Brexit. Macroeconomic Consequences

Table of Contents

List of Tables

List of Illustrations

List of Abbreviations

1. Introduction

2. State of Research

3. The History of Brexit

4. Juristic consequences of the Referendum

5. Scenarios
5.1 Best Case Scenario
5.2 Most Probable Scenario
5.3 Worst Case Scenario

6. Possible Options for Britain after the Brexit
6.1 The UK remains within the existing treaties
6.2 The UK remains following a treaty change
6.3 The Norwegian Model [EEA & EFTA]
6.4 The Swiss Model [Bilateral Treaties & EFTA]
6.5 The Turkish Model [EUCU]
6.6 Free trade respectively association agreement
6.7 A more international approach [USA/Canada/WTO]
6.7.1 Unilateral adoption of WTO governed trade
6.7.2 Transatlantic Free Trade [TTIP]
6.7.3 Free Trade among the Commonwealth countries

7. Consequences for Britain
7.1 Quantifiable Consequences
7.2 Not quantifiable Consequences
7.3 Consequences in the short term
7.4 Consequences in the long term

8. Consequences for affiliated nations and territories
8.1 Consequences for Scotland
8.2 Consequences for Gibraltar
8.3 Consequences for (Northern-) Ireland

9. Consequences for the Rest European Union

10. Consequences for Germany

11. Outlook: Grexit and other potential exit candidates

12. Conclusion

Annex

A GDP of EU-28 and selected member countries

B Percentage of foreign nationals in the EU

C GDP/EUR exchange rate over the last six month

Bibliography

Brexit – Macroeconomic Consequences

Markus PASSLACK,

University of Bamberg, Germany

Abstract: The possibility the UK might leave the European Union infamously known as Brexit– is a major source of concern. The probability of the UK leaving the EU significantly rose after the referendum on 23. June 2016. This Bachelor Thesis seeks to assess the macroeconomic consequences of Brexit on the UK’s, Germany’s and other major european country’s economies. Despite the heaviest awareness that it is difficult to properly quantify the costs of uncertainty over Brexit, this work provides evidence that the severity of Brexit’ impact was not uniform across the investigated countries. The first part will elaborate the juristic consequences of the referendum and the potential resulting scenarios, while the second part will present the various options Britain has outside of the EU. The last big block will focus on the consequences of the Brexit for the UK, Germany and the rest of the EU.

Keywords: Brexit; EU; UK; Europe; uncertainty; Single Market; EEA; EFTA

Jel Classification: F13, F15, F5

List of Tables

Table 1: Comparison of different economical outcomes

Table 2: Possibilities of the UK outside of the EU

Table 3: Changes in real GDP per capita in case of soft exit and isolation of the UK

List of Illustrations

Figure 1: Effects of Brexit on real GDP in the United Kingdom

Figure 2: Percent of Employees in the UK per bank

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Introduction

On June 23th 2016 51.9 % of the British people voted for “Brexit”. An opt-out of Great Britain of the European Union, even though the highly controversially discussed polls indicated a tie or slight lead for remaining in the EU. Immediately after the referendum on United Kingdom membership of the European Union the British pound value dropped drastically, but stabilized afterwards, fluctuated slightly up and down, but remained on a constant level thereafter. Since this week the pound rushed further in the depth, faster and faster. Major frontiers were breached. At the same time the British banks lost dramatically in worth, the real estate market had to take emergency measures to not let him fully crash. All this shows that international investors are fleeing. Turning a back on Britain trying as quickly as possible to get their money out of the country. No country in the world is so dependent on capital inflows as the UK. Therefore, the British are now facing significant welfare losses. The Single Market is particularly important to the UK given the nature of its economy, with services accounting for almost 80% of GDP. Both the services industry and advanced manufacturing are reliant on cross-border trade and supply chains. Furthermore, it is estimated that 3.3 million jobs are linked to exports from the UK to other EU countries.

