeOrganisation?
Abilateraldealwiththeblocislikelytotakeyearstonegotiate,sayexperiencedtrade
negotiators.BarackObama,USpresident,hasalsocautionedthatBritainwouldbeatthe
backofthequeueforaUSUKtradedeal.
Alternativeexplanation
TheLeavecampaignsaidtheUKdoesnotneedtradeagreementstotrade.Itsaidthat
GermanyandothercountriesrunningtradesurpluseswiththeUKwouldeagerlyseeka
preferentialdealandtheUKcouldbemuchmorenimbleinnegotiatingdealswithother
countries.
Assessment
Leavewasrightthattradedealsarenotnecessaryfortrade.Butsuchagreementsdosetthe
rulesforcommerceandprotectBritainandUKcompaniesfromdisputesandarbitrary
actionsfromothercountries.LeavingtheEUwillrequireamammothnegotiationprocess,
sinceBritaincannotevenguaranteetobeabletotradesecurelyunderWTOrules,sinceit
doesnothaveitsownscheduleoftariffs,commitmentsonservicesandagricultural
subsidies.Withoutthis,BritainwillbeleftvulnerabletolegalactionunderWTOdispute
settlementrules.

Can Britain cut migration signicantly?

Britainsnetmigrationstoodat333,000in2015,thesecondhighestfigureonrecordand
morethanthreetimesDavidCamerons2010pledgetobringthefiguredowntothetensof
thousands.NetimmigrationfromEUcountries,particularlycentralandeasternEuropean
memberstates,roserapidlyaftertheiraccessiontotheEUin2004andmorerecentlywhen
citizensofBulgariaandRomaniaacquiredtherighttoworkandsettleintheUK.Onlyby
leavingtheEUcanthegovernmentreducethenumbersofEUmigrants.
Alternativeexplanation
EUmigrantstendtobeyoungandarelikelytobeemployed.Theycontributemoretothe
UKpublicfinancesthantheytakeoutandmuchmorethanUKborncitizens.Andtheir
numbersalreadyappearedtobeplateauing,nowthattheinitialsurgefromRomaniaand
Bulgariahasabated.
Assessment
EvenifEUnetmigrationwascuttozero,Britainwouldhavefarmoremigrantsfromnon
EUcountriesthantheprimeministerstensofthousandspledge.AslongasBritains
economydoeswell,itwillattractimmigrants.

Do migrants reduce UK wages?

ThechartshowsthechangeintheshareofEUimmigrantsforeverylocalareaintheUK
(lefttoright)andthechangeinlocalwagelevels(upanddown).Thereisnocorrelation,
indicatingthatareaswithhighlevelsofimmigrationdonothavelowerwagegrowth.There
isnoindicationthatimmigrationreduceswages.
ABankofEnglandstudyfoundasmalleffectonthelowerpaid,witha10percentagepoint
riseintheshareoflowskilledmigrantsreducingwagesofthelowerpaidby2percent.But
theincreaseinEUmigrationsharehasbeenonlyabout2percentagepointsbetween2008
and2015,suggestingtheeffectonlowpayisaboutacutof0.4percentoversevenyears.
Alternativeexplanation
WhiletheLeavecampaigngrosslyexaggeratedtheverysmallmeasuredeffectofmigration
onlowskillwages,thereisaquestionwhethernormallyhighgrowthareasshouldbe
expectedtohavehadlargerincreasesinwages.Thiscouldexplainwhythereisnopositive
correlationinthechartbetweenareasofhighimmigrationandhigherwagerises.
Assessment
TheavailableevidencesuggestsEUmigrationdoesnotcutpeoplespay,evenforthelow
paid.Butthereisapossibilitythatitallowsemployerstoincreaseemploymentinhigh
demandareaswithoutraisingpaybutallowingEUmigrationtobeabuffer.

Were EU regulations a yoke around the neck of the UK economy?

EvidencethatEUregulationsstifledBritishcreativity,innovation,competitionandgrowth
isthinontheground.TheOECDassessesthattheUKhasthesecondlowestlevelof
productmarketregulationamongitsmembers,justbelowtheNetherlands.Thereisno
figurefortheUSin2013.

Podcast

Fact-checking Brexit
claims with Tim Harford
(http://podcast.ft.com/20
16/07/01/fact-checking-br

ThedifferencesbetweenEUmemberstatesinthis
measureandinassessmentsoflabourmarket
regulationsuggeststhat,farfromharmonising
practicesacrossmemberstates,Brusselsrules
allowcountriestomaintaintheirownrulestohave
highlyorlightlyregulatedeconomies.

