gros89_Thomas Lohnes_Getty Images_brexit economy

The Not-So-High Costs of Brexit

Sep 8, 2016 Daniel Gros

Beyond a weaker pound and lower UK interest rates, the British vote to exit the EU has not had a lasting economic impact. In fact, thanks to the economic transformation that the UK has undergone over the last 20 years – in part, driven by the country's EU membership – the economy may well be able to dodge the Brexit bullet.

BRUSSELS – The United Kingdom’s vote to “Brexit” the European Union is on course to become the year’s biggest non-event. Beyond a weaker pound and lower UK interest rates, the referendum has not had much of a lasting impact. Financial markets wobbled for a few weeks after the referendum, but have since recovered. Consumer spending remains unmoved. More surprising, investment has remained consistent, despite uncertainty about Britain’s future trade relations with the EU. Have the costs of Brexit been overblown?

Not exactly. In fact, the UK may well end up losing the predicted 2-3% of GDP from Brexit. But it is the exit from the single market, not the initial vote to leave, that will bring those losses, and that may happen over a long period. If the exit turns out to be a ten-year process, the losses would be borne gradually over that period, costing the UK about 0.2-0.3% of GDP per year, on average.

This could be very good news for the UK. With a weaker currency, the country will benefit from an increase in export competitiveness that could offset those incremental losses and the transient investment weakness that is likely to arise.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Already have an account? Log in

Support High-Quality Commentary

US President-elect Joe Biden may have promised a “return to normalcy,” but the truth is that there is no going back. The world is changing in fundamental ways, and the actions the world takes in the next few years will be critical to lay the groundwork for a sustainable, secure, and prosperous future.

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world’s foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Subscribe Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 18 in all 18 Comments on this article

Violeta Campos Sep 20, 2016

It is surely a great thing to say that the UK can count on more important exports to non-EU countries than EU members, but we are forgetting that other economic zones in the world, here talking about Asia mainly, often use the UK as a platform to access the common EU market, or simply to trade with the EU as a whole. Wouldn't the UK loose that? Or is this 7% of GDP in goods exports concerning the UK only ?
A new reply to this comment has been posted.
Barry Rosenfeld Sep 14, 2016

The British have relied on financial services and "invisible exports" for far too long. The balance in invisibles offset the deficit in goods prior to WWI. The attempt by Churchill to re-establish British dominance in finance led to the prolonged slump in Britain during the 1920s. The more recent excessive reliance on invisible exports, therefore, is not new and has continued the lack of balance in industrial, regional and occupational opportunities and returns.
A new reply to this comment has been posted.
John Reid Sep 12, 2016

Brexit hasn't actually happened yet, so pontificating on the outcome may well be a bit previous at this stage in the game. In any event S&P thinks the author may well be wrong (he's rather forgotten about the countries dependence on services, and their continued health rather depends on the maintenance of the so-called Passport). He should read http://uk.reuters.com/article/uk-britain-eu-s-p-idUKKCN11I10A
A new reply to this comment has been posted.
M M Sep 12, 2016

It is the blind leading the blinds once again in our human history. For a start why are people talking about Brexit when such an event has not even occurred yet? To speculate about a specific set of circumstances based on this or the other scenario is utterly irrelevant. The U.K. Is uncompetitive, very expensive, heavily regulated, overburdened by vested interests from all walks of life, highly political, overseen by inefficient and incompetent civil service who have outsourced many of their services to even less efficient, less competent and more expensive parties / consultants. The current leadership of the country is playing politics and dealing with soft issues instead of dealing with the main issues such as eliminating all red tapes, assuming accountability and responsibility for its policies, creating real jobs and security, real growth and economic prospects, less inequality, in brief it is just a big mess. Trade agreements and any Brexit arrangement will take years to finalise, if at all, since events and always events will occur to take matters off their planned course. Therefore, politicians, financial authorities, economists, advisers, etc. must focus their attention on developing policies to create jobs and growth and nothing but.
A new reply to this comment has been posted.
S Sam Sep 12, 2016

The costs of Brexit have been overblown in the short term by experts predicted loss of confidence and recession in short order which has not materialised.

