Government and Institutions

Brexit: What would it mean for the EU?

Most of the discussion about the upcoming referendum concentrates on what the effects of Brexit would be on the UK. But what of its impact on the rest of the European Union? David Folkerts-Landau of Deutsche Bank has done us a service by pointing out that the EU would see its global influence much reduced if the UK left.

It would indeed. In the short run, the uncertainty and instability created by a Brexit vote would affect the rest of the EU – most of which is currently in a far worse economic position than us – badly, choking off any nascent recovery.

Longer-term, the EU would lose a substantial net contributor to its budget, an eighth of its population and a much larger slice of its internal market. But it would also lose a counterbalance to the power of Germany and France and the centralising ambitions of the European Commission, a voice for competition and reform, important links to the United States and the wider world, and probably a third or more of its effective defence capability.

Many of its poorer members would also, assuming that new immigration to the UK was restricted, gradually lose an important outlet for its unemployed young people. This would mean higher welfare costs falling on their taxpayers, and a reduction in the flow of remittances which help sustain families which remain at home.

Its agricultural producers and its fishery industry would lose out sharply as cheaper producers elsewhere would be able to compete on more equal terms, as would many of its manufacturers and service providers.

So why isn’t the rest of the EU apparently more concerned? Two reasons. First, the double-whammy of the Eurozone and migration crises have inevitably meant that the attention of politicians and policy-makers has understandably been diverted elsewhere.

Second, our renegotiation approach has been so low-key, the demands so vague and trivial, and David Cameron so sadly unconvincing a negotiator, that it has been all too easy to ignore the problem. Other EU leaders have simply assumed Mr Cameron will counsel the electorate to vote ‘stay’ whatever the outcome of the negotiations. They also probably believe that the British people are naturally small-c conservative and, faced with endless scare stories – which they can help to orchestrate –may be relied on to take the ‘safe’ option to remain in the EU.

They may be right. But what if? Following a vote to leave, all hell would surely break loose. The realisation of what other members stand to lose, added to all the other tensions tearing Europe apart, could lead to panic.

Many pro-EU commentators suggest that the rest of the EU, like a bitter deserted party in a broken marriage, would turn vindictive and give the UK the worst possible deal in the two-year exit process. But I doubt this. Individuals may cut off noses to spite faces, but politics doesn’t necessarily work like this. Rather it will shake up old alliances and alter incentives.

The vote is unlikely to be massively in favour of exit. If the majority in favour of leaving was relatively small, the EU would try (as it always does in this kind of situation) to change our mind in a second vote. Concessions which formerly seemed impossible would now be on the table. Take for instance the obduracy of Poland and other Eastern European countries in resisting limits on benefits to migrants to the UK. Faced with the far worse – from their viewpoint – prospect of no free entry into the UK, positions would change. The benefits regime only probably affects a small minority, whereas the prospect of work restrictions affects all potential migrants. And those countries which want to remain outside the euro, realising that their position vis-à-vis the euro ‘ins’ would deteriorate sharply without the UK to bat for them, would stir themselves to demand new concessions for us.

Paradoxically, therefore, those who favour staying in the EU but on improved terms might benefit from voting to leave. And perhaps those spreading scare stories about the consequences of Brexit for the UK might consider redirecting some of their energies to scaring our EU neighbours.

Prof Len Shackleton is a Visiting Fellow at the IEA, and professor of economics at the University of Buckingham.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.