The Economic Impact of the United Kingdom Leaving the

European Union

Jackson Spivey, Ryan Delgado, Charlie McCubrey, Shaun Jameson, Joel Vastl

MGMT 585-01

The Global Economy

Professor Rick Trilling

8/5/13

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The Current Situation

The United Kingdom first joined the European Union (EU) in 1973. Recently however,

opinions over whether or not to stay in the EU have become more diverse and prominent. The

United Kingdom would be the first member state to ever leave the current European Union.

Much of this is due to the fact that before the Treaty of Lisbon, there was no provision in treaties

or law of The European Union outlining the ability for a member state to voluntarily withdraw

itself. The United Kingdom withdrawing from the European Union is primarily being pursued by

a group known as Eurosceptics. These Eurosceptics have the opinion that the United Kingdom

would flourish outside of this political and economic alliance.

The party by party break down is quite wide spread. The Conservative party features a

two/thirds bias in favor of withdrawal. The Labor Party does not currently support the

referendum at this time, but could be open to it in the future. The Liberal Democrats do not

support in/out referendum, and they believe the best interest is to remain with the European

Union. The United Kingdom Independence Party, The Green Party, and The British National

Party all support the referendum.

British Prime Minister David Cameron has a proposed solution stating that if there is a

Conservative Party majority in the2015 general election, he would negotiate new agreements

with the European Union, then hold a referendum on leaving or staying in the European Union.

Cameron is not necessarily focused on leaving the European, rather looking for a more ideal

situation, “Membership of the EU is crucial in guaranteeing Britain a seat at the “top table”.”

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Aside from the political party forefronts, there have been smaller third party campaigns

influenced by the referendum conundrum. Conservative James Wharton has drafter the Private

Member bill, which states the referendum, must be in place before December 31st, 2017. There

was the “Petition Campaign” where Nikki Sinclaire was able to secure 100,000 signatures in

favor of the referendum. There is also the Conservative campaign, “Let Britain Decide” which is

seeking a referendum on the EU relationship. Arguably the most important project is the Exit

Plan Competition which allows people to write in 2,000 word proposals to nine judges on a

preselected panel featuring former Chancellor of Exchequer Lord Lawson, who will select the

winning plan. The winner shall receive 100,000 Euros in 2014 upon the contests completion.

There is a lot of criticism of the referendum and withdrawing. The Obama administration

has made it clear to UK officials that this move would exclude the UK from US-EU trade and

investments, which is worth hundreds of billions of pounds a year. It is also worth noting the

Obama administration stated a separate deal with the UK is unlikely, whether there is some

validity to that threat is up for debate. This will be further explored later in this report. In order to

remain in the European Economic Area or European Free Trade Area, the UK would have to

remain implementing European Union Law relevant to this internal market, but no longer have

authority to influence its formation. There is much debate in regards to what the UK would do

once divorced from the EU. There could be strained relations and while the UK would have

more freedom, it could also be crippled with lesser resources. While Eurosceptics believe a

divorce with the EU would create a million British jobs, millions of jobs could be lost. Global

manufacturers dealing with the EU currently could be apt to moving for lower-cost countries in

the EU. It is believed that the UK’s large foreign owned car industry would move into the EU as

well. Companies such as Airbus could potentially move production to Germany and France.

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Background

Before examining the potential economic impact of the situation, it is important to

discuss the history and purpose of the EU and Britain’s role in the community. The European

Union is a group of 28 member states joined to create a unique, common political and economic

community throughout Europe. The European Union has a rich history and a unique

organization, both of which aid in its current success and its ability to fulfill its mission for the

21st Century (Briney). The 28 member states accumulate to the European Union consisting of

507,890,191 citizens. The European Union has no official capital and has no plans on making

one. However, Brussels, Belgium is considered to be the unofficial capital of the European

Union. This is because Brussels hosts the official seats of the European Commission, Council of

the European Union, and European Council, as well as a of the European Parliament. The euro is

the single currency shared by 17 of the European Union’s Member States, which together make

up the euro area. The introduction of the euro in 1999 was a major step in European integration;

around 330 million EU citizens now use it as their currency thus making it the European Union’s

official currency (The Euro).