There might be rational cause to believe that a Brexit would be positive for both sides. According to the motto: rather a good neighbour than a bad roommate. Maybe the UK and the EU are not made for each other. Moreover, could a Brexit be the wake-up call for the internally slackened reform willingness of the EU. There are also good reasons for the standpoint that the UK is further needed as corrective, net payer and political heavy weight in the EU (Kroll and Leuffen, 2016). A leave of the UK could lead to economic dislocations, protectionism and political chaos. The political camps cannot be divided among the classical left/right- or individualist/collectivist scheme. Many liberals in the UK dream of a new golden age of free trade on the island triggered by an independent Great Britain. Even many left wing supporter rely on a Brexit to substantiate their idea of a socialist pre Thatcher Great Britain, or to finally achieve the European Superstate without the opposition of the UK. Whereas liberals hope for more democratic participation affectations in other member countries, caused by a Brexit, and therefore the dream of a European Superstate pops.

If we speak about the perspectives of Great Britain outside the EU, we are walking on thin ice. The result is dependent on many variables and developments, which are not foreseeable from today’s point of view. Remaining in an EU, which proves herself more and more incapable of reform and which tries to tackle the global challenges with centralism and protectionism could be as damaging to the UK, as leaving a reformed EU could be.

This thesis seeks to assess the ramifications of an out likewise a remain from a neutral point of view. It will initially showcase the ever difficult relationship between the UK and the EU and afterwards depict the juristic, economic and political consequences of every potential option the UK now could pursue.

The presented work will help answer to the question, what a Brexit would mean for freedom, market economy, subsidiarity and competition in the UK and its affiliated nations, Germany and the rest of the EU.

State of Research

Generally, the purpose of a review is to analyse critically a segment of a published body of knowledge through summary, classification, and comparison of prior research studies, reviews of literature, and theoretical articles

As the Brexit is a current topic and no decision regarding the further steps has been taken, all considered literature is only hypothetical due to its nature as there cannot be backed information yet. All recent events and developments have solely been caused by the referendum and not by any political/regulatory change.

However, there have been different forecasts about potential scenarios which have been utilised in my thesis.

They can be classified as follows: government close publications (HM Treasury, 2016) EU publications (Dagnis Jensen and Snaith, 2016), lobby publications (Kasonta, 2015), research papers (Vaitilingam, 2016), pro Brexit/anti EU paper, pro EU/anti Brexit paper

Most authors, amongst them (Dhingra et al., 2016a; Dhingra et al., 2016b, 2016c; Dhingra and Sampson, 2016a, 2016b; European Journal of International Law, 2015) agree, that a Brexit would harm the UK and the EU to a considerable extent

Other Authors, such as (Mansfield, 2014; Nieboer, 2013; Filipovic, 2015; Winders, 2016; Mansfield, 2014) disagree with the severity of the impacts and emphasize the positive aspects a Brexit could have and diminish the potential downsides.

While (van Randwyck, 2014, 2013) favour an EFTA membership for Britain as the best option (North, 2013) argues that an EEA membership is the best option.

Most findings in recent research suggest that the many uncertainties surrounding Brexit make it virtually impossible to quantify the economic effects exactly. Nevertheless, outcomes across models are consistently negative (Dhingra et al. 2016b; Dhingra et al. 2016c; HM Government, 2016 and PwC, 2016). Even though the different studies used different methods of research, channels and modelling techniques, they all arrive at the same conclusion: Brexit would harm not only the UK economy substantially, but also the rest of the EU. This thesis shall add to the currently fast moving literature concerning the Brexit and give an updated overview over the potential consequences.

The OECD (2016) published a good overview over the different outcomes, different institutions forecast.

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Comparison of different economical outcomes

Source: Kierzenkowski et al. (2016). Originally taken from: CBI/PwC study: PwC (2016), “Leaving the EU: Implications for the UK economy”, PricewaterhouseCoopers (PwC) report commissioned by The Confederation of British Industry (CBI).; LSE/CEP study: Dhingra, S., G. Ottaviano, T. Sampson and J. Van Reenen (2016), “The consequences of Brexit for UK trade and living standards”, Centre for Economic Performance (CEP), London School of Economics and Political Science (LSE); and Treasury: HM Treasury (2016), "HM Treasury analysis: the long-term economic impact of EU membership and the alternatives", April 2016.

