18

The Not-So-High Costs of Brexit

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.

Other factors will also cushion the blow of Brexit. Over the last two decades, the UK has transformed its economy to foster unprecedented specialization in services. In the mid-1990s, goods exports were three times as important as services exports, and the majority of British exports went to the EU. Nowadays, the UK exports mostly services – and mostly to non-EU markets.