A British exit from the EU most imperils the UK's poorest regions, and could make the country's regional inequality worse.

Summary

Britain is home to some of the richest and poorest regions in Western Europe, and the gap between their economic fortunes is widening.

There are several causes of this growing regional inequality. The number of jobs in manufacturing and heavy industry, long a source of well-paid employment in Britain’s poorer regions, has been in decline for 40 years. The services jobs that have replaced them pay less well on average. And high-skilled people tend to move to prosperous cities while the low-skilled stay put.

A British exit from the EU risks making this regional inequality worse, because poorer regions of the UK are more dependent on exports to the EU than richer ones. Exports to the EU account for 15 per cent of private sector output in the North East of England, one of Britain’s poorest regions, compared to 9 per cent in the South West of England and Scotland, two of its richer regions. And even with its sizeable financial services exports to the EU, London is among the less exposed.

There is a risk that the UK would be unable to conclude a free trade agreement with the EU after exit. The EU buys 45 per cent of UK exports, while the UK only buys 7 per cent of the other EU member-states’ exports, giving the EU the upper hand in any negotiation over Brexit terms. Current alternatives to EU membership suggest that even a free trade agreement that covered only goods would come at the price of accepting free movement of labour: the Switzerland-EU bilateral treaties require it, for example. This might be too much for the British people to accept.

Without a free trade agreement, the UK could trade with the EU under World Trade Organisation rules. But the EU would apply tariffs to British goods. These would hit economic activity in poorer regions of the UK, where manufacturing tends to predominate, harder than richer ones.

While London’s large financial and commercial services sector would be badly hit by a British exit from the EU, services make up less than one third of British exports, and services exports to non-EU markets have grown quickly over the course of the eurozone crisis. As a region, London would be among the less-affected regions.