Brexit has been a very frequently mentioned topic lately. UK is very likely to exit EU in the next few years as long as Cameron keeps staying strong in British political circle. It is very controversial that should UK insist to leave EU. But according to most of the people, this is not a smart move. UK might suffer from significant reduction in incomes, major slump in trade and investment. Brexit will also hurt other EU countries, which have close tourism and financial links with UK such as France, Germany, Italy, Malta, Cyprus and Luxembourg.
It is concerned that UK will experience a sudden outflow of money after Brexit. This will raise UK’s current account deficit of 5% of national income hard to finance. In that case, it requires a higher risk premium on the tremendous capital inflows to finance the deficit, which will result in an immediate fall in sterling and the price of UK assets.
Other economists have totally opposite ideas. They believe that investment will fall in the wake of a bumpy exit from EU. This will result in continuous slow growth and further affects GDP and this dampening effect on investment will last for couple years.
Brexit will also cause a big clampdown on immigration from EU and cut and already limited supply of skilled labor, which will lead to lower potential growth, lower consumer spending, and weaker investment growth. This will further affect government budget, and result in higher taxes or lower public spending.
Currently, 90% of UK’s trade with Europe is in goods and both UK and EU benefit from the free-trade agreement within EU countries. Brexit will bring harmful effects to both parties with higher tariff and trade barriers. What is more, EU and UK will become competitor instead of partners when it comes to priority of trade deals with other countries. Not even mention the time that they will spend on reaching all of the new trade agreements and the adjustment period follow after. It is obvious that, in short term, Brexit will bring only a whole lot of mess to British economy.
To be more precise, economists divide Brexit to three scenarios: soft exit, deep cut, and isolation. In soft exit scenario, UK remains European free trade association, non-tariff barriers, and tariff-free trade with EU. In the second scenarios, UK will remain the bilateral trade with US, tariff and non-tariff barriers. This will retain some access to the European single market, which is similar to Norway and Switzerland. In the third scenario, UK will lose privileges arising from EU’s 38 existing agreements with other countries as well as negotiations and loses in barrier-free access to continental trade and to countries with that EU has ratified free-trade agreements. However, both UK and EU will experience from various extent of economic damage even in the best case.
Hence, Brexit is not a good solution for UK to improve its current economic situation. It will hurt both UK and other EU countries in trade profit and domestic economy even UK applies a soft exit. The damage will persist in long term as well as short term.