Why the UK can’t afford a Brexit

Why the UK can’t afford a Brexit

In this debate, GRI asked whether or not the UK should leave the EU. Nandini Rao argues that the uncertainty caused by Brexit would hurt growth and diminish the UK’s global clout. Read the pro-Brexit side here.

Thousands of years ago, the UK was connected to the European mainland by a land bridge. After that, higher sea levels isolated the UK from the Continent. On June 23rd, another separation may occur.

A vote in favor of Brexit may isolate the UK from the EU in political and economic terms. This is unlikely to be as permanent as the geographical separation but a short-run period of isolation cannot be ruled out. This could have adverse consequences for the UK and the rest of the EU.

Impact on international trade

Uncertainty is likely to prevail in the immediate aftermath of a vote in favour of Brexit. No country has ever left the EU in its current form. Greenland left the EEC in the 1980s but that particular case does not provide a clear precedent for the UK, which has a much larger economy and is more closely linked to the EU than Greenland was to the EEC.

The EU is a major destination for UK exports and a major source of imports. Source: Office of National Statistics.

There is no clear outcome with respect to the UK’s future trading relationships with the EU if it decides to pull out. Brexit supporters have argued that the UK and the EU could still reach a trade agreement, which may ensure that British companies face no extra duties or tariffs when trading with the continent.

However, while this may be economically beneficial to the EU, it may not be politically acceptable.

Possible domino effect

This is because if the UK leaves and successfully negotiates a trade agreement, other countries in the bloc may consider leaving or start to question the terms of their membership. The National Front party in France also wants to hold a referendum on EU membership if it wins next year’s election. Other countries in the EU also contain their share of Eurosceptic politicians.

Brexit may enable these political parties to campaign for looser ties to Brussels. Consequently, post-Brexit, the EU may be unwilling to sign a free trade agreement with the UK, out of fear that other countries may become less committed to European integration.


The loss of the UK – the union’s second largest economy – may also cast a shadow on the EU’s economic prospects which have not been bright since the sovereign crisis.

In addition, if the UK leaves the EU, it will no longer be able to benefit from existing EU trade agreements with countries outside the bloc. It may need to negotiate fresh agreements with these countries – a potentially time-consuming process.

The absence of free trade agreements in the near-term will increase costs for British importers and make British exports less competitive. Lower exports would increase the UK’s current account deficit, which is already rather high. This means that the UK would be even more reliant on what the Bank of England’s Governor calls “the kindness of strangers” – foreign investment – to fund its balance of payments.

However, the uncertainty caused by a vote in favour of Brexit may dent consumer and business confidence. This would, in turn, have a negative impact on domestic growth and reduce the attractiveness of the UK as an investment destination. This is highly probable at least in the near-term, as even if the UK and EU do sign a trade agreement, this would take time to implement.

Financial ramifications of Brexit

Moody’s – one of the three major credit rating agencies – warned that it could consider assigning a negative outlook to the UK’s sovereign rating in the event of an exit from the EU. The country would be unlikely to lose its investment-grade rating, but the action might discourage foreign investors from investing in the UK.

Theoretically, the UK could seek out new export markets by negotiating agreements with other large economies outside the EU. However, the UK may be in a stronger position to negotiate favorable terms in trade agreements if it remains within the EU and applies along with a number of countries with similar aims, rather than if it applies alone.

Leaving the EU could also hurt London’s reputation as a global finance hub, although the financial services industry is divided on whether or not Brexit will be favorable for the sector.

Over the last few years, the EU has been working towards the harmonisation of members’ rules on financial services within the bloc. This means that post-Brexit, the City may have to re-write some of these rules and pass new legislation.

The impact of this is not fully apparent, but new legislation will inevitably cause uncertainty, which may hurt the domestic financial services sector. This could adversely affect growth as the sector is a major contributor to GDP.

Scottish after effect

Finally, a vote in favour of Brexit may in turn lead to another referendum in the UK – this time in Scotland. The Scottish National Party is in favour of EU membership and last year its leader stated that Scotland would probably press for another independence referendum if the UK left the EU.

If the UK does leave and Scotland becomes independent, then the UK would lose a significant amount of political importance globally. The uncertainty caused by the prospect of a second Scottish referendum in almost as many years would also hurt growth.

The UK’s political and economic future hinges heavily on the outcome of the referendum. In the long-term, a vote to pull out may not isolate the UK as permanently as the rising sea levels did millennia ago, but the near-term implications are likely to be adverse.

The uncertainty alone would impact growth, as foreign investors may shy away from investing in the UK. By leaving the EU, the UK may also diminish its global clout and the EU’s economic significance. Although supporters of Brexit state that the status quo is not ideal, an exit is by no means the best alternative.

GRI Debates provide critical insight into the world’s most challenging political risk topics. Through well-balanced opinion based articles, GRI Debates offer a forum for deeper discussion into how major political decisions and security challenges affect markets, investment, and economic growth across the globe.

Categories: Economics, Europe

About Author

Nandini Rao

Nandini has a Masters in Financial Economics from Saïd Business School, