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The Economic Consequences of Brexit

Many in the UK claim that, outside the EU, their country could quickly negotiate a bespoke agreement with the EU that offers all the benefits of membership and none of the costs; strike better trade deals with other countries; and reap huge benefits from scrapping EU regulations. These arguments border on delusion.

LONDON – Those campaigning for Britain to exit the European Union claim that doing so would make their country both freer and richer. They assert that after “Brexit”, the UK could quickly negotiate a bespoke agreement with the EU that offers all the benefits of free trade without the costs of EU membership; strike better trade deals with other countries; and reap huge benefits from scrapping burdensome EU regulations. But this is a delusion.

In fact, Brexit would entail big economic costs for Britain. The uncertainty and disruption of drawn-out and doubtless acrimonious divorce proceedings would depress investment and growth. Permanent separation would reduce trade, foreign investment, and migration, hurting competition, productivity growth, and living standards. And “independence” would deprive Britain of influence over future EU reforms – notably, the completion of the single market in services – from which it would benefit.

The London School of Economics’ Centre for Economic Performance calculates that the long-term costs to Britain of lower trade with the EU could be as high as 9.5% of GDP, while the fall in foreign investment could cost 3.4% of GDP or more. Those costs alone dwarf the potential gains from Brexit. Britain’s net contribution to the EU budget amounted to only 0.35% of GDP last year, and scrapping EU regulation would bring limited benefits, because the UK’s labor and product markets are already among the freest in the world.

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