The annual impact of leaving the EU on the UK after 15 years (difference from being in the EU) EEA Negotiated bilateral agreement WTO GDP level – central -3.8% -6.2% -7.5% GDP level -3.4% to -4.3% -4.6% to -7.8% -5.4% to -9.5% GDP per capita – central* -£1,100 -£1,800 -£2,100 GDP per capita* -£1,000 to -£1,200 -£1,300 to -£2,200 -£1,500 to -£2,700 GPD per household – central* -£2,600 -£4,300 -£5,200 GDP per household* -£2,400 to -£2,900 -£3,200 to -£5,400 -£3,700 to -£6,600 Net impact on receipts -£20 billion -£36 billion -£45 billion

Adapted from HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, April 2016.

﻿*Expressed in terms of 2015 GDP in 2015 prices, rounded to the nearest £100.﻿﻿

Leave supporters tended to discount such economic projections under the label "Project Fear." A pro-Brexit outfit associated with the U.K. Independence Party (UKIP), which was founded to oppose EU membership, responded by saying that the Treasury's "worst-case scenario of £4,300 per household is a bargain basement price for the restoration of national independence and safe, secure borders."﻿﻿

Although Leavers have tended to stress issues of national pride, safety, and sovereignty, they also muster economic arguments. For example, Boris Johnson, who was mayor of London until May 2016 and became Foreign Secretary when May took office, said on the eve of the vote, "EU politicians would be banging down the door for a trade deal" the day after the vote, in light of their "commercial interests."﻿﻿ Labor Leave, the pro-Brexit Labour group, co-authored a report with a group of economists in Sept. 2017 that forecasted a 7% boost to annual GDP, with the largest gains going to the lowest earners.﻿﻿

Vote Leave, the official pro-Brexit campaign, topped the "Why Vote Leave" page on its website with the claim that the U.K. could save £350 million per week: "we can spend our money on our priorities like the NHS [National Health Service], schools, and housing."﻿﻿ In May 2016, the U.K. Statistics Authority, an independent public body, said the figure is gross rather than net, which "is misleading and undermines trust in official statistics."﻿﻿ A mid-June poll by Ipsos MORI, however, found that 47% of the country believed the claim.﻿﻿ The day after the referendum, Nigel Farage, who co-founded UKIP and led it until that November, disavowed the figure and said that he was not closely associated with Vote Leave.﻿﻿ May has also declined to confirm Vote Leave's NHS promises since taking office.

Brexit Economic Response

Though Britain has officially left the EU, the year 2020 is a transition and implementation period. Until a variety of decisions are made and finalized, trade and customs continue as previously, so there isn't much on a day-to-day basis that seems different to people living in the U.K.

Even so, the decision to leave the EU has had an effect on Britain's economy.

The country's GDP growth slowed down to around 1.4% in 2018 from 1.9% in both 2017 and 2016 as business investment slumped.﻿﻿ The IMF predicts that the country's economy will grow at 1.3% in 2019 and 1.4% in 2020.﻿﻿ The Bank of England cut its growth forecast for 2019 to 1.2%, the lowest since the financial crisis.﻿﻿

The U.K. unemployment rate hit a 44-year low at 3.9% in the three months to Jan. 2019.﻿﻿ Experts attribute this to employers preferring to retain workers instead of investing in new major projects.

In 2018, the pound managed to claw back the losses it suffered after the Brexit vote but reacted negatively as the likelihood of a no-deal Brexit increased. The currency could rally if a "soft Brexit" deal is passed or Brexit is delayed.

While the fall in the value of the pound has helped exporters, the higher price of imports passed onto consumers and has had a significant impact on the annual inflation rate. CPI inflation hit 3.1% in the 12 months leading up to Nov. 2017, a near six-year high that well exceeded the Bank of England's 2% target. Inflation eventually began to fall in 2018 with the decline in oil and gas prices and was at 1.8% in Jan. 2019.﻿﻿ ﻿﻿

﻿﻿

A July 2017 report by the House of Lords cited evidence that U.K. businesses would have to raise wages to attract native-born workers following Brexit, which is "likely to lead to higher prices for consumers."﻿﻿

International trade is expected to fall due to Brexit, even if Britain negotiates a raft of free trade deals. Dr. Monique Ebell, former associate research director at the National Institute of Economic and Social Research, forecasts a -22% reduction in total U.K. goods and services trade if EU membership is replaced by a free trade agreement. Other free trade agreements could probably not take up the slack: Ebell sees a pact with the BRIICS (Brazil, Russia, India, Indonesia, China, and South Africa) boosting total trade by 2.2%; a pact with the U.S., Canada, Australia, and New Zealand would do slightly better, at 2.6%.﻿﻿

