Brexit: What is the Real Cost?
The British exit from the European Union (colloquially known as Brexit) has major economic impacts for the UK and the EU alike. Brexit officially happened on January 31st of this year, but there is a waiting period until the end of 2020 to establish a trade deal. The close relationship between the UK to the rest of Europe makes this trade deal uniquely important. Besides outlining the deal, aviation standards, information and police cooperation, and medical trading need to be negotiated.
Leading economists have calculated the cost of Brexit at 170 billion dollars, and it's estimated to hit 260 billion dollars by the end of the year. Total payments from the UK to the EU from 1973 (when the UK joined the EU) to 2018 were just over 200 billion dollars, less than the cost of leaving this year alone. These numbers do not paint a rosy picture of the implementation of Brexit so far. Nevertheless, the question that remains is: why is leaving so costly?
The first main cost derives from the decline in business confidence. Business leaders and workers alike are uncertain about the future of the economy. They begin to contemplate, will there be ease of movement between the EU and the UK? Will there be tariffs or free trade? These questions are discouraging investment and business expansion across the country. In other words, most macroeconomists think investment levels are the sole non-fixed variable affecting an open economy, and having lower investment levels will cause the GDP to fall. Consequently, if individuals see a falling economy, they are more likely to sit on their money, and the effect becomes a vicious cycle. Until a trade deal is announced and agreed upon, these issues will be nagging the British economy.
As the US trade war with China shows, free trade is important between trading partners. Britain has been pushing for almost complete free trade between the UK and EU, however, the EU wants the UK to comply with the majority of their regulations on goods. This negotiation cuts to the heart of Brexit in the first place. The UK wanted freedom from the EU’s self-described “burdensome” regulations. The EU is willing to have free trade, but they want to implicitly require all the same regulations as before, which is not something the UK can explain to their voters. Nevertheless, the flow of goods and services across borders directly impacts the economic wellbeing of both regions.
Finally, the freedom of movement through borders is important for millions of people with family across the English Channel and the million British who currently live in the EU. This issue is compounded by the fact that the UK wants to be seen as separate from the EU without paying an economic or political price. These issues all mix to create a situation where the EU has leverage over the UK, but the UK can’t afford to compromise due to campaign promises. While the idea of Brexit may have been good initially, the implementation of leaving has had vast and serious economic implications for the British economy. A strong and good deal is essential to the future of the UK. Any British voter or politician needs to look in the mirror and remind themselves why they left the EU in the first place, and if the costs have been too steep and the benefit not worth it, wouldn’t it have been better to never have left at all?
