Over the past few months, a growing risk of Britain possibly exiting the European Union (“Brexit”) has risen, particularly as the migrant crisis escalates and as Europe’s ability to contain terrorism is thrown into question. A “Brexit” could have far-reaching consequences for all parties involved.
The European Union is Great Britain’s largest trading partner and, at present, nearly 60% of the UK’s trade is being carried out through its European partners. That figure is expected to rise to over 85% once the current trade negotiations are sorted through if, in fact, this occurs.
The single EU market employs three important tools which boost British trade. First, it eliminates tariffs on the goods traded. Second, as a full member of the EU consortium, it allows British companies or people to sell their goods or services, or to invest directly, in other member-states freely (what are known as the ‘Four Freedoms’). And third, it reduces costs substantially for British exporters as they would not have to comply with 28 different sets of EU country trade rules.
So, What Would Britain’s Departure Mean?
There have been a number of attempts to quantify what an exit from the EU would do to the UK and European economies respectively, taking into consideration a variety of factors, but none to date have provided compelling evidence to suggest there is one right answer.
On one side, assuming a “Brexit,” this would hinder the British economy in terms of trade, investment and bilateral relations within the EU. In this scenario, permanent losses on the back of weaker trade, lower productivity and drying up of foreign investment would be expected. However, departing the EU would provide freedom from EU rules and costs that could make Britain more prosperous (reducing taxes for British citizens and the burdens of immigration issues).
One of the biggest positives for the UK being a member of the EU is free trade. This not only makes it easier for British companies to export their goods to Europe but also makes it cheaper. Still, some factions of the British business community believe a “Brexit” would not only allow them to establish free trade agreements with non-EU countries, it would also save billions of pounds they have to shell out for membership. To many, this comes with the risk of losing negotiation power internationally by leaving the trading bloc and potentially increases risk of competition from countries with low production costs.
Weighing the Brexit’s Impact on GDP
An analysis by the economists at the Centre for Economic Performance (CEP) suggests that lower foreign direct investment inflow could make UK incomes fall by 6.3% to 9.5% of GDP, a loss similar in magnitude caused by the 2008-09 financial crisis.
The Bottom Line for Investors
The possible consequences of a “Brexit” are complex and vary depending on the terms of departure. Britain’s EU membership is not the only consideration – assuming a “Brexit” occurred, actions post-splitting and how the world reacted would also need to be considered.
On one hand, millions of jobs could be at risk both in the UK and EU post-Brexit, such as large multinational manufacturers moving operations to low-cost countries. On the other hand, British farmers could lose billions in EU subsidies.
The market appears to be pricing-in Britain remaining in the EU, but we don’t think there are any tactical portfolio moves to be made as a result. There will be winners and losers if Britain leaves the EU, but the consequences probably won’t ripple severely into the global economy.