Before the European Union was established, Europe was mostly controlled by violent

regimes such as the Roman Empire, Ottoman Empire, Nazi Germany, etc. These acts of violence

served as a precursor to the European Union. The EU was established after World War II in the

late 1940’s in an effort to unite the countries of Europe and end the period of wars between

neighboring countries. These nations began to officially unite in 1949 with the Council of

Europe. In 1950 the creation of the European Coal and Steel Community expanded the

cooperation (Briney). The original six nations involved in this initial treaty were Belgium,

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France, Germany, Italy, Luxembourg, and the Netherlands. However the European Union truly

did not become what it is today until 1993, when the Maastricht Treaty was implemented.

The Treaty on European Union (TEU), signed in Maastricht on February 7, 1992, entered

into force on November 1, 1993. This Treaty was the result of external and internal events. At

the external level, the collapse of communism in Eastern Europe and the outlook of German

reunification led to a commitment to reinforce the Community’s international position.

Internally, the Member States wished to supplement the progress achieved by the Single

European Act with other reforms (The Euro). The Maastricht Treaty was such an important

turning point for the European Union because it went outside the EU’s original economic

purposes. The Treaty’s five main goals were to strengthen the democratic legitimacy of the

institutions, improve the effectiveness of the institutions, establish economic and monetary

union, develop the Community social dimension, and to establish a common foreign and security

policy. These five main goals are the true reason why the European Union is what it is today.

The United Kingdom as a part of the European Union

The United Kingdom is one of the most essential entities to the overall function of the

European Union. Its sheer size alone makes it the important to the clout of the EU and its world

power. Boasting the 3rd largest population in the Union, the total number of people directly

correlates to political power. The country has the highest amount of council votes and therefore

the most influence in EU decisions. If there is anything that may be put up for vote, the United

Kingdom will have a significant say. While the United Kingdom is a staple in the European

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Union, they also are not all in. They do not utilize the Euro as their main source and form of

currency. The Kingdom’s main currency is the British Pound. The power of the pound several

years ago was way over the Euro, but now due to a slight recession in the economy it is lesser.

One Pound is equal to 1.15856 Euros. With the slight recession, the United Kingdom no has the

second highest GDP in terms of Euros at 2,054,000.

Since the United Kingdom joined the European Union in 1973 there has always been a

sense that they are sort of independent to the establishment. This belief stems down from

government along to the citizens. On the fact of whether to leave the EU, the country is still

incredibly split. There’s no set plan or group of people who want to go a certain route.

Eurosceptics do believe that there will be no issues with the UK economy if they leave (Peter).

They in fact believe that they will flourish outside and honestly thrive on their own. This fact can

be heavily debated due to the fact that 52% of trade is through the European Union (Peter). If

there is a withdrawal from the union, it’s hard to fathom a flourishing economy removing 52% of

its solid trade.

Impact on the United Kingdom

The United Kingdom leaving the European Union would have widespread effects on the

UK, the EU, the United States, and other countries around the world. Yet many of these effects

are difficult to exactly predict due to uncertainties in the exit strategy and post-breakup strategies

of both Britain and the EU. This is primarily due to the fact that much of the argument is based

on opinion, rather than solid fact. While there are some certain consequences and benefits, others

are based on pre-supposed new trade deals or lack thereof. The biggest unknown is the exact

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manner in which Britain would exit the EU. While many believe Britain could create a free trade

deal with the EU, similar to those of Switzerland and Iceland, others expect retaliation from the

Union, leading to tariffs and taxes on goods transferred between the UK and member states. In

terms of analysis at this point, the most beneficial thing to do is simply to present the few known

facts and the arguments put forth by each side.

One of the easiest and most concrete ways to examine the economic impact on both

Britain and the other EU member states is through subsidies. Subsidies in this case are defined as

financial assistance to producers in the form of cash payments, low-interest loans, tax breaks, or

product price supports (Wild). One of the primary benefits of the European Union is the high

diversity and magnitude of

subsidies for inter-state

commerce on products ranging

from sugar to wheat. Currently,

Britain loses about £8 billion

(around $12.2 billion) annually

through subsidies to EU

member states (Voyles). These

contributions to the EU equate

to about 0.6% of Britain’s GDP,

and while not massive, certainly

equate to a legitimate loss for the country (Voyles). On the other hand, Britain’s farmers would

lose £2.7 billion ($4.12 billion) in subsidies should their host decide to leave the EU (Voyles).

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While some of the gains from subsidies to the EU certainly could be used to help Britain’s

farmers, it is far from a guarantee.

