Publication - United Kingdom : Selected Issues
EXECUTIVE SUMMARY
The UK’s forthcoming referendum on European Union (EU) membership presents voters with a momentous decision. Given the importance of the referendum, this paper aims to provide information on some of the macroeconomic implications of the UK exiting the EU, while recognizing that the choice of whether to remain in the EU is for UK voters to make and that their decisions will reflect both economic and noneconomic factors.
In the event of a vote to leave the EU, the process for withdrawing and establishing a new economic relationship with the EU could be expected to begin immediately. Alternatives—from maintaining membership of the European Economic Area (EEA), to negotiated bespoke arrangements, to defaulting to World Trade Organization (WTO) trade rules—imply tradeoffs between freer access to the EU market and independence from the obligations that come with membership of the single market.
Leaving the EU has potential implications for trade and investment, productivity and incomes, the labor market, and the public finances. Most formal long-run assessments indicate that leaving the EU would adversely affect the UK economy, but the range of estimates is large, and a few studies even suggest the possibility of positive net economic benefits. Studies that find net gains, or only very small losses, tend to assume the potential for rapid expansion of trade from new trade agreements with other economies or a substantial boost to productivity from reducing EU-sourced regulation.
While theoretically possible, in practice the effects on output are unlikely to be sufficiently large to make the net economic impact of exiting the EU positive. In staff’s view, increased uncertainty and risk aversion in the short and medium run would result in a material hit to incomes. The net long-run economic effects of leaving would also likely be negative and substantial, though there is significant uncertainty about the precise magnitude. Reduced trade access would likely lead to lower output and investment.
Permanently lower incomes would be associated with reduced consumption. Pass-through from a weaker pound would result in higher prices for imported goods; depreciation would mitigate economic losses to the UK somewhat by stimulating net exports, but not enough to offset declines in other expenditure categories. Fiscal savings from reduced contributions to the EU budget would likely be outweighed by lower revenues from expected lower output, resulting in a net fiscal loss. The economic consequences for other countries would mainly be negative, albeit smaller than for the UK, and concentrated in the EU. Within the EU, losses would vary widely, reflecting variation in trade and financial exposures to the UK. Ireland, Malta, Cyprus, Luxembourg, the Netherlands, and Belgium would likely be most affected.
page source http://www.imf.org/
