European Union and Brexit

Year 13 Economics Revision Webinar

 Main Characteristics of the EU Single Market

• The EU single market is built upon four key freedoms:

1. Free Trade in Goods: Businesses can sell their products
anywhere in the EU’s member states and consumers can
buy where they want with no penalty
2. Mobility of Labour: Citizens of EU member states can
live, study and work in any other country. The aim is to
improve the mobility of labour.
3. Free Movement of Capital: Financial capital can flow
freely between member states and EU citizens can use
financial services such as insurance in any EU state.
4. Free Trade in Services: Professional services such as
pensions, architecture, telecoms and advertising can be
offered in any member state.
 Enlargement of the European Union
• Since 1957 then there have been six main waves of
enlargement of the European Union
• 1973 (UK, Ireland and Denmark)
• 1981 (Greece)
• 1986 (Portugal and Spain)
• 1995 (Austria, Finland and Sweden)
• 2004 (Latvia, Lithuania, Cyprus, Malta, Slovenia, Slovakia,
Estonia, Hungary, Czech Republic, Poland)
• 2007 (Bulgaria and Romania)
• 2013: (Croatia)
• In June 2016 the UK became the first member nation to
vote to leave the European Union
• Article 50 was pressed in March 2017
 Brexit – The UK’s decision to leave the European Union
• On June 23rd 2016 the UK
voted in a referendum to
leave the European Union.
• Prime Minister David
Cameron resigned the
morning after the vote
• A few weeks later, Theresa
May was elected leader of
the Conservative Party
and new Prime Minister.
• The terms of the UK’s new
economic relationship Article 50 was invoked in March
with the EU remain 2017, there is a maximum period of
uncertain. two years before the UK finally
leaves the European Union.
 Major Export Markets for UK Goods and Services
    Export Sources
Country Value % of Total Cumulative
    £ million UK Exports Percentage (%)
1 United States 37 364 12.7 12.7
2 Germany 30 730 10.5 23.2
3 Netherlands 22 367 7.6 30.8
4 France 19 089 6.5 37.3
5 Irish Republic 18 145 6.2 43.5
6 China 15 511 5.3 48.8
7 Belgium & Luxembourg 12 317 4.2 53.0
8 Switzerland 10 318 3.5 56.5
9 Spain 9 299 3.2 59.7
10 Italy 8 808 3.0 62.7

Nearly a quarter of total UK overseas trade in goods and services is

done with the United States and Germany. Seven of the top ten
export markets for Britain are with European Union countries. This
emphasises the importance of a trade agreement after Brexit.
 Major Import Sources for the UK Economy
      Import Sources for the UK
   Country Value % of Total Cumulative
     £ million UK Imports Percentage (%)
1 Germany 60 820 14.6 14.6
2 China 36 900 8.9 23.5
3 Netherlands 33 160 8.0 31.5
4 United States 28 283 6.8 38.3
5 France 25 274 6.1 44.4
6 Belgium & Luxembourg 21 443 5.1 49.5
7 Norway 18 489 4.4 53.9
8 Italy 16 581 4.0 57.9
9 Spain 13 813 3.3 61.2
10 Irish Republic 11 911 2.9 64.1

Germany is the biggest source of UK imported products, Germany is

the world’s biggest exporter of manufactured products and UK
consumers have a high income elasticity of demand for them. China
is now the second biggest source of imported products for the UK.
 UK Trade Balance in Goods and Services with the EU
Source: Office for National Statistics
UK trade in goods and services balance with selected EU countries, 2003 to 2014,
annual balance, £ billion
40

20

-20

-40

-60

-80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
France Germany Ireland Netherlands Spain Rest of EU

The UK runs a trade surplus with Ireland but large trade deficits
with countries such as Germany and Spain.
Hard and Soft Brexit
• Hard Brexit
• Means that the United Kingdom leaves the EU Single Market
and trades under World Trade Organization rules
• Under WTO rules, each member must grant the same market
access—including charging the same tariffs—to all other
members as the most favoured nation
• Soft Brexit
• Involves the option of staying in the Single Market (like
Norway)
• As a member of the European Economic Area (EEA), Norway
has a free trade agreement with the European Union, which
means that there are no tariffs on trade between the two
There are many ways to leave the European Union!
 A Future Outside of the EU – the Norway Option