Foreign Direct Investment

In terms of the direct economic impact on Britain, it is beneficial to look closely at two

important elements: foreign direct investment (FDI) and trade. FDI is the purchase of physical

assets or a significant amount of the ownership of a company in another country to gain a

measure of management control (Wild). While the practice is incredibly important for many

countries, few see a greater impact than Britain. In 2011, the UK was second only to the United

States in terms of inward FDI, with £770 billion (approximately $112 billion) pouring in from

countries around the world (Miller). The European Union and its member states is by far the

most important partner for Britain in terms of FDI. In 2011, 48% of inward FDI into Britain

came from EU member states (Miller). No other country, including the US, comes close to this

share.

So what sort of impact on FDI should be expected if indeed Britain did decide to leave

the European Union? The answer to that lies in how an important piece of information

discovered by Ernst and Young is interpreted; the 2013 European Attractiveness Survey revealed

that Britain is the most attractive location for investment in the EU (Ernst and Young). This fact

can be taken one of two ways. The first is that many businesses see the UK as the gateway to the

EU, and companies would be less likely to invest in Britain if it were not involved in the union.

Many, including various economists and research groups agree with this view. The National

Institute of Economic and Social Research, an independent British research organization,

estimates that investors, estimates that both foreign and from other EU states, would be turned

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off and decrease their investment in Britain (Chu). The group believes that largely due to this

decrease, the UK would experience a permanent 2.25% decline in GDP (Chu). German

conglomerate Siemens agrees, with Director of UK Operations Juergen Maier stating that

leaving the EU would cost Britain thousands of jobs and millions in further investment from his

company (Hall).

The other viewpoint on this hotly debated topic is that Britain would actually be even

more attractive for foreign direct investment if it left the EU. This thought group believes that

allowing the UK to negotiate its own trade deals, independent of the EU, would actually increase

FDI from both foreign and domestic sources. Capital Economics, a London-based economic

research consultancy, estimates that FDI in Britain would increase upon leaving the EU because

companies would see the country as a safe haven from the economic turmoil currently hampering

major growth in the EU. Additionally, although businesses like Siemens may suggest staying, 1

in 5 British businesses state that the EU is hurting their profits, and leaving would benefit their

bottom line (Vina). However, many of these thoughts appear to be based on the idea that either

Britain would able to negotiate individual trade deals, or tariffs would be low-enough to

downplay any foreign hesitation to invest in the country. Based on recent conversations, each of

these ideas are uncertain at best.

Trade

In addition to foreign direct investment, one must examine the potential effects on trade

in and out of the UK when discussing the economic impact of Britain leaving the European

Union. However, as mentioned earlier, determining the exact trade impact on Britain after

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leaving the European is incredibly difficult to predict due to the fact that no one truly knows

what sort of trade rules would apply. Currently, EU member states currently do not pay tariffs or

additional taxes on goods traded between member states. This allows for easy trade between EU

members and promotes the transfer of goods throughout Europe. However, if Britain left the EU,

these rules would no longer apply. Britain would be faced with a variety of options, as they

certainly would like to continue trading with EU member states.

One potential trade for post-EU Britain is to attempt to enter into a free trade agreement

with the union, similar to those of Iceland and Switzerland. This would allow Britain to receive

all the trade benefits of EU members, including tariff-free trade with member states, without full

EU membership. However, Britain would lose its ability to negotiate the terms of these

agreements. Subjecting itself to an agreement that it has no power to negotiate seems highly

unlikely. Additionally, the EU could enforce some sort of punishment if you will, and not allow

Britain to enter into this type of agreement. Although World Trade Organization (WTO) rules

have been created to prohibit this behavior, many legal experts agree that the union could skirt

these regulations to punish Britain’s exit (Miller). In the end, some sort of trade deal would be

reached, yet the exact terms could be less appealing to both sides than the current agreement.

The impact on trade agreements extends beyond the borders of the European Union. The

EU has negotiated free trade deals agreements with Mexico, South Africa, Chile, and South

Korea (Miller). Additional countries have also reached deals with the EU that have significantly

lowered tariffs and taxes on trade between the two. Should the UK leave the EU, it would

essentially have to start all over. Although many of these deals could be restructured, the process

is lengthy and lethargic. The time necessary for creating new deals could cost Britain billions in

trade both in and out of the country.