16/07/01/fact-checking-br
exit-claims-with-tim-harf
ord/)

(http://podcast.ft.com/2016/07/01/f
actcheckingbrexitclaimswithtim
harford/)
TimHarfordjoinshostCardiff
Garciatodiscussthepotential
economiceffectsoftheUK
leavingtheEU.Thereferendum
campaignsthatprecededBrexit
includedanumberof
exaggerationsand,insome
cases,outrightlies.Butthereare
alsonuancedanddifficult
questionsthatcannotbe
answereddefinitively,and
deservecarefulscrutiny.Music
byMinden

Alternativeexplanation
Leavecampaignerssaidthateventhese
regulationsaretoomanyandshouldnotbesetfor
thewholesinglemarket.TheythinkthatBritish
regulationswouldbebetterandevenlessonerous
onbusiness.
Assessment
Britainhasagoodrecordininternationalleague
tablesandbyfarthemostcostlyregulationsare
notshownhere,suchasrulesgoverningplanning
andtheuseofland.Thereisnoguaranteethat
repatriatingregulatoryactivityfromBrusselswill
notmaketherulesworse.Suchrepatriationwill
itselfbeamassivebureaucraticundertaking.It
wouldbebettertoimprovetheregulatory
environmentwhereBritainhasalwaysbeenin
control,butfailedtotakeaction.

What about the 350m a week sent to Brussels?

ThisfigurewidelypromotedbytheLeavecampaignisnotcorrect,asseveralBrexiters
acknowledgedafterthepollshadclosed.Whenpushed,theLeavecampaignacceptsthat
BritainsnetcontributionsaremuchloweraftertherebatesecuredbyMargaretThatcher
andpaymentstofarmers,poorerregionsandscience.Britaindoes,however,makenet
contributionstotheEUbudgetof8.5bnin2015,about163maweek.Thiswillbesaved
oncetheUKhadlefttheEUandBritainwouldgettochoosehowitspentthemoney
currentlyallocatedforfarmersandothersbycommonEUrules.
Alternativeexplanation
Anetcontributionof8.5bnisroughly1outofevery100theBritishgovernmentspends
everyyear,soanysavingswillbesmall.TheInstituteforFiscalStudiesandothershave
pointedoutthatifleavingtheEUimpliesslowergrowth,thenetsavingwouldbewipedout
throughlowertaxrevenuesandhigherbenefitspendingevenifthegrowthreductionwas
merely0.6percent.TheIFSestimatedthatiftheeconomicassessmentsofBrexitwere
accurate,leavingtheEUwouldcostUKtaxpayersbetween20bnand40bnayear.
Assessment
ThereisnodoubtthattheeffectofEUmembershiponnationalincomewasmore
importantfortheUKpublicfinancesthantheannualmembershipfee.Thisisthedominant
issueandasmallhitwouldleaveBritainspublicsectorworseoff.

Put it all together economists. What do you get?

Brexithurts.Themaingroupsofeconomistswhohavepublishedstudiesinthecampaign
usedifferentmodelsanddifferentdatabutspeakwithmoreunanimityonthissubjectthan
onanyother.ErectingtradebarrierswiththeEUwouldhitprosperity,whichisnoteasily
replacedbygreaterfreetradeelsewhere.Leavingtheblocwillaffordthecountrylittle
additionalregulatoryfreedomandtherecouldbelongtermconsequencesfromtheshort
termupheavalofBrexit.EconomistsoverwhelminglythinkleavingtheEUisbadfortheUK
economy.
Alternativeexplanation
OnegroupeconomistsforBrexitbelievesBritainseconomywillbestrongerifit
adoptsunilateralfreetrade,droppingallbarriersonimportsandlettingothercountries
decidewhethertomaintaintariffsonBritishexports.Thisdivertsalltradeawayfromthe
EU,lowerspricesandproducesgains
Assessment
TheeconomistsforBrexitareoutonalimb,bothbecauseoftheirdesireforunilateraltariff
reductionandduetotheirassessmentofthebenefits.Manyothereconomistssaythe
modelthegroupusesisfarremovedfromtherealworldandisnotrelatedtorealcurrent
dataontradepatterns.
Rarelyhastherebeensuchaconsensusamongeconomists,asthereisonthedamagethat
BrexitwillwreakontheBritisheconomy.Thewarningmayturnouttobewrongbutitis
difficulttoignore.
Printasinglecopyofthisarticleforpersonaluse.Contactusifyouwishtoprintmoreto
distributetoothers.TheFinancialTimesLtd.

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