The Possible Economic Effects of Brexit

Economic Foundations and Methodological Possibilities

Abstract

Leaving the EU has potential effects on trade, investments, productivity, income, labour market and on public finances. The EU membership has significantly enhanced the UK’s economic prosperity mainly through three main mechanisms: trade, foreign investment and the financial sector. Missing precedents make it difficult to anticipate the economic consequences of the Brexit. Facing these problems three approaches are possible: working with studies which focus on accession experience, i.e. ex post revealing of integrations effects in order to assess the potential effects of disintegration; simulation of Brexit with quantitative equilibrium models; or restricted forms of ex ante projections on the trade effects of the EU membership.

The starting point of these analyses is the development of trade under the terms of disintegration. The impact analysis should be based on its static and dynamic effects and on other impact factors. Analyses suggest that the Brexit will result in a significant decrease of the GDP, which may reach the level of 10% if we take into account the dynamic long term effects as well. The negative effect depends on the level of the disintegration: in case of a soft Brexit, more moderate effects can be expected.