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As mentioned, regardless of what happens between Britain and the EU, both sides both

sides both desire and need to keep trading with one another. The European Union is Britain’s

most important trade partner. In 2012, 51% of British imports came from EU members (Miller).

Likewise, 48% of its exports went to EU states (Miller). Additionally, these trade deals,

especially the exports, have been credited from moving Britain’s economy from recession to its

more stable current state. Sir Iain Begg, a professional research fellow at the European Institute

of the London School of Economics, states that the export sector supports more than 3 million

jobs (Chu). Begg also believes had the country exported less in the late 2000’s, Britain could still

be stuck in recession (Chu). Clearly these trading partners are essential to one another, and

regardless of the deal, trade would continue between Britain and the UK. Yet the size and

magnitude of these transactions could easily fluctuate, in either direction, should Britain decide

to leave the European Union.

Foreign Impact

The impact on trade additionally expands well beyond the borders of the European

Union, all the way to the United States. Negotiations have begun between the United States and

the European Union on the Transatlantic Trade and Investment Partnership (TTIP). Currently,

the US and EU attach a 3-5% tariff on goods exchanged between the two (Borger). If completed,

TTIP would eliminate all or almost-all of these tariffs and would become the largest trade

agreement in world history. Although final terms are far from certain, TTIP is estimated to bring

£10 billion ($15.3 billion) annually to the British economy alone (Borger). Estimates expect a 1-

2% jump in GDP for all parties, hopefully enough to help kick start not only the US and EU

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economies, but the rest of the world (Borger). However, the administration of US President

Barrack Obama has warned Britain that they would be left out of the deal should they choose to

leave the EU. The administration states that completing this deal is the top priority, and there is

no real desire to create a secondary deal with Britain should they indeed go through with leaving

the European Union. Unfortunately, excluding the UK could completely derail the deal

altogether. It appears as if there is little support for the deal in the United States Congress if

Britain is not involved (Borger). Obviously, while the UK-EU debate may seem to relate only to

Europe, the potential effects will be felt across the globe.

If the UK were to leave the EU it would not only effect the EU but it would have a huge

impact on other countries outside of the EU. One country that would be affected if this was to

happen would be China. Another country that would be affected by the UK leaving would be

Japan. Both of these countries have huge involvement with both the EU and more importantly

the UK.

Last year, China invested £8billion in the UK which is a substantial amount of money

(Kirkup). With this said, recently relationships have become rocky between the two parties after

the UK hosted the Dalai Lama. This meeting infuriated Chinese government officials because of

the hatred they have for the spiritual leader. Since the Britain is still part of the EU china

continues to trade things with them because of the buffer zone that has been created with the EU.

If the UK were to leave the EU, trading between the two parties could be threatened and

potentially ended by one of the parties. If this were to happen, both sides would feel the effect of

the withdrawal and the billions of pounds invested between the two could be no more. This

example shows how the decision whether to leave or stay no only effects the EU but can also

effect a power house country such as China.

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Another country that will also be affected by the UK withdrawing from the EU would be

Japan. Japan looks at Britain as a gateway to the European market. Japanese firms are often very

attracted to this gateway and take full advantage of the opportunities that are offered by the UK.

There have been more than 1,300 Japanese companies who have invested in the UK (BBC).

These companies have created more than 130,000 jobs in the UK which ranks at the top of the

list when looking at the European market (BBC). If the UK decided to leave, it would put

thousands of jobs at risk and could potentially ruin the relationship between the parties.

Immigration

One potential consequence that is often overlooked in this debate is the immigration

factor between the UK and EU nations. If Britain were to leave the EU, the British Government

would not be required to permit the free movement of all citizens from the 27 nations of the EU

into Britain. This would

also be a factor for those

who immigrate to the UK

for work. The possibility of

work being prevented in the

UK would have a huge

impact on all types of

people. Since soccer is the

most popular sport in

Europe, players from an EU nation might not be able to play soccer in the UK. If Britain did

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decide to leave the EU, the EU could potentially close all of its borders to the UK which would

have a big impact on the UK citizens. Britain citizens would have to try and get a work permit in

order to leave their country and work in an EU nation. These citizens vary from athletes to

business people.