• The so-called Norway option allows for the free movement

of goods, services, capital, and people
• But Norway has no formal input into shaping the rules of
the single market although all new rules must be adopted
• Annual fee is paid by Norway for access to EU single market
• Under the Norway option, all UK banking and financial
service regulation would be ‘mutually recognised’ as good
enough, and thus all EU members would have to
automatically grant full access to UK-based firms
• Norway option does not include free trade in food, or
participation in EU agriculture subsidies (CAP) or in the EU’s
regional policy, and nor does it require Norway to adopt EU
trade policies with respect to non-EU nations.
 A Future Outside of the EU – Joining EFTA

• EFTA is the European Free Trade Area

• EFTA membership provides the UK with less access to the
Single Market beyond goods trade
• Switzerland is the most prominent EFTA member and is
required to strike bilateral treaties with the EU to secure
access to the Single Market for specific services only.
• In 2014 the Swiss voted in favour of restricting migration.
The EU has made it clear that this is incompatible with
access to the Single Market.
• Switzerland makes a smaller per capita contribution to the
EU budget than Norway in the EEA, to reflect the lower
level of market access.
 Outside of the EU – WTO Option & Unilateral Trade

• WTO is the World Trade Organisation

• UK will be completely out of the EU single market.
• It will face the EU’s external tariff on goods and services in the
absence of a comprehensive free trade agreement
• Gains in having more control over migration policy and freedom
to trade with rest of the world including establishing free trade
agreements with emerging countries
• Unilateral free trade is the option favoured by a group
called “Economists for Brexit”
• This involves the UK leaving the EU Single Market
• Elimination of EU trade barriers on imports – pressing for global
free trade
• Control of borders to support migration control
• Democratic control of UK laws and regulations
 Will London retain competitive advantage in services?

• Pre-referendum, many argued that London’s pre-eminence

as a global / EU centre for financial and related business
services could be threatened by Brexit
• Impact depends crucially on the Brexit deal that is eventually
negotiated especially with passport rights
• Passport for banks and financial firms allows firms authorized by
any EU Member State (MS) to establish branches or provide cross-
border financial services in other MS
• London retains many strengths:
1. Large pool of highly skilled labour including critical mass of
knowledge on financial services, accounting and law
(comparative advantage based on strong human capital)
2. Language, strengths of the UK legal system and a highly
convenient time-zone
Will London retain competitive advantage in services?
A Future Outside of the EU – Overview of some Options
Customs World Trade
EEA EFTA Union Organisation
(Norway) (Switzerland) (Turkey) Option

Migration controls ❎ ❓ ✅ ✅
EU budget contribution ❎ ❎ ✅ ✅
Compliance with EU rules ❎ ❓ ❓ ✅
Free to negotiate with
third countries ❎ ✅ ❎ ✅
Passporting rights ✅ ❎ ❎ ❎
Direct access to Single
Market ✅ ❎ ❎ ❎
Import tariffs? ✅ ✅ ✅ ❎
 EU Countries likely to be most affected by Brexit

Trade with UK % of
Country measured as investment Comment
% of GDP from the UK

Closely aligned in many EU

Netherlands 7.6% 27.6% policy debates; favours
liberalisation of EU
Most deeply integrated with
Ireland 11.8% 7.5% the UK, only country with
(soft) land border
High total value of trade, UK
Germany 2.8% 2.4% leaving increases political
power of French
Around 800,000 UK expats
Spain 2.5% 6.0% living in Spain, big tourism
and trade linkages
 Brexit – UK’s Net Contribution to the EU Budget
Forecasted net UK contributions to EU budget from 2014/15 to 2019/2020 (in £m)

12000

10,178
10000 9,374
9,054 8,908
Net contributions in million GBP

8,385
8,049
8000

6000

4000

2000

0
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
 Possible Short-Term Impact of Brexit on the UK
Economy
Impact Comment

Weaker exchange Sterling fell against US dollar and Euro in wake of Brexit vote
rate (depreciation) Higher prices for imports
Over 50% of UK imports come from EU, about half of which are
intermediate goods such as component parts

High current External deficit of more than 5% of GDP requires strong net inflows of
account deficit capital on the financial account – perhaps to achieve this harder post-
referendum because of macroeconomic uncertainty

Short run real GDP Expected to take two years to negotiate EU exit terms after Article 50
growth There was a dip in confidence but the real economy stabilized fairly
quickly helped by the depreciation in sterling

Housing market Fall in confidence may lower mortgage demand

Possibility of decline in overseas demand although weaker pound
increases real purchasing power of US dollars in UK property market
Unemployment Unemployment tends to be a lagging indicator of the economic cycle –
a year after Brexit the unemployment rate fell to a new low of 4.6%
 Impact of Brexit on Developing Countries

Brexit is likely to have effects on developing countries over time. Much depends on
the nature of the Brexit deals that the UK makes with the EU and other nations +
the impact of Brexit on UK growth and government finances.

