Short and long term effects of Brexit


As the date of the EU referendum draws closer, the economic arguments are being subjected to increasingly sophisticated analysis. One feature of this is the distinction being drawn between the short-term and longer-term effects of BREXIT.

Almost all academic and other studies conclude that the short-term effects will be negative – indeed, that even the possibility of BREXIT is already having this effect. The key statistics behind this are the UK’s persistent and growing fiscal and trade deficits, which are mirrored by capital inflows. Anything which discourages the inflow of capital – whether this takes the form of deposits attracted by the stability of Sterling, or FDI in industry and infrastructure –will therefore have an immediate impact on the UKs ability to finance the deficits. And most forecasts of the situation post-BREXIT involve a weakening Pound, serious instability in financial markets and a fall-off in FDI until the UK’s future relationship with the rest of the EU is clear.

The position in the longer-term, however, is a great deal more nuanced. If negotiations on access to the Single Market can be rapidly concluded, together with trade agreements with non-EU countries, the UK economy might soon bounce back. This is the scenario advanced by the free-market wing of the Leave campaign: for example, Douglas Carswell MP, and the Institute of Economic Affairs.

The plausibility of this scenario, however, depends upon implementation of other elements in the free market agenda: a unilateral reduction of all UK tariffs, an open door to workers from both the EU and the rest of the world, a reduction in subsidies (for example, to agriculture), and so on.

Unfortunately, as Ian Mulheirn observed in The Times on Thursday April 7, “these are all exactly the things that most Brexiteers want to repudiate”. Instead they want to clamp down on immigration, subsidise struggling industries, tear up regulations that smooth free trade across the EU and continue to support agriculture with taxpayers’ money. If this agenda were to be followed, the long-term effects of Brexit would almost certainly be as negative as those in the short term.

Author: GBP 12 April, 2016