"The single market is a very deep and comprehensive trade agreement aimed at reducing non-tariff barriers," Ebell wrote in Jan. 2017, "while most non-EU [free trade agreements] seem to be quite ineffective at reducing the non-tariff barriers that are important for services trade."﻿﻿

June 2017 General Election

On April 18, May called for a snap election to be held on June 8, despite previous promises not to hold one until 2020. Polling at the time suggested May would expand on her slim Parliamentary majority of 330 seats (there are 650 seats in the Commons). Labor gained rapidly in the polls, however, aided by an embarrassing Tory flip-flop on a proposal for estates to fund end-of-life care.

The Conservatives lost their majority, winning 318 seats to Labor's 262. The Scottish National Party won 35, with other parties taking 35. The resulting hung Parliament cast doubts on May's mandate to negotiate Brexit and led the leaders of Labor and the Liberal Democrats to call on May to resign.﻿﻿

﻿﻿

Speaking in front of the prime minister's residence at 10 Downing Street, May batted away calls for her to leave her post, saying, "It is clear that only the Conservative and Unionist Party"—the Tories' official name—"has the legitimacy and ability to provide that certainty by commanding a majority in the House of Commons."﻿﻿ The Conservatives struck a deal with the Democratic Unionist Party of Northern Ireland, which won 10 seats, to form a coalition. The party is little known outside of Northern Ireland, judging by a wave of curious Google searches that caused the DUP's site to crash.

May presented the election as a chance for the Conservatives to solidify their mandate and strengthen their negotiating position with Brussels. But this backfired.

"The election served to diffuse, not concentrate political power, especially with regards to Brexit," wrote Sky News political correspondent Lewis Goodall. "Ever since election night, Brussels hasn't just been dealing with Number 10 but in effect, the House of Commons too."﻿﻿

In the wake of the election, many expected the government's Brexit position to soften, and they were right. May released a Brexit white paper in July 2018 that mentioned an "association agreement" and a free-trade area for goods with the EU.﻿﻿ David Davis resigned as Brexit secretary and Boris Johnson resigned as Foreign Secretary in protest.

But the election also increased the possibility of a no deal Brexit. As the Financial Times predicted, the result made May more vulnerable to pressure from Euroskeptics and her coalition partners.﻿﻿ We saw this play out with the Irish backstop tussle.

With her position weakened, May struggled to unite her party behind her deal and keep control of Brexit.

Scotland's Independence Referendum

Politicians in Scotland pushed for a second independence referendum in the wake of the Brexit vote, but the results of the June 8, 2017 election cast a pall over their efforts. The Scottish National Party (SNP) lost 21 seats in the Westminster Parliament, and on June 27, 2017, Scottish First Minister Nicola Sturgeon said her government at Holyrood would "reset" its timetable on independence to focus on delivering a "soft Brexit."﻿﻿

Not one Scottish local area voted to leave the EU, according to the U.K.'s Electoral Commission, though Moray came close at 49.9%. The country as a whole rejected the referendum by 62.0% to 38.0%.﻿﻿ Because Scotland only contains 8.4% of the U.K.'s population, however, its vote to Remain—along with that of Northern Ireland, which accounts for just 2.9% of the U.K.'s population—was vastly outweighed by support for Brexit in England and Wales.

Scotland joined England and Wales to form Great Britain in 1707, and the relationship has been tumultuous at times. The SNP, which was founded in the 1930s, had just six of 650 seats in Westminster in 2010. The following year, however, it formed a majority government in the devolved Scottish Parliament at Holyrood, partly owing to its the promise to hold a referendum on Scottish independence.

2014 Scottish Independence Referendum

That referendum, held in 2014, saw the pro-independence side lose with 44.7% of the vote; turnout was 84.6%.﻿﻿ Far from putting the independence issue to rest, though, the vote fired up support for the nationalists. The SNP won 56 of 59 Scottish seats at Westminster the following year, overtaking the Lib Dems to become the third-largest party in the U.K. overall. Britain's electoral map suddenly showed a glaring divide between England and Wales—dominated by Tory blue with the occasional patch of Labour red—and all-yellow Scotland.

