Brexit: a shake-up not an apocalypse

Brexit: a shake-up not an apocalypse
Acrticle by Melanie Debono - Capital Economics

In the latest of our series of guest articles, we are delighted to present an article by Melanie Debono of Capital Economics in London about the implications of Britain leaving the European Union, and the possible effects of this on Jersey’s finance industry.

Unless you’ve been living under (rather than on) a rock, you know that the United Kingdom will hold a referendum on whether to remain in the European Union on 23 June. The vote looks to be a close call especially following the recently-agreed reform deal – so it is worth thinking through carefully now the implications of a separation.

The impact on Jersey, and its financial sector, will depend critically on the economic and financial consequences for the United Kingdom and the City.

The influx of migrants is arguably the main reason Brits want to stop waving the twelve-starred flag. Annual net migration from Europe has more than doubled since 2012, reaching 172,000 in September 2015. Exiting the European Union doesn’t necessarily mean the United Kingdom will gain any power to restrict immigration from Europe – Britain may have to keep the free movement of labour to retain full access to the single market. However, it is more likely that policy will change in line with Britain’s needs – restricting low skilled workers and attracting more high skilled workers. Brexit may benefit the United Kingdom economy if it leads to a more tailored immigration policy.

Similarly, leaving the European Union may leave Britain’s external sector better off in the long run. Given the amount of trade that is done between the two, Britain should be able to get a favourable trade agreement after Brexit. The worst-case scenario would be that Britain’s exporters face tariffs under the ‘most-favoured nation’ rules when trading with bloc members. This wouldn’t be a disaster. The additional costs to exporters would be an inconvenience but not a major barrier to trade. What’s more, exporters wouldn’t be left high and dry on 24 June if the vote is for Brexit. Under the Lisbon Treaty, a country leaving the union has two years to negotiate a withdrawal agreement. Falling tariffs, the decline in manufacturing and Europe’s diminishing importance in the global economy mean British exports would not be affected significantly in the absence of a trade deal either. Outside the union, Britain can fashion new trade deals with non-European Union countries.

But Brexit wouldn’t be a game changer for Britain’s productivity. There would be some benefit from not having to adhere to the European Union’s rigid regulations. In practice, Westminster would still choose to implement many of them, and would need to, to continue to export easily to the single market. The impacts on the property market overall will probably be limited too, although aggregate consumption may even benefit if savings to the exchequer are passed on in the form of lower taxes for example. The British government could save about £10 billion a year on its contributions to the European Union budget if it left the bloc. This could be higher if, for example, Brexit was to result in higher economic growth. Then again, the government might need to make some contributions to continue to be part of the single market. 

Britain’s financial services industry may suffer at least initially. If the United Kingdom leaves the European Union, it may lose its passporting rights for example. These rights offer the freedom of providing services from one state to another in the European Economic Area. That said, Brexit would take Britain out of the EU but not necessarily out of the EEA. And even if Britain doesn’t (or is unable to) negotiate EEA membership, Switzerland’s case shows that business can continue. Meanwhile, fears over foreign direct investment drying up if Britain votes to leave the union seem overblown. Firms do not invest in Britain solely due to the single market. That said, flows may stumble (and possibly fall) until the United Kingdom’s new relationship with the European Union is renegotiated.

The upshot is that, although the impact of Brexit on the United Kingdom economy is uncertain, Britain’s long term economic or financial outlook doesn’t hinge on it. Regaining productivity levels seen before the 2008 financial crisis is arguably more important as this would more than offset the negative impacts of Brexit on the economy.

Brexit will definitely shake things up, but it’s not the apocalypse some make it out be.

The United Kingdom’s economic prospects are good both in and out of the European Union – and, as such, so are Jersey’s by and large. Indeed the bailiwick has always done a good job of responding to changes beyond its borders, and turning crisis into opportunity. But its fortunes may be more sensitive than the City’s to any change in financial services’ access to continental European markets. The risk for St Helier is that it may get caught up after Brexit in political battles between London and other European capitals that Westminster can afford to lose but it can’t.

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A Maltese national, Melanie Debono is an economist at Capital Economics, where she worked closely with Roger Bootle in the research for his latest book, The Trouble with Europe, as well as contributing to research into Brexit for clients. She has previously worked for both the European Commission and European Parliament.

Capital Economics is a leading independent international macroeconomic research consultancy with offices in Toronto, London, Singapore, New York and Sydney, and winner of the 2012 Wolfson Prize. Working with Jersey Finance Limited, a team of its economists authored the Jersey’s value to Britain and Jersey’s value to Africa reports.

You may contact Melanie Debono at Melanie.Debono@capitaleconomics.com