The History of Brexit

Since the accession of the United Kingdom to the European Community in 1973 the relationship between the Brits and the rest of Europe has been tense and critical to distant. There has already been a referendum over the remain in the European Community in 1975 (Todd, 2016). 1984, Margaret Thatcher managed to obtain the “Britain Rebate” on the EU budget, with the legendary words “I want my money back”, which is granted up to today. The Schengen Treaty, 1995 and the abolition of passport controls at the borders between participating EU countries has not been signed by the UK until now. (Freund & Schwarzer 2011)

· "Today, I will give this cast-iron guarantee: If I become PM a Conservative government will hold a referendum on any EU treaty that emerges from these negotiations." — David Cameron MP, The Sun, 26th September 2007 ^[1]

· "I want to deal with several arguments that should not count. The first is that in the 21st century Britain is too small a country to cope outside the European Union. That’s nonsense. We’re the fifth biggest economy in the world, we’re growing faster than any economy in the G7, we attract nearly a fifth of all foreign investment in the EU, we have a military capable of projecting its power around the world, intelligence services that are second to none, and friendships and alliances that go far beyond Europe. We have the greatest soft power in the world, we sit in exactly the right timezone for global trade and our language is the world’s language. Of course Britain could cope outside the European Union." — The Rt Hon. Theresa May, MP - Home Secretary, speech in London on leaving the EU, 25th April 2016

- 'The UK is highly likely to secure a Free Trade Agreement with the EU, and such an agreement would be likely to be negotiated at an extremely high level of ambition relative to other FTAs.' — Our Global Future, Report by the Confederation of British Industry, 4th November 2013
- "There is no doubt that the UK could secure a free trade agreement with the EU. That is not an issue." — Lord Kerr of Kinlochard, UK's former Ambassador to the EU and leading supporter of BSE (Britain Stronger in Europe), Lords Hansard col. 1492, 2nd November 2015
- "If we were outside the EU altogether, we’d still be trading with all these European countries, of course we would... Of course the trading would go on. Sometimes … There’s a lot of scaremongering on all sides of this debate. Of course the trading would go on." — The Rt Hon. David Cameron, MP - UK Prime Minister, Andrew Marr Show, 6th January 2013
- "Of course, Britain could survive outside the EU...We could probably get access to the Single Market as Norway and Switzerland do..." — The Rt Hon. Tony Blair, MP - UK Prime Minister, speech in Ghent, 23rd February 2000 ^[2]

As we the above listed quotes prove, the idea of a Brexit has long been going around and now has come to an end with the referendum on the 23th of June 2016.

The election turnout is as follows:

In the referendum on the 23th of June 51,9 % of the British voters voted for a Brexit. The referendum turnout was 71.8%, with more than 30 million people voting. England voted strongly for Brexit, by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%. Scotland and Northern Ireland both backed staying in the EU. Scotland backed Remain by 62% to 38% as anticipated (European Journal of International Law, 2016), while 55.8% in Northern Ireland voted Remain and 44.2% Leave.^[3] Typically one could say that younger English, the inhabitants of London, the Welsh and the Scots wanted to remain in the EU. The higher the education level, the higher the support for the EU. While the Older English, lower middle class who are workers or live in rural areas or worker cities tended to vote for a Brexit (Vasilopoulou, 2016).

Juristic consequences of the Referendum

Will the UK parliament accept the referendum as legally binding or declare it as an “internal” referendum with no liabilities attached?

There is little academic literature on Article 50 TEU. This is not surprising because until the UK voiced its intention to re-negotiate its membership terms, the withdrawal provision was considered no more than a theoretical option.