Also PwC said the EU vote has created a “major opportunity” for the financial services sector in the capital to “work with regulators, investors and clients in order to shape a new rulebook to fit for the new climate”. While the author appears to paint a negative outcome of Brexit long term?
A new reply to this comment has been posted.
Mia Mikic Sep 12, 2016

Source of data? Does it include services bounded in goods?
A new reply to this comment has been posted.
j. von Hettlingen Sep 11, 2016

Daniel Gros maintains that Britain will have to rethink "its growth model" ahead of its negotiations with the EU. Regardless of Britain's "future trade relations" with the bloc, it would be wise to revive the manufacturing sector, which has been suffering decline in growth of domestic orders coupled with falling exports. On the other hand financial services boom, and they "account for about one-third of Britain’s total services exports and two-thirds of the overall services surplus that the UK needs to pay for its deficit on goods." The industry’s "success" has Britain's EU membership to thank for.
According to the author it is still too early to assume that the costs of Brexit might have been "overblown," given the financial market's recent recovery from turbulences and a weak pound. Despite news that "consumer spending remains unmoved," and "investment has remained consistent," Britain may still brace itself for an uncertain future. Even though many supporters of Brexit welcome a weaker currency, saying "the country will benefit from an increase in export competitiveness that could offset those incremental losses and the transient investment weakness," exports of manufactured goods had slumped since the mid-1990s, giving way to exports of services - "mostly to non-EU markets."
But what makes London one of the world's financial hubs is "the specialization of the UK economy and its external accounts toward financial services (and services in general)," which took off "when capital movements were liberalized under the internal market program of the 1990s. It was accelerated with the introduction of the common currency, which, combined with the elimination of obstacles to cross-border capital flows and a global credit boom, fostered the concentration of many types of wholesale financial services in the City of London." It explains why the majority of voters in London reject Brexit.
The author says "most of the advantages that have made London into a financial-services hub will remain even after Brexit," and this sector "could therefore survive." However it is "unlikely that it will maintain its previous vigor." What he finds a paradox is that "one of the major economic benefits of the UK’s EU membership led the British to reject the project." While the financial-services industry contributes significantly to Britain's economic growth, it has also led to a "rising income inequality." Unlike the manufacturing sector the financial services industry creates "few, but very highly paid jobs" - an anathema that has fueled "the widespread frustration with globalization" and the political and finanical eltes, which ultimately "carried the Brexit campaign to victory."
The question is whether Britain can manage a rebalancing of growth by means of "economic changes that Brexit will necessitate" in order to "produce the benefits for British workers that the “Leave” campaign promised." If not "the long-term cost of Brexit might turn out to be substantially higher than current estimates."
A new reply to this comment has been posted.
Enrique Titos Sep 11, 2016

The author seems to believe than simply moving to the continent through subsidiaries will allow to retain value in FS. But UK FS based in EU shod be subject to EU rules, for example regulator will no longer be the FCA/PRA or the BoE. The potential loss of passporting from London cannot be solve that easily - EU countries will not tolerate it - and is a major question mark for UK based FS.
A new reply to this comment has been posted.
JAMES BECKMAN Sep 11, 2016

Really useful comments. My input is as one raised in Silicon Valley, with 14 yrs in Central Europe doing global business/tech & profing much of it: 1) China & Germany are the two world champions in world trade, imports + exports, telling us that a lot of what is exported comes in part from imports such as components for Apple phones in China or for German autos finally assembled in Germany from components mostly from the Eastern EU.
This tells us that both tariffs & exchange rates matter; 2) Bankers make so much money that they support many others. I have lived near New York; 3) Mfg is critical as a value- added process, but as suggested above a large portion of the value can arise from imports; 4) Lots of nations love their tariffs as the UK will shortly find. Bottom line: it's a tough, tough world. Talk to the people who fly internationally more than a hundred days a year. Oh, but it's a learning experience....
A new reply to this comment has been posted.
John Ellis Sep 11, 2016

