From budget to banks: how Brexit could impact the EU economy

The European Union’s chief
concern over a potential British exit is the political impact on
such things as European integration, but there would be a huge
economic impact on the bloc from losing its second-largest
economy.

Below are some of the main economic risks or benefits of
Brexit for the remaining 27 EU members should Britons vote in a
June 23 referendum to leave.

BUDGET

Most obviously, other EU members would have to fill in at
least some of the shortfall from a lack of UK contributions.

In 2014, Britain’s total contribution to the EU budget was
14.1 billion euros, including its rebate and the contribution
from customs duties. However, it also received 7.0 billion
euros, largely in the form of agricultural and regional
subsidies, leaving a 7.1 billion euro (5.65 billion pound/$7.99
billion) gap to fill or just over 5 percent of the total EU
budget.

Germany, the EU’s largest member, would inevitably have to
provide the most extra cash. Germany’s Ifo institute estimates
that would be 2.5 billion euros.

Germany is the largest contributor to the EU budget, based
on its gross national income, with additional contributions from
VAT and customs duties and sugar levies.

TRADE

The rest of the European Union has a trade surplus of around
100 billion euros in goods with Britain, while Britain exports
some 20 billion euros more in services than it imports, the same
gap as for financial services.

Imports tariffs could be introduced although, in accordance
with World Trade Organisation rules, these would generally be in
the low single-digits, albeit with a rate of 10 percent on cars.

Many economists forecast Brexit would at least temporarily
reduce UK growth, uncertainty hitting domestic demand and
weakening the pound, with a resultant impact on EU goods exports
to Britain, which make up some 2.6 percent of rest-EU GDP in
2014.

But a UK “demand shock”, linked also to a possible
reintroduction of import tariffs, of 10 percent could lead to a
reduction of rest-EU GDP by 0.26 percent.

Brexit campaigners say the EU would want to agree a free
trade deal with Britain even if the country left the bloc.

However, Oliver Schulz, an economist at Citi, reasons that
could play more into the hands of the EU given that there tends
to be more focus in trade deals on goods than on services, and
financial services in particular.

Switzerland, where financial services are a larger share of
GDP than in Britain, has no general access to EU financial
service markets and runs a financial services trade deficit with
the bloc.

The EU’s main service export to Britain, tourism, is
unlikely to be affected.

The rest of the EU could see a boost of its services trade
with Britain, but given Britain’s strength in specific sectors,
the EU might have to import them at a higher cost or rely on
inferior domestic suppliers, reducing overall productivity.

INVESTMENT

The United Kingdom is consistently the largest recipient of
foreign direct investment in the European Union, according to
UNCTAD data, with an average of some $56 billion per year in the
2010-2014 period. EU partners supply just under half of this.

Some 72 percent of investors in an EY study in 2015 cited
access to the European single market as important to the UK’s
attractiveness to FDI.

There is a risk some FDI would be diverted to other EU
countries if Britain lost access to the EU single market.

MIGRATION

One of the main arguments for Brexit campaigners is to limit
migration of workers from other EU countries, even though both
Norway and Switzerland have had to accept free movement of
people in return for access to EU internal markets.

If Britain did cap immigration, it could have a negative
impact on eastern European countries, from which some 1.2
million workers were in Britain in late 2015.

The impact could be most acute in the countries with the
most citizens in Britain – Poland (853,000 in 2014), Romania
(175,000) and Lithuania (155,000)

By contrast, other affluent western European countries, such
as Germany, could as a result see higher inflows of EU migrants.
This might be beneficial economically, if politically difficult.

CURRENCY/BANKING

On the assumption that the British pound would indeed weaken
if Britain voted to leave the European Union, the euro-based
earnings of European companies with businesses in Britain would
fall although currency variations are not new.

Economists also refer to a risk, albeit limited, of a
British financial crisis resulting from Brexit, with a huge
ripple effect in the rest of the EU, where banks, companies,
governments and households held UK assets of some 46 percent of
GDP in 2013, according to Citi, many times more than Greek
holdings in 2012.

IRELAND, BENELUX HIT HARDEST?

Research by the Bertelsmann Foundation sought to break down
the impact by country and determined that the impact of a “soft
exit” could be worse in Ireland than in Britain, based on their
degree of trade dependence on Britain.

The Benelux countries and Sweden were the next biggest hits,
while the impact on Germany would be very limited given that its
auto and other manufacturing sectors have many other markets.

DYNAMIC EFFECTS

The Bertelsmann study also looks into “dynamic effects”,
such as a potential loss of productivity because a decreased
openness to trade reduces international competition and lowers
the incentive to improve competitiveness.

With dynamic effects, the long-term impact on German GDP
would range between 0.3 and 2 percent below the value if Britain
remained in the European Union.

($1 = 0.9015 euros)
(1 British pound = 1.2773 euros)

($1 = 0.8883 euros)

(1 British pound = 1.2563 euros)

(Reporting By Philip Blenkinsop Editing by Jeremy Gaunt)

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