When Britain voted to leave the EU, Scotland fulminated. A combination of rising nationalism and strong support for Europe led almost immediately to calls for a new independence referendum. When the Supreme Court ruled on Nov. 3, 2017, that devolved national assemblies such as Scotland's parliament cannot veto Brexit, the demands grew louder. On March 13 that year, Sturgeon called for a second referendum, to be held in the autumn of 2018 or spring of 2019. Holyrood backed her by a vote of 69 to 59 on March 28, the day before May's government triggered Article 50.

Sturgeon's preferred timing is significant since the two-year countdown initiated by Article 50 will end in the spring of 2019 when the politics surrounding Brexit could be particularly volatile.

What Would Independence Look Like?

Scotland's economic situation also raises questions about its hypothetical future as an independent country. The crash in the oil price has dealt a blow to government finances. In May 2014 it forecast 2015–2016 tax receipts from North Sea drilling of £3.4 billion to £9 billion but collected £60 million, less than 1% of the forecasts' midpoint. In reality, these figures are hypothetical, since Scotland's finances are not fully devolved, but the estimates are based on the country's geographical share of North Sea drilling, so they illustrate what it might expect as an independent nation.

The debate over what currency an independent Scotland would use has been revived. Former SNP leader Alex Salmond, who was Scotland's First Minister until Nov. 2014, told the Financial Times that the country could abandon the pound and introduce its own currency, allowing it to float freely or pegging it to sterling. He ruled out joining the euro, but others contend that it would be required for Scotland to join the EU.﻿﻿ Another possibility would be to use the pound, which would mean forfeiting control over monetary policy.

Upsides for Some

On the other hand, a weak currency that floats on global markets can be a boon to U.K. producers who export goods. Industries that rely heavily on exports could actually see some benefit. In 2015, the top 10 exports from the U.K. were (in USD):

Machines, engines, pumps: US$63.9 billion (13.9% of total exports) Gems, precious metals: $53 billion (11.5%) Vehicles: $50.7 billion (11%) Pharmaceuticals: $36 billion (7.8%) Oil: $33.2 billion (7.2%) Electronic equipment: $29 billion (6.3%) Aircraft, spacecraft: $18.9 billion (4.1%) Medical, technical equipment: $18.4 billion (4%) Organic chemicals: $14 billion (3%) Plastics: $11.8 billion (2.6%)

Some sectors are prepared to benefit from an exit. Multinationals listed on the FTSE 100 are likely to see earnings rise as a result of a soft pound. A weak currency may also benefit tourism, energy and the service industry.

In May 2016, the State Bank of India (SBIN.NS), India's largest commercial bank, suggested that the Brexit will benefit India economically. While leaving the Eurozone will mean that the U.K. will no longer have unfettered access to Europe's single market, it will allow for more focus on trade with India. India will also have more room for maneuvering if the U.K. is no longer abiding by European trade rules and regulations.

UK-EU Trade After Brexit

May advocated a "hard" Brexit, meaning that Britain would leave the EU's single market and customs union, then negotiate a trade deal to govern their future relationship. These negotiations would have been conducted during a transition period that will begin when a divorce deal is ratified. The Conservatives' poor showing in the June 2017 snap election called popular support for a hard Brexit into question, and many in the press speculated that the government could take a softer line. The Brexit White Paper released in July 2018 revealed plans for a softer Brexit. It was too soft for many MPs belonging to her party and too audacious for the EU.﻿﻿

The White Paper says the government plans to leave EU single market and customs union. However, it proposes the creation of a free trade area for goods which would "avoid the need for customs and regulatory checks at the border and mean that businesses would not need to complete costly customs declarations. And it would enable products to only undergo one set of approvals and authorizations in either market, before being sold in both." This means the U.K. will follow EU single market rules when it comes to goods.﻿﻿

The White Paper acknowledged that a borderless customs arrangement with the EU—one that allowed the U.K. to negotiate free trade agreements with third countries—is "broader in scope than any other that exists between the EU and a third country."﻿﻿

The government is right that there is no example of this kind of relationship in Europe today. The four broad precedents that do exist are the EU's relationship with Norway, Switzerland, Canada, and World Trade Organization members.

The Norway Model: Join the EEA

The first option would be for the U.K. to join Norway, Iceland, and Lichtenstein in the European Economic Area (EEA), which provides access to the EU's single market for most goods and services (agriculture and fisheries are excluded). At the same time, the EEA is outside the customs union, so Britain could enter into trade deals with non-EU countries. The arrangement is hardly a win-win, however: the U.K. would be bound by some EU laws while losing its ability to influence those laws through the country's European Council and European Parliament voting rights. In Sept. 2017, May called this arrangement an unacceptable "loss of democratic control."﻿﻿

David Davis expressed interest in the Norway model in response to a question he received at the U.S. Chamber of Commerce in Washington. "It's something we've thought about but it's not at the top of our list."﻿﻿ He was referring specifically to the European Free Trade Association (EFTA), which like the EEA offers access to the single market, but not the customs union. EFTA was once a large organization, but most of its members have left to join the EU. Today it comprises Norway, Iceland, Lichtenstein, and Switzerland; all but Switzerland are also members of the EEA.