Actually it's the huge service element of the British economy that makes it much more vulnerable to Brexit. The most obvious example is the financial industry but there are others. Without those city passports London is going to be in serious trouble. It's the major Achilles heel in the British negotiating position and the main reason why they are almost certainly likely to accept EU demands for free movement in return for access. The city contributes about 13% of British tax revenues and if you take into account the accumulator effect of all that internal spending by the industry and its employees the effect is far larger. London as whole contributes a third of all UK tax revenues and it's basically a huge service machine driven by the city and tourism (which incidentally is also heavily dependent upon migrant labor). Nothing really has happened so far apart from a 12% devaluation, an emergency package from the Bank of England, and almost certainly a lot of stalled investment (we have no reliable numbers yet). Recovery in financial markets is arbitrage in response to the devaluation. Meanwhile confusion seems to reign in Whitehall. The author may well be right that there are no high costs of Brexit because ultimately Brexit may be more apparent than real.
A new reply to this comment has been posted.
John Stanham Sep 11, 2016

At last we see an expert who begins to get it. Experts, intellectual elites have failed to recognize that Brexit was not an economic decision, but rather a political one with big economic implications.
The difference is not minor. The English did not vote against an economic model but rather a political model. The world cannot live without the UK and vice-versa. Nobody believes that the path will be easy, cheap or painless, including the growing likelihood of the dismemberment of the UK.
A new reply to this comment has been posted.
Anold Man Inthe Sep 11, 2016

It's way too soon to be writing such an article, unless you think that markets are efficient in processing info, and never overreact to news...which I don't.
If check the fall in the pound immediately after the brexit referendum, there was a correction afterwards... Also, article 50 hasn't been activated, so no consequences have taken effect. Just wait and until the proper negotiations start. The market seems to be dormant, and wishfull that it won't have severe consequences to UK economy, but it will. Germany and France will make sure of it, otherwise the Euro will be lost.
A new reply to this comment has been posted.
Edward Laxton Sep 10, 2016

"The fact that the UK now relies more heavily on access to world markets than on access to the EU’s internal market surely contributed to the Brexit vote".

Does the author really believe that a significant number of voters understand UK trade flows? Opinion polls would suggest otherwise.

Second, his comment on rising income inequality ignores the fact that the Gini coefficient has been broadly flat since 1990.

Maybe the rest of his observations are correct.....
A new reply to this comment has been posted.
jagjeet sinha Sep 9, 2016

ENCHANTMENT AND DISENCHANTMENT
In the mid 1990s, "Goods exports were three times as important as Services exports, mainly to EU".
The fact that UK now relies more heavily on access to World Markets, surely contributed to Brexit.
Engagements with Europe always leads to decline in UK manufacturing - in the 1880s, Britain was the World's largest workshop.
While the specialization in Services is laudable, the capacity to manufacture is at the core of Countries that count.
Germany in Europe, both in the 1880s and 1990s, leapt to the forefront - on the bedrock of manufacturing.
Japan, in the 1880s during Meiji and in the 1960s post-war reconstruction, leapt to the forefront - on the bedrock of manufacturing.
China, in the 1990s and now, leapt to the forefront - on the bedrock of manufacturing.
The author's inferences on the decline in manufacturing during the periods of Britain's engagements with Europe, sound specious.
In fact, the hollowing out of manufacturing was accompanied by unfettered Migration from Europe during the same period.
Not surprisingly, Britain's capacities to absorb the unfettered EU Migration contributed conspicuously to Brexit.

