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Analysis
EU exit's colossal cost to UK economy

EU exit's colossal cost to UK economy

Long-term decline, not short-term crisis, is core problem for Brexit Britain

by Joergen Oerstroem Moeller in Copenhagen

Tue 26 Jun 2018

Infighting among the Conservatives has forced UK Prime Minister Theresa May into negotiations with various people and factions that all hold differing and seemingly irreconcilable views on Britain's exit from the European Union. May has reached the point where she is making contradictory commitments, and any semblance of consistency was lost long ago under the weight of these blurred promises.

The problem is not whether a contender will challenge May for leadership of the Conservative party or if a general election will be called. The problem is that Britain has become ungovernable. Members of parliament are opting for turf fighting and stubborn pursuit of policies without regard to national interests. This state of affairs will spread to practically all major political questions. Last week's turmoil in the Conservative party about how to finance an extra £25bn in funding for the National Health Service by 2023 and May's request that her defence minister justify Britain's status (and expenses) as a 'tier one' military power are dark omens.

Before the Brexit referendum in June 2016, Britain's economic growth was considerably higher than that of the euro area. Now it is the other way around, with no prospects for reversal. Despite the Remain camp's proclamations before the referendum on Brexit's short-term negative impact, this is not the core problem. Brexit will lead to gradually falling investment, which will depress productivity, competitiveness, employment and economic growth. Car manufacturers – most recently BMW – say they may stop investment unless the government guarantees free access to the EU single market. Around 140,000 people are directly employed in automotive manufacturing in Britain. Last week, Airbus announced it would 'carefully monitor any new investments in the UK and refrain from extending the UK suppliers/partners base' if no deal was reached. Airbus operations account for 100,000 British jobs.

Accumulated over several years, the costs will be colossal. An estimate using International Monetary Fund data points to UK GDP in 2030 being almost 12% lower if UK growth continues to run below euro area growth until that time. The Centre for European Reform estimates the British economy is already 2.1% smaller because of the Brexit referendum.

Two years after the referendum, there is still no clear picture of how the UK views its future relationship with the EU. The Leave vote was imposed on a considerable majority of MPs who would have preferred to stay in the bloc but have the unenviable task of turning the electorate's decision into reality. The same majority supports a close relationship with the EU through some form of customs union, perhaps even access to the single market, but is stymied by minorities in both major parties. It would be a miracle if the UK secures a Brexit solution that majorities in both the electorate and parliament support while avoiding revolts in the Conservative and Labour parties.

If, somehow, a miracle does happen, it will be because May has sidled up to form a compromise while devoting little attention to the EU's position. This is risky, to say the least. A compromise among the various political factions in Britain could prove so finely tuned that it cannot be renegotiated if the EU upsets the balance. Going back to form a new agreement inside Britain would, simply speaking, not be possible.

Joergen Oerstroem Moeller is Senior Research Fellow, ISEAS Yusof Ishak Institute, and a former State Secretary at the Danish foreign ministry.

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