The Switzerland Model

Switzerland's relationship to the EU, which is governed by around 20 major bilateral pacts with the bloc, is broadly similar to the EEA arrangement. Along with these three, Switzerland is a member of the European Free Trade Association (EFTA). Switzerland helped set up the EEA, but its people rejected membership in a 1992 referendum.

The country allows free movement of people and is a member of the passport-free Schengen Area. It is subject to many single market rules, without having much say in making them. It is outside the customs union, allowing it to negotiate free trade agreements with third countries; usually, but not always, it has negotiated alongside the EEA countries. Switzerland has access to the single market for goods (with the exception of agriculture), but not services (with the exception of insurance). It pays a modest amount into the EU's budget.

Brexit supporters who want to "take back control" would be unlikely to embrace the concessions the Swiss have made on immigration, budget payments, and single market rules. The EU would probably not want a relationship modeled on the Swiss example, either: Switzerland's membership in EFTA but not the EEA, Schengen but not the EU, is a messy product of the complex history of European integration and—what else—a referendum.

The Canada Model: A Free Trade Agreement

A third option is to negotiate a free trade agreement with the EU along the lines of the Comprehensive Economic and Trade Agreement (CETA), a pact the EU has finalized with Canada but not ratified. The most obvious problem with this approach is that the U.K. has only two years from the triggering of Article 50 to negotiate such a deal. The EU has refused to discuss a future trading relationship until December at the earliest.

To give a sense of how tight that timetable is, CETA negotiations began in 2009 and were concluded in 2014. Three years later, a small minority of the EU's 28 national parliaments have ratified the deal. Persuading the rest could take years. Even subnational legislatures can stand in the way of a deal: the Walloon regional parliament, which represents fewer than 4 million mainly French-speaking Belgians, single-handedly blocked CETA for a few days in 2016. In order to extend the two-year deadline for leaving the EU, Britain would need unanimous approval from the EU 27. Several U.K. politicians, including Chancellor of the Exchequer Philip Hammond, have stressed the need for a transitional deal of a few years so that—among other reasons—Britain can negotiate EU and third country trade deals; the notion has met with resistance from hard-line Brexiteers, however.

In some ways, comparing Britain's situation to Canada's is misleading. Canada already enjoys free trade with the United States through NAFTA, meaning that a trade deal with the EU is not as crucial as it is for the U.K. Canada's and Britain's economies are also very different: CETA does not include financial services, one of Britain's biggest exports to the EU.

Speaking in Florence in Sept. 2017, May said the U.K. and EU "can do so much better" than a CETA-style trade agreement, since they're beginning from the "unprecedented position" of sharing a body of rules and regulations. She did not elaborate on what "much better" would look like, besides calling on both parties to be "creative as well as practical."﻿﻿

Monique Ebell, formerly of the National Institute of Economic and Social Research stresses that even with an agreement in place, non-tariff barriers are likely to be a significant drag Britain's trade with the EU: she expects total U.K. foreign trade—not just flows to and from the EU—under an EU-U.K. trade pact. She reasons that free-trade deals do not generally handle services trade well. Services are a major component of Britain's international trade; the country enjoys a trade surplus in that segment, which is not the case for goods. Free trade deals also struggle to rein in non-tariff barriers. Admittedly Britain and the EU are starting from a unified regulatory scheme, but divergences will only multiply post-Brexit.﻿﻿

﻿﻿

WTO: Go It Alone

You want out? You're out. If Britain and the EU cannot come to an agreement regarding a future relationship, they will revert to the World Trade Organization (WTO) terms. Even this default would not be entirely straightforward, however. Since Britain is currently a WTO member through the EU, it will have to split tariff schedules with the bloc and divvy out liabilities arising from ongoing trade disputes. This work has already begun.