Each Member State may, in accordance with its constitutional requirements decide on a withdrawal from the EU. EU membership is thus no longer a marriage for life, but rather a “Lebensabschnittspartnerschaft“. (Withdrawal from the EEA requires separate notice). A willing member state has to notify the European Council (EC) of that intention, which then would create appropriate (binding) guidelines based on which the Union subsequently drafts an agreement on the particulars of the Brexit with the UK. Said framework has to cater for the future relationship the EU and the UK. The agreement by Article 218 (3) TFEU shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consents of the European Parliament (Art. 50 (2) TEU). As Article 50 provides the timetable for withdrawal, Article 8 should provide the “mood” music.

This withdrawal notice cannot be legally enforced by the EU or faked, as EU law does not provide any regulatory power on the submission of the withdrawal notice. Taking into account the down stepping of David Cameron as Prime Minister, the whole case is likely to be delayed until at least October 2016, when a new Prime Minister is sworn into office (Deutscher Bundestag, 2016). U.K. ministers may even decide to wait until after France and Germany hold national elections in 2017 before pulling the trigger on Brexit, which would further raise uncertainty.

According to (Thiele, 2016) Britain can always “exit from the Brexit” during the two-year negotiation period or even pull-and-refile (reinstating the two-year period) as often as they like, because until the signature of the exit agreement, the exit notification is a unilateral not directly formative willing declaration, which can unilaterally be withdrawn at all times.

Article 50 of the Lisbon Treaty:

Under Article 50, to leave the EU a Member State need simply notify the European Council of its intent. The EU treaties shall cease to apply to the Member State two years after the date of notification – unless a different date is agreed to before that date (by qualified majority and obtaining the consent of the European Parliament) or after that date (by unanimity). During the period between notification and exit, the EU is required to negotiate and agree (by qualified majority and obtaining the consent of the European Parliament) with the Member State the arrangements for its withdrawal and future relationship with the EU.

From the date of entry into force of the withdrawal agreement, the treaties no longer apply to the state, but the same effect also comes into power, if after notification of the exit desire to the European Council - without having concluded any a withdrawal agreement - a period of two Years has elapsed (so-called. "Sunset clause"); unless the European Council, in Agreement with the Member State agreed unanimously to extend this period (Art. 50 para. 3 TEU) (Kumin, 2009). This so-called “dirty exit” would cause major legal uncertainty and massive interventions in protected legal positions of companies and individuals who took advantage of the fundamental freedoms and might even justify private liability claims towards the UK.

The withdrawal does not have to be justified. Except for the purposes of paragraphs 2 and 3.. The withdrawing member state does not participate in the member state discussions of the relevant resolutions of the European Council or of the Council. A qualified majority is determined here according to Art. 238 para. 3 lit. b TFEU (Art. 50 para. 4 TEU). A State, which has withdrawn from the Union and would like to be a member of the EU again, must request this following the formal accession process according to Art. 49 TEU apply (Art. 50 para. 5 TEU) and enjoys no related special treatment (Nicolaides, 2013).

Much more serious in this context is the silence of Art. 50 TEU, whether there is not also a distinct right to exit solely from the euro zone or the monetary union (The UK however already has an opt-out clause, which gave them the right to not adopt the Euro) that is regardless of a general right to withdraw from the EU. There would be also to examine whether due to the "Irrevocability" of compulsory acquisition excrete consent of euro for a one-sided member state of the euro zone the obligation would arise, to first negotiate the departure from the EMU and then to announce withdrawal from the EU

(Athanassiou, 2016). Although an isolated exit from the euro is not provided for legally in Art. 50 TEU, some authors try to justify its admissibility through a gap closure by analogy. They use among others the so-called "size-circuit" (“argumentum a maiori ad minus“ resp. “a maiore ad minorem“), which reads as follows: If you can leave the whole, meaning the EU, you can certainly leave its individual parts such as the monetary union, as they are the essential parts of which the EU is composed.

This gap closure however exhibits two weaknesses. First: the gap closure is formal logically inadmissible since it is methodically difficult to see an unplanned loophole there. Second: it would only say that the right to leave the euro zone implies in broader law a right to leave the EU, but not that a member state can solely leave the euro zone, but remain in the EU.