Foreign
Trade
investment

Economic
Aid
“The UK’s vote to leave the EU comes at a time when many developing economies
are already facing multiple shocks: lower oil and commodity prices, a stronger US
dollar and a slowing Chinese economy.” Source: UK ODI Report, July 2016
 Aspects of Brexit on Developing Countries

Contraction in
Slower UK exports to UK
Countries such
as Bangladesh
growth & from
& Kenya most
developing
weaker £ nations
affected

Migration South Africa,

Fall in external
flows are Uganda,
value of £
uncertain - Nigeria
reduces value
possible short especially
of remittances
term rise affected

UK aid was 10% of UK Key is whether

$18.7 billion in the UK maintains
aid flows
2015 - falling £ their 0.7% of GNI
cuts the real through the aid target after
value EU Brexit
Micro & Macro impact of decision to leave single market
Brexit – Micro Impact of UK leaving the Single Market

Point 1 Point 2 Point 3

The EU is a customs union and Some UK firms and industries Leaving the EU might cause
leaving it may lead to higher might suffer from a decline in delays at borders as UK firms
import tariffs on EU exports. net inward migration from EU comply with EU rules

Higher import prices increase In sectors such as hospitality, Many products cross borders
costs for UK firms who then technology and construction, several times. Just in time
experience lower profits. EU workers have helped delivery requires minimal
Consumer welfare would suffer overcome skills shortages. border delays, costs will rise

The assumes that the UK is A fall in UK net payments to Most UK exporters already
unable to negotiate a wide- the EU could fund increased comply with EU regulations.
ranging free trade deal with investment in better technical Post Brexit, businesses will
the EU before Brexit is finalized training for UK workers have less red tape to deal with
Brexit – Macro Impact of UK leaving the Single Market

Point 1 Point 2 Point 3

Leaving the EU will allow the Leaving the single market will Leaving single market
UK to make many free trade allow the UK economy to limit diminishes UK trade with EU
agreements with other nations net inward migration from EU and will cut inward investment

Free trade deals with fast- This will provide opportunities 44% of Britain’s exports go to
growing emerging economies for UK people to find work and the EU - £220bn out of £510bn.
might see a surge in UK exports also lead to a slower growth of Higher tariffs would make UK
which will add to GDP growth house prices and rents exports harder to sell in the EU

However complex trade But the UK suffers from long This depends on the trade deal
agreements take time. The run skills shortages. Parts of we make with the EU. Inward
recent EU-Canada free trade the economy and the NHS are FDI depends on many factors
deal took seven years to agree. hugely reliant on migration including tax & regulations
Forecasts of effects of the UK Leaving the EU
 Brexit: Some “it depends on” evaluation points

Post Brexit Depends on scope / scale / timing of trade deals with EU and other
countries. How strong will the UK’s bargaining power be in
Will some discussions with EU27?
owners of labour Depends on whether UK can keep significant numbers of highly-
and capital skilled EU workers post Brexit in industries in which the UK has
successfully comparative advantage + staffing the NHS
achieve their
own Brexodus Depends on the impact of Brexit on UK universities - in 2012,
from the UK universities generated an annual output of £73 billion, contributed
once the terms 2.8% of GDP and supported over 750,000 jobs
of trade with the
EU become Depends on the ability of UK manufacturing businesses to modify
clearer? their existing supply-chains and their success in pivoting export sales
to non-EU countries
Depends on the extent to which the UK government is able to replace
existing EU funding in areas such as research, farm support and
workplace training initiatives
Depends on the the impact of higher trade costs from being outside
the EU on UK productivity and innovation - the long-run dynamic
effects might be bigger than the static effects e.g. on consumer prices