We doubt that the UK’s outlook hinges on the Brexit question. Things have changed a lot since 1973, when joining the European Union was a big deal for the UK.
We think that the UK economy will do well over the next few years whether inside or outside the EU.
It is easy to imagine how events over the next year or two could sway the opinion of UK voters towards leaving the EU. A Greek departure from the euro-zone, a further rise in migration or a failure of David Cameron to gain any concessions from Brussels could all tip the balance for voters.
So how would a Brexit affect the economy? Most of the major issues are impossible to quantify or depend on how events turn out, such as what is negotiated – hence why estimates of the economic impact vary so much.
But generally, both the purported gains and losses from a Brexit are overstated.
Take trade. Even in a worst-case scenario, whereby the EU imposed tariffs on UK exports, this 4% cost would be fairly easily absorbed. And if the UK’s trade with Europe suffered, these losses could be offset over the long-term by the extra opportunities to boost trade with emerging economies.
As for investment, the UK might lose out on some inward investment from abroad. But firms choose to invest in Britain for a myriad of reasons, not just its access to the single market.
Meanwhile, business investment is currently strong, even though a referendum has been on the cards since 2013.
And note that the Scottish independence referendum last year did not damage investment there.
At the same time, though, the £10bn odd savings that the UK would make on its contributions to the EU could easily be wiped out if Brexit had even a minor adverse impact on the economy and therefore public finances.
The upshot is that the UK probably faces much bigger issues than whether it stays in the EU – such as whether productivity will recover.
Indeed, in part because of our optimism on the productivity front, we think that the UK’s outlook is pretty good. Arguably the most important implications of Brexit, then, are not the consequences for the UK economy, but for the future of the entire EU project.