The exit provisions in Art. 50 TEU are formulated too cursory for any eventualities a Brexit from the EU would cause. (Nicolaides, 2013)(Stieber, 2015)

Scenarios

The following chapter will present three scenarios, created by Iain Mansfield. A best case scenario, a most-probable scenario and a worst case scenario. The three scenarios have been selected because one of the most renowned and oldest market liberal British think tanks has published them: The Institute of Economic Affairs (IEA). Another reason is simplicity that a single author has developed all of the scenarios, as well as to showcase a pro Brexit point of view. All IEA papers are subject to the same rigorous independent blind-refereeing process that is used by leading academic journals^[4].

1.1 Best Case Scenario

The Institute of Economic Affairs (IEA) Brexit prize winner Iain Mansfield (2014) suggested in his winning entry “A blueprint for Britain – Openness not Isolation” that in a best case scenario, the UK would negotiate a positive exit agreement with the EU. Major goals would be the securing of EFTA access, including some concessions for agriculture and access for significant service exports in exchange for accepting half or less of the acquis^[5]. Undiminished trade access and a reduction of the EU regulatory burden would cause exports to boom. Securing a range of new agreements with major and minor external trading partners including the BRICS states Brazil, Russia, India, China, South Africa and Australia would also grow Britain’s exports. Trading partners inside the EU would maintain their FTAs with the UK, some with minor amendments. Taking the reduction of the regulatory burden and a competitive tax environment into account, a rise in FDI would more than compensate the Brexit. Mansfield estimates the total impact on GDP at 1,1 %.

1.2 Most Probable Scenario

Mansfield (2014) states that in the most probable scenario the UK would negotiate a satisfactory exit agreement with the EU, securing EFTA access and access for significant service exports in exchange for accepting approximately two thirds of the acquis. Regulatory reforms free up businesses to operate more competitively and contributions to the EU are gradually phasing out over a period of five years, though the UK continues to contribute to a small number of common programmes (Especially economic research programmes mainly funded by the EU). Existing EU trading partners maintain their FTAs with the UK, some with minor amendments, and the UK also secures new agreements with several mid-level trading partners such as Australia and Brazil, though negotiations are anticipated to go more slowly with China, the USA and Russia. After some initial market turbulences, the stable trading relationship with the EU reassures international business and the positive steps taken to promote investment ensure that within two years’ FDI levels have regained their pre-exit levels. Total impact on GDP is +0.1%.

1.3 Worst Case Scenario

In the worst case scenario established by Mansfield (2014), the UK fails to negotiate an acceptable exit agreement with the EU and withdraws with no agreement in place after two years. All access to the Single Market is lost and the UK exporters must pay the full ‘most favoured nation’ (MFN) 110 tariffs paid by other developed nations. No other free trade agreements are signed and some major nations with FTAs with the EU, including Canada and South Korea, refuse to honour theirs with the UK. Without the ability to export tariff free to the UK FDI sharply drops, while international money markets react negative, causing the UK’s borrowing costs (interest rates) to spike. Both exports and imports significantly fall. Contributions to the EU cease. With no exit agreement in place, the UK is free to cut any burdensome regulation and contributions to the EU budget, but this is not enough to compensate the impact of losing access to biggest Single Market. Total impact on GDP is –2.6%

Possible Options for Britain after the Brexit

The following chapter presents all possible options Great Britain has following the Brexit referendum. Anticipating nothing, one could argue that none of the possible options with the EU clearly stands out in terms of probability. However, some options are more likely and easier to realise than others, because they fit the needs of the UK.

The table below gives an overview over the different freedoms and issues, different possibilities would provide for.

illustration not visible in this excerpt

Table 2: Possibilities of the UK outside of the EU

Source: Mansfield (2014)

The UK could also try to be one of the 16 countries of the European Neighbouring Politics (ENP) and therefore sign a partnership agreement according to Art. 8 Abs. 2 EUV. This group of countries, however, represents more of the middle east and economically weaker countries.