Eschewing the embrace of Europe, perhaps freed Britain to pursue Greatness as never before in history.
After Brexit, reverting back to its route to historical greatness perhaps will enable revalidation of that truth.
The Anglosphere always the anchor that should never have been downplayed in its enchantment with EU.
Democracy - and Brexit - May have saved Britain yet again.
- John Brian Shannon Sep 9, 2016
  
  Hi Jagjeet,
  
  Very well said, as always.
  
  It's important for every country to have at least some manufacturing base. Especially one with such a proud history (Industrial Revolution and everything since) in manufacturing.
  
  As you correctly pointed out, Great Britain was the world's largest workshop and the term 'Bristol finished' (supreme craftsmanship) meant that any manufactured piece was the best that could be bought for any price, anywhere in the world.
  
  While other parts of the world can certainly produce things more cheaply, there are things that Britain can create a need for, design, engineer, manufacture, and market, and 'cheap' isn't a word that should be associated with those items.
  
  When we think of Aston Martin cars, Range Rovers, rudders for Airbus aircraft, etc. we don't want the cheapest -- we want the best that money can buy.
  
  The Koenigsegg supercar is one example of what Britain should've been doing all along.
  
  http://koenigsegg.com/
  
  If Britain can lock onto the specialty and luxury items, like premier cars, yachts, personal aircraft, and (for example) sporting goods (I always wanted a matching colour Raleigh bike and Triumph motorcycle!) then it can succeed in capturing a market based on reputation for Bristol finished quality and bespoke items.
  
  I always enjoy your brilliant comments.
  
  As always, very best regards, JBS
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Jose araujo Sep 9, 2016

LOL, now the predicted losses were gross losses...

This will be a big blow on free trade fundamentalists, gold buggers and the likes. We will see that the benefits of the EU are not that big and can be replicated with much less hassle than allways following Brussels regulations.
A new reply to this comment has been posted.
Robert Pringle Sep 9, 2016

1.The title does not reflect the conclusions of this article: : "if the country doesn’t manage such a rebalancing, the long-term cost of Brexit might turn out to be substantially higher than current estimates."
2. Professor Gros says the UK will have to change its growth model "proably through a modest revival of manufacturing". Why? Economies should specialise where they have a compaative advantage; the UK has a revealed comparative advantage in services, not manufacturing. That is where official policies should focus.
3. Non financial commercial services play a cetral role in th UK's success in services: excluding banking, transport and travel, it runs surpluses with every country in the world except India. It needs to ofset any reduction in earnings from finance by building on its stunning success in education, health, engineering, creative sector, architecture, legal services etc..
Robert Pringle
Robert Pringleconsultancy,legal,
A new reply to this comment has been posted.
John Brian Shannon Sep 8, 2016

Hi Daniel,

'There is more than one way to skin a cat' as they say, and bringing new startups to Britain is one of the ways to increase investment in the UK economy.

In fact, things have been progressing on that front for some time with London overtaking Berlin for the largest share of startup investment in H1 2016.

“Berlin has long been jewel in the crown of Europe’s startup scene. Startup investment has flowed into the German capital for years but according to research from Ernst & Young, other European cities are providing it with stiff competition.

Berlin saw a huge year on year decrease in startup investment volume from H1 2015 to H1 2016 to see its crown slip as startup capital of Europe.

In its place is now London, with 1,320 million euros of investment in the latest half year – an increase of 289 million over the same period in 2015.” — Niall McCarthy (Statista)

Nice chart of this here:
https://lettertobritain.com/2016/09/06/london-usurps-berlin-startup/

I'd also agree with you that a manufacturing boost would do wonders for the British economy. The more of that, the better!

Freed from EU constraints, it is just as likely that the UK economy will take-off and gain 0.2%-0.3% of GDP per year, on average. If it's done right.

And therein lies the whole story. If the UK government charts a visionary course, one that large numbers of Britons can buy-into, Britain will become all that it can and should be.

Thank you for posting your fine essay at ProSyn!

As always, very best regards, JBS
A new reply to this comment has been posted.