Woodford Investment Management commissioned Capital Economics to produce a report examining the impact of an exit from the EU on the British Economy. The report is split into topic areas - see a summary of each topic below.
• Annual net migration from Europe has more than doubled since 2012, reaching 183,000 in March 2015. • Immigration from the European Union is currently boosting the workforce by around 0.5% a year. • If Britain leaves the EU, we will undoubtedly wish to preserve our free trade status. This means taking the “Norwegian option” as our initial exit plan and ensuring our continued membership of the EEA and EFTA. This would mean we are bound by the same freedom of movement rules we are today.
Trade and Manufacturing
• Again, we should be confident that in the event of an exit, the best and most likely outcome for all parties is first to ensure Britain’s continued membership of the EEA and EFTA. In essence this would mean no changes to trade policy. • The worst-case scenario would likely mean Britain faces tariffs under “most-favoured-nation rules”. Exporters would face some additional costs and compliances, but these would serve more as inconveniences than major trade barriers. • Fears that exporters would be left high and dry the day after an exit vote are unfounded. Under the Lisbon Treaty, a country leaving the EU has 2 years in which to negotiate a withdrawal agreement. For these two years, EU membership essentially continues. • Falling tariffs, the decline in manufacturing and Europe’s diminishing importance in the global economy mean we doubt that even the absence of a trade deal with the EU would hurt the United Kingdom’s overall exports materially. • An exit from the EU would be a crucial opportunity to broker our own trade deals with non-European Union countries; indeed Britain could even have a unilateral free trade policy. Non-EU countries may find negotiating with Britain easier and quicker than dealing with the EU’s bureaucratic machine, as Switzerland has shown. • Production sectors face more uncertainty than services, with greater downside potential if we are subjected to tariffs, but more upside potential if we improve trade arrangements post-exit. • Contrary to the claims of many authors and commentators, it is probable that the impacts of an exit on trade would be relatively small.
• Financial services have more to lose immediately after an EU exit than most other sectors of the economy. • The City would probably be hurt in the short term, but it would not spell disaster. The City’s competitive advantage is founded on more than just unfettered access to the single market. • An EU exit would enable the United Kingdom to broker trade deals with emerging markets that could pay dividends for the financial services sector in the long run.
Regulation, innovation and productivity.
• An exit from the EU is only likely to have a limited impact on Britain’s productivity. • Estimates that axing EU regulations would save Britain a lot of money exaggerate the true picture as the United Kingdom would still choose to implement many of them. It would also need to implement the union’s regulations to continue to export easily to the single market.
• Concerns about a drying up of foreign direct investment if Britain votes to leave the EU are overblown. • Britain would remain a haven for foreign direct investment flows even if it was outside of the EU. • We could see a period of weak foreign direct investment inflows as the UK’s new relationship is renegotiated. However, if Britain is able to obtain favourable terms, then foreign direct investment would probably recoup this lost ground.
• The British government could save about £10bn per year on its contributions to the EU’s budget if the country left the bloc. • Economic disruption and lower migration as a result of an exit could offset these savings. • Contributions would still have to be made to retain access to the single market. • The government may have to compensate particular sectors for any EU hand-outs lost. • We expect that an exit would benefit the public finances, but not to a huge degree.
Consumption and the Property Market
• The city seems to have the most to lose post-exit. • The role of financial services in holding up the market is probably overstated. • We anticipate that the impacts on the property market overall and on aggregate consumption in the economy will be limited. • Consumption could even benefit from savings to the exchequer and independent policymaking in the future.
• Although the impact of an exit vote on the British economy is uncertain, we doubt that Britain’s long-term economic outlook hinges on it. • The more extreme claims made about the costs and benefits of an EU exit for the British economy are wide of the mark and lacking in evidential bases. • There are potential net benefits in the areas of a more tailored immigration policy, the freedom to make trade deals, moderately lower levels of regulation and savings to the public purse. In each of these areas, we do not believe that the benefits of an exit would be huge, but they are likely to be positive. • Meanwhile, costs in terms of financial services, foreign direct investment and impacts on London property markets are more likely to be short-term and there are longer-term opportunities from an exit vote even in these areas • We continue to think that the UK’s economic prospects are good whether inside or outside the EU. Britain has pulled ahead of the EU in recent years, and we expect that gap to widen over the next few years regardless of whether an exit occurs.
This is a very even-handed report that paints a more nuanced picture than most others and avoids any extreme or confident predictions. It speaks more generally about the potential impacts of leaving rather than analysing specific exit strategies. Whilst this means it does not get bogged down in detail, it also means some specific arguments or risks are perhaps not fully considered. Overall, the full report provides a good overview of the current and potential future situations across the topic areas, it never feels as if it is preaching to one crowd or another and avoids overly speculative or bold claims.