1.4 The UK remains within the existing treaties

Unlikely, but possible if the British administration does not submit a formal request to leave the EU according to art. 50 AEUV. This possibility theoretically has already been shut down. The EU will not tolerate this behaviour and sanction the UK where possible (Siekmann, 2016) probably in “uncommon” ways and where they find the possibility as Art, 50 TEU does not provide for a sanction right. However, from the current state (August 2016) one could try to argue that the UK is exactly trying to pursue this strategy as they are playing for time and might not consider the referendum as legally binding (see chapter 4).

At the end of two-year negotiation period the result could also be a Bremain (Remain of Great Britain in the EU) (Whitman, 2016).

1.5 The UK remains following a treaty change

A treaty change is a dangerous operation with a high risk of wasting precious time. All member states would have to agree and afterwards go through their respective constitutional ratification processes. At best, it is time intensive; at worst, it opens up the opportunity for some member states to start bargaining. For example, Spain on the status of Gibraltar, which will be discussed later in the thesis. Such ‘blackmail’ attempts may be rejected, but that will again be time consuming. The more complex changes Britain asks for, the more likely a failure is and that other members may also start to claim special rights for themselves (Moeller, 2015).

1.6 The Norwegian Model [EEA & EFTA]

The European Economic Area (EEA) was established in 1994 to give European countries that are not member countries of the EU a way to access the Single Market (Fahey, 2016). The EEA is comprised of all members of the EU and Iceland, Liechtenstein and Norway. Inside the EEA exists free movement of goods, services, people and capital. This entails an implementation of EU rules concerning the Single Market including laws regarding employment, consumer protection, environmental and competition policy.

It does not oblige the members of the EEA to participate in the monetary union, the EU’s common foreign and security policy, the justices and home affairs policies and in the Common Agricultural Policy (CAP). EEA members are not part of the EU’s customs union, which means that the UK could set their own external tariffs and negotiate their own FTAs with countries outside the EU.

The UK would have to pay a fee to participate in the Single Market. They do this by contributing to the EU’s regional development funds and contributing to the costs of the EU programmes in which they participate. In 2011, Norway’s contribution to the EU budget was £106 per capita, only 17% lower than the UK ’s net contribution of £128 per capita (House of Commons, 2013). Becoming part of the EEA would therefore not generate substantial fiscal savings for the UK government (Dhingra and Sampson, 2016).

As an EEA member, Norway is not part of the EU customs union and not part of the EU value added tax zone. It means that Norwegian companies face costly and time-consuming cross-border formalities as they sell their goods to Europe and receive inputs from their European suppliers.

The downside of an EEA membership would be the membership fee and the need to adhere to EU regulation, such as rules of origin, while not being able to influence them. EEA members must accept and implement the regulations governing the Single Market without having any part in deciding on it, because the rules of the Single Market are set by the EU and not the EEA. Joining the EEA would therefore actually entail a further loss in sovereignty, than remaining EU member. For the third largest economy in the EU (See annex A) and fifth largest in the world, losing its voice in european and world affairs is likely to be a difficult position to accept (North, 2013).

Remaining in the EEA would allow the UK to remain part of the Single Market while not participating in other forms of European integration.

Consequently, EEA membership is an option to retain the economic benefits of the EU, but not participate in the “ever closer union” (Dhingra and Sampson, 2016 and Dhingra et al., 2016).

1.7 The Swiss Model [Bilateral Treaties & EFTA]

Following the way Switzerland is pursuing: a negotiated BrEFTA (Accronym Britain + EFTA) exit, in which the four freedoms of movement, of goods (Art. 28ff. TEU), of services (Art. 49ff. TEU), of people (Art. 39ff. & Art. 43ff. TEU) and of capital (Art. 56ff. TEU) remain largely in place, but with allowance for the emergence of frictional costs of trade in the form of customs controls. This will include: time costs of customs clearance, additional documentation, costs of complying with ROOs and costs in the movement of personnel.