Another result of the UK leaving the EU would be that students would be at risk. Since

the UK is currently a member of the EU, Britain students get a discounted rate to travel to

another EU nation to go to school. With that said, prices of tuition could increase drastically

which could limit some students from leaving the UK for schooling. To put into perspective of

how important immigration is between Britain and the EU, 165,000 EU citizens migrated to the

UK in the year of September 2011 (Chu). The previous year 182,000 EU citizens migrated to the

UK. These two years alone show that the migration between the UK and the EU is

extraordinarily important for the EU (Chu). When looking at the migration statistics of Britain

citizens moving to an EU nation, the number was far less. In the last two years, there have not

been more than 50,000 UK citizens leaving their country each year (Chu). The total number of

EU citizens that live or work in the UK is 2.3 million, where there are only 1.7 million Brit’s that

live in the EU (Voyles). These numbers put into perspective just how many more EU nation

citizens migrate to the UK compared to British citizens migrating to EU nations each year and

total. Some argue that the withdrawal from the EU would stop the flow and would improve the

quality of life because there would be less strain on public services and infrastructure, while

others disagree and think development and innovation would be hindered (Chu).

A survey was taken by many UK citizens and 65% percent of the people believed that the

immigration factor was the top reason to why Britain should leave the EU. This survey shows

that it’s not only government officials that have the mindset of a withdrawal from the EU could

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benefit their country as a whole (Chu). Overall, the immigration factor between the UK and the

EU would have a huge effect on both parties. The potential consequences could cause millions to

lose their jobs, houses, and much more.

Impact on the EU

So far, this paper has only examined the impact of Britain leaving the European Union

through effects on the UK. Yet it is also important to discuss the potential impacts on the union

itself, should Britain decide to secede and return to complete independence. First, it is important

to look back at some of the primary goals of the European Union: Unity, continuity, and the

creation of a world power that puts the interests of Europe first. With Britain leaving the EU,

some of these goals would be put in jeopardy. Although clearly not the sole member, Britain is

one of the flagship states of the European Union.

The argument over whether or not the EU could survive and thrive without Britain is

rooted in history and pride. One must remember that the United Kingdom has never completely

bought into the idea of the EU. Though one of the most powerful countries throughout European

history, Britain did not fully join the EU until 1973. Even after joining, Britain has long been

thought of us arrogant and too close to Washington to ever function as a fully invested member

of the union (Speck). Financially, the European Union could easily survive without Britain. The

EU would still contain the world’s fourth, fifth, and eighth largest economies in Germany,

France, and Italy, respectively (United Nations). Trading would continue between Britain and

EU member states, due to the fact that, as previously discussed, each is such a valuable trading

partner to the other. Yet Britain remains an essential element for the union, especially in

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international negotiations. Without Britain, the EU would lose a significant amount of

international power. If the EU wants to keep its rising stock as a world-power, significant enough

to challenge the likes of the United States and China, it must find a way to keep Britain as an

engaged, active member.

Feelings on the place of the UK within the EU are relatively mixed. While most would

like Britain to stay in the union, many are not willing to bend over backward to British demands

for the sole reason of keeping the UK involved. French President Francois Hollande recently

stated that “Europe existed before Britain joined it” (Samuel). The comment was in response to

British Prime Minister David Cameron’s remarks guaranteeing a vote on his country’s EU

membership by 2015, and clearly stated his views on the subject. Other EU leaders, especially

those whose beliefs do not necessarily align with those of Britain, share similar feelings,

although few have been as outspoken as Hollande.

Conclusion

It is easy to see how the United Kingdom leaving the European Union could have

profound affects, not only on both direct parties, but also on countries around the globe. The UK

on its own is one of the world’s top 10 economies. As a member of the EU, it is a significant

piece of the largest economic conglomerate in the world. Clearly, separating itself from the

European Union would not be an easy, independent matter. Foreign direct investment, exports,

imports, and immigration are among the wide variety of elements that would be directly affected

in both the United Kingdom and throughout European Union member states. Additionally,

foreign powers like Japan and China could develop substantial changes in the variety and

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magnitude of goods they send to and from the Eurozone. Finally, massive trade deals such as the

Transatlantic Trade and Investment Partnership (TTIP) would be influenced by a British exit

from the EU. Britain would most likely be excluded from a free-trade deal, and the entire TTIP

agreement could be derailed. Clearly, Britain leaving the EU is a prime example of the new

global-economy and should be closely monitored by countries around the globe in the coming

months and years.

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