Trading with the EU on WTO terms is the "no-deal" scenario the Conservative government has presented as an acceptable fallback—though most observers see this as a negotiating tactic. U.K. Secretary of State for International Trade Liam Fox said in July 2017, "People talk about the WTO as if it would be the end of the world. But they forget that is how they currently trade with the United States, with China, with Japan, with India, with the Gulf, and our trading relationship is strong and healthy."﻿﻿

For certain industries, however, the EU's external tariff would hit hard: Britain exports 77% of the cars it manufactures, and 58% of these go to Europe. The EU levies 10% tariffs on imported cars. Monique Ebell of the NIESR estimated that leaving the EU single market would reduce overall U.K. goods and services trade—not just that with the EU—by 22–30%.﻿﻿

Nor will the U.K. only be giving up its trade arrangements with the EU: under any of the scenarios above, it will probably lose the trade agreements the bloc has struck 63 third countries, as well as progress in negotiating other deals. Replacing these and adding new ones is an uncertain prospect. In a Sept. 2017 interview with Politico, Trade Secretary Liam Fox said his office—formed in July 2016—has turned away some third countries looking to negotiate free trade deals because it lacks the capacity to negotiate.﻿﻿

Fox wants to roll the terms of existing EU trade deals over into new agreements, but some countries may be unwilling to give Britain (66 million people, $2.6 trillion GDP) the same terms as the EU (excluding Britain, around 440 million people, $13.9 trillion GDP).﻿﻿

﻿﻿

Negotiations with third countries are technically not allowed while Britain remains an EU member, but even so informal talks have begun, particularly with the U.S.

Impact on the U.S.

Companies in the U.S. across a wide variety of sectors have made large investments in the U.K. over many years. American corporations have derived 9% of global foreign affiliate profit from the United Kingdom since 2000. In 2014 alone, U.S. companies invested a total of $588 billion into Britain. The U.S. also hires a lot of Brits. In fact, U.S. companies are one of the U.K.'s largest job markets. The output of U.S. affiliates in the United Kingdom was $153 billion in 2013. The United Kingdom plays a vital role in corporate America's global infrastructure from assets under management, international sales, and research and development (R&D) advancements. American companies have viewed Britain as a strategic gateway to other countries in the European Union. Brexit will jeopardize the affiliate earnings and stock prices of many companies strategically aligned with the United Kingdom, which may see them reconsider their operations with U.K. and European Union members.

American companies and investors that have exposure to European banks and credit markets may be affected by credit risk. European banks may have to replace $123 billion in securities depending on how the exit unfolds. Furthermore, U.K. debt may not be included in European banks' emergency cash reserves, creating liquidity problems. European asset-backed securities have been in decline since 2007. This decline is likely to intensify now that Britain has chosen to leave.

Who's Next to Leave the EU?

Political wrangling over Europe is not limited to Britain. Most EU members have strong euroskeptic movements that, while they have so far struggled to win power at the national level, heavily influence the tenor of national politics. In a few countries, there is a chance that such movements could secure referendums on EU membership.

In May 2016, global research firm IPSOS released a report showing that a majority of respondents in Italy and France believe their country should hold a referendum on EU membership.﻿﻿

﻿﻿

Italy

The fragile Italian banking sector has driven a wedge between the EU and the Italian government, which has provided bailout funds in order to save mom-and-pop bondholders from being "bailed-in," as EU rules stipulate. The government had to abandon its 2019 budget when the EU threatened it with sanctions. It lowered its planned budget deficit from 2.5% of GDP to 2.04%.﻿﻿

Matteo Salvini, the far-right head of Italy's Northern League and the country's deputy prime minister, called for a referendum on EU membership hours after the Brexit vote, saying, "This vote was a slap in the face for all those who say that Europe is their own business and Italians don't have to meddle with that."﻿﻿ The Northern League has an ally in the populist Five Star Movement (M5S), whose founder, former comedian Beppe Grillo, has called for a referendum on Italy's membership in the euro—though not the EU. The two parties formed a coalition government in 2018 and made Giuseppe Conte prime minister. Conte ruled out the possibility of "Italexit" in 2018 during the budget standoff.

France

Marine Le Pen, the leader of France's euroskeptic National Front (FN), hailed the Brexit vote as a win for nationalism and sovereignty across Europe: "Like a lot of French people, I'm very happy that the U.K. people held on and made the right choice. What we thought was impossible yesterday has now become possible."﻿﻿ She lost the French presidential election to Emmanuel Macron in May 2017, gaining just 33.9% of votes.﻿﻿

Macron has warned that the demand for "Frexit" will grow if the EU does not see reforms. According to a Feb. 2019 IFOP poll, 40% of French citizens want the country to leave the EU. Frexit is also one of the demands of the yellow vest protesters.