Switzerland has negotiated a series of bilateral treaties safeguarding its relations with the European Union. Each treaty provides for Switzerland to participate in a particular EU policy or programme (Dhingra and Sampson, 2016)

Switzerland is also a member of the European Free Trade Association (EFTA) along with Liechtenstein, Norway and Iceland. However, Norwegian politicians had expressed fears that Britain, which has a population four times bigger than those of the other members combined, would dominate the group if it joined^[6].

As with the EEA countries, Switzerland (and potentially Great Britain) has no influence over the decision making process of the EU programmes in which it wants to participate. It can only make an in or out choice, but does not have the power to shape the content along its wishes.

Contributions of Switzerland have averaged around 53 £ per capita, which is around 60% lower than UKs net average contribution per capita (106 £) (House of Commons, 2013)

Following the argumentation above, the Swiss Model would result in less economic integration between the EU and UK than an EEA membership would.

The Swiss Model would also require giving up some of the newly won sovereignty, since the UK would no longer have the power to influence the EU decision making, but would have to adopt EU legislation nonetheless to participate in the Single Market.

Process of re-joining EFTA is set out in Article 56 of the EFTA Convention and should be done as soon as the formal leave notice has been given to the EU

Risks of this approach include the fact that the EU is not obligated to offer the UK everything for negotiation. That means that the Swiss Model might not guarantee the same market access, an EU or EEA membership would offer. The UK’s participation in the Single Market is uncertain and certain restrictions would hamper Britain’s ability to export goods and services to the EU (van Randwyck, 2014).

1.8 The Turkish Model [EUCU]

The UK could try to become a state, which is affiliated with the EU via a tax union (European Union Customs Union). Other members include Turkey, San Marino, Monaco, Andorra and Akrotiri und Dhekelia, Guernsey, Isle of Man and Jersey. The UK would have to dodge their tax sovereignty and would have to accept the preferred trade treaties the EU has with third parties telle quelle.

Then tariff-free access to most of the EU Single Market, except for financial services and non-processed agricultural goods is granted. However, are the financial services they key industry in the UK and therefor is this option deemed to not fit the UK desires.

Adoption of EU external tariffs for non-EU trade and some EU law, especially some industry standards is mandatory for a membership.

This option grants very limited influence on regulation and Article 8 of the customs union agreement states that “member countries shall incorporate into its internal legal order the Community instruments relating to the removal of technical barriers to trade”. Additionally, Article 66 states that member countries must conform to the rulings of the European Court of Justice, in which the UK would not have representation any more while other members of the EUCU like Turkey never had one (Togan, 2000).

Therefore, the EU would still be able to govern the UK’s trade policy, because EU’s external tariffs would continue to apply to imports to the UK and undertake anti-dumping actions against the UK. Furthermore, the UK could not negotiate new FTAs or take advantage of positive opportunities without the consent of the EU.

1.9 Free trade respectively association agreement

The UK could also negotiate a free trade agreement or an association agreement on the basis of Art. 217 AEUV. A European Union Association Agreement is a treaty between the EU and its Member States and a non-EU country that creates a framework for co-operation between them. Areas frequently covered by such agreements include the development of political, trade, social, cultural and security links. Exactly, what the UK is looking for.

Association Agreements have to be accepted by the European Union and need to be ratified by all the EU member states.

This option grants mostly tariff-free Single Market access in exchange for compliance with EU standards and product regulations (European Union External Action Service, 2011)

No full access for services and, as in option 6.6, no automatic passporting rights for banks are granted. Because this very important right for the UK banking sector is not given, this option seems unlikely.

1.10 A more international approach [USA/Canada/WTO]

A more international approach would be to consider trading partners further away from the EU. Particularly the USA and Canada. However, the Gravitation Model (Dhingra et al., 2016b) could significantly restrict the trading volumes and FDI. For completeness the possible options will be explained on the following pages.

1.10.1 Unilateral adoption of WTO governed trade

UK-REU commercial relations are reset from Single Market context to a default WTO rules-based context. The WTO currently includes 161 members, compromising all major economies and most minor ones. Each WTO member must grant the same most favoured nation (MFN) market access. This includes charging the same tariffs to all members.

