Brexit: What happens if the UK leaves the EU?

In the second of a three-part report on the practical implications of a vote to leave the European Union, Andrew Grice looks at what might happen in the year or two after the UK has ceased to be a member of the EU

Andrew Grice
Friday 24 June 2016 07:48
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You need to weigh up the financial risks of a vote for Brexit or Remain
You need to weigh up the financial risks of a vote for Brexit or Remain

Those who campaigned for Brexit would hail it as “independence day,” the historic moment when the UK escaped the EU’s shackles and could realise its full potential as a thriving economy with unfettered access to the 80 per cent of the world not covered by the single market.

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But the public, especially those who had voted to leave the EU, would be looking for early evidence of the “Brexit dividend” promised by the Leavers during the 2016 referendum. The short-term economic turmoil might have calmed by the time we formally ceased to be an EU member, but voters hoping to see an immediate lift-off might be disappointed.

Paradise postponed?

The key to economic success would lie in the trade deals the UK could strike with the rest of the world. The disruption for British business could last well beyond the time taken to reach a divorce settlement with the EU (which is expected to take at least two years). Trade agreements between the EU and 52 other countries, which currently cover the UK, would have to be negotiated individually and could not just be lifted off the peg, as some Brexiters have claimed. The Government would seek to secure a “presumption of continuity”.

One problem would be a lack of capacity and expertise in the civil service on trade talks, because they are currently handled by the EU. Another delay could be caused by the EU insisting that its new trade deal with the UK be negotiated after the exit agreement. That could delay the EU-UK trade deal until 2021. Those who campaigned for Remain would say they were right to warn of a “decade of uncertainty”.

The moment Britain officially voted to leave the EU

How would non-EU countries treat the UK?

A Trump presidency could be beneficial to Britain in the event of Brexit

Foreign direct investment could fall without guaranteed access to the EU single market, putting UK jobs at risk. If we were still the fifth-biggest economy in the world and had not suffered a big shock after a Brexit vote, countries like America, China and Canada might consider a trade deal. But these countries are already negotiating with the EU and so, as Barack Obama warned, Britain could go to the “back of the queue”. However, America’s stance could depend on whether the Democrats or Republicans were calling the shots. Eleven Republican members of Congress have said the UK would be at the front of the line. Donald Trump, who backed Brexit, might speed things up if he has beaten Hillary Clinton in the race for the White House.

The UK Government would hope to secure trade deals with non-EU countries within two years. But negotiations could drag on for much longer. The EU’s agreement with Canada took seven years and is still being ratified. A deal with China could prove double-edged: while the UK could sell more to it, we might suck in cheap imports that damaged our firms.

With one bound, would we be free?

If the UK reverted to World Trade Organisation rules, as some Leavers advocate, then British exporters would face tariffs – for example, 10 per cent on cars made in the UK. It could be another long journey, causing more uncertainty. The Treasury calculates that our economy would be 7.5 per cent smaller by 2030 if we adopt this option, due to higher tariffs and restricted access to markets. But the Out camp says Treasury assumptions are based on downsides with no upsides such as new trade deals.

Some ministers might be tempted by the idea floated by Patrick Minford, one of the small band of economists backing Brexit, of the UK unilaterally removing all trade barriers. But others would be cautious: Minford conceded that it would almost certainly kill off our remaining manufacturing industry.

The pound in your pocket

If the pound continued to be weak, Brexit could boost exporters, but it would mean higher costs for companies importing raw materials – and British travellers abroad. House prices could fall, or at least rise more slowly than expected, which many would say would be no bad thing. However, higher inflation could cause the Bank of England to raise interest rates if we had emerged from a short post-referendum recession, which would push up mortgage payments.

Whatever happened to that cut in immigration?

Many voters who backed Brexit in 2016 did so to bring down immigration and so many eyes would be on the figures. Leading Brexiters would be desperate to bring down net migration through an Australian-style points system. But the two-thirds cut in EU migration predicted by some experts might be tempered by allowing more skilled migrants from Commonwealth countries like India.

What did we do when we got our money back?

Ministers who campaigned for Brexit would be under strong pressure to deliver swiftly on their promise to give the NHS £100m a week and scrap Vat on fuel bills. But unless economic growth returned quickly after Brexit, the public finances could worsen and there could be many other calls on the £8bn saving from our annual EU contribution. Even if an “NHS dividend” emerged, it might not prove enough to prevent serious problems in health and social care.

Brexit in the City

In the medium term, the City of London could lose business to rivals such as Paris, Frankfurt and Dublin. Some City firms could move out of the UK rather than wait to see what new relationship is forged with the EU. Banks would be most affected, but hedge funds and private equity companies might thrive without the threat of EU regulation.

A silver lining could be that any decline in the City could lead to a more balanced economy – provided we invested in skills and helped manufacturing.

But we might not be able to afford that if the economy were still struggling.

Pulling up the drawbridge?

In the new post-Brexit era, the UK might want to show the rest of the world that it had not retreated into isolationism, and is still totally committed to NATO and the United Nations. There could be pressure to spend more on defence and take a pro-active stance in world troublespots, although intervention has become more problematic since the Iraq War. The Foreign Office would have to work hard to prevent Brexit reducing our clout on the world stage. It might be harder to work with EU countries on issues like Syria, Russia and Iran and unexpected crises. The US President might pick up the phone to the German Chancellor before the British Prime Minister.

Breaking up is easier to do

One consequence of Brexit could be the break-up of the UK. If a majority of Scots backed Remain but were outvoted by England, there would be pressure for a second independence referendum so that Scotland could keep its place in the EU. Nicola Sturgeon, Scotland’s First Minister, would negotiate directly with Brussels about keeping Scotland in the EU club. Alex Salmond, the former SNP leader, envisages a referendum within three and a half years of Thursday’s vote. Ms Sturgeon is more cautious: she wants another bite at the cherry only if she is confident of winning, as another No vote would kill the issue for a very long time.

The UK’s relationship with Ireland might come under strain. Sensitive issues include border controls between Northern Ireland and the Irish Republic to stop EU migrants entering the UK, and the possible impact of Brexit on the Northern Ireland peace process. The law of unintended consequences might still apply after Brexit.

The EU referendum debate has so far been characterised by bias, distortion and exaggeration. So until 23 June we we’re running a series of question and answer features that explain the most important issues in a detailed, dispassionate way to help inform your decision.

What is Brexit and why are we having an EU referendum?

Does the UK need to take more control of its sovereignty?

Could the UK media swing the EU referendum one way or another?

Will the UK benefit from being released from EU laws?

Will we gain or lose rights by leaving the European Union?

Will Brexit mean that Europeans have to leave the UK?

Will leaving the EU lead to the break-up of the UK?

What will happen to immigration if there's Brexit?

Will Brexit make the UK more or less safe?

Will the UK benefit from being released from EU laws?

Will leaving the EU save taxpayers money and mean more money for the NHS?

What will Brexit mean for British tourists booking holidays in the EU?

Will Brexit help or damage the environment?

Will Brexit mean that Europeans have to leave the UK?

What will Brexit mean for British expats in Europe?

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