WTO does not provide for free movement of labour, meaning that employee mobility between the EU and the UK would cease.

The positive aspect would be greater political sovereignty, but any divergence in regulation would result in the creation of a new NTB and raise the cost of trade.

Overall, the scope of further tariff reductions is limited, because the average rate charged on imports to the EU is only 1 % (World Bank, 2015). Koske et al. (2015) found that the UK labour market is already one of the least regulated in Europe, while being in the Single Market, and exhibits flexibility like the labour market in Canada and the USA. So the effect of further deregulation (If possible) is uncertain

1.10.2 Transatlantic Free Trade [TTIP]

This is a TTIP Scenario with Ambitious Regulatory Harmonization reached two years in advance of the REU and with deeper liberalization commitments.

However, it is uncertain if the UK alone could negotiate a better trade agreement than the EU-27 could, as its bargaining power would be limited.

Nonetheless can a to UK needs tailored free trade agreement never replace EU-membership as a doubling in distance between two trade partners approximately halves the trade volume (Head & Mayer, 2014). The UK is geographically much closer to the EU than to any other large economy such as the USA or the People’s Republic of China. Ergo the fact, that roughly half of the UK’s trade is with the EU, is not surprising (Ottavino et al., 2014).

Yet, it is rather geography than politics that make the EU the UK’s most important trading partner.

The future of the UK lies within the EU regardless of which agreements and treaties might be reached with countries located elsewhere in the world. Currently TTIP seems to be of the table anyway and will not be finished during the Obama administration if ever in this form.

1.10.3 Free Trade among the Commonwealth countries

The last and possibly unrealistic scenario is a free trade agreement among the “old” commonwealth countries.

Here the same problem as above applies as according to the Gravitation Model of Trade a doubling in distance between two trade partners approximately halves the trade volume (Head & Mayer, 2014).

It is also questionable if the remaining Commonwealth countries would agree to that kind of free trade agreement. India for example is now a member of the BRICS states, the country with the second highest population after China and one of the fastest growing economy of the world (Buckle and Hewish, 2015).

Consequences for Britain

Consequences for Britain are various and can be positive as well as negative, depending on the choice of the above stated options. The following chapter seeks to explain the difference between quantifiable and not quantifiable consequences and the consequences itself. The second part will distinguish between consequences in the short and long term.

1.11 Quantifiable Consequences

Negative:

An emergence of a tariff wall between the UK and the EU under Brexit could be monetary wise quantified, as well as the emergence of a new hard border for trade.

The introduction of new administrative requirements to track rules of origin (ROOs) for purposes of UK-REU trade under Brefta could be estimated using Norway as an example.

The emergence of new non-tariff barriers (NTBs) to goods trade, depending on assumptions concerning the extent to which the UK “drifts” away from EU regulatory policies could be calculated by taking Switzerland as an example.

The emergence of new barriers to cross-border services trade and foreign direct investment (FDI) can be approximated by following the method done by Liechtenstein (Baker and Schnapper, 2015).

The OECD (Kierzenkowski et al., 2016) analysis finds that the annual loss of GDP per household after 15 years under the three proposed models for an alternative to EU membership would be as follows:

- 2,200 £ in the case of an EEA membership
- 3,200 £ in the case of a negotiated bilateral agreement
- 5,000 £ in the case of a WTO membership

[...]

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^[1] http://www.brugesgroup.com/quotes/referendum-promises

^[2] http://www.brugesgroup.com/quotes/withdrawal

^[3] http://www.bbc.com/news/politics/eu_referendum/results

^[4] http://www.iea.org.uk/publications/peer-review-protocol

^[5] The acquis is the body of common rights and obligations that is binding on all the EU member states.

^[6] http://www.express.co.uk/news/uk/701642/Norway-performs-U-turn-over-Brexit-and-hints-it-will-now-WELCOME-Britain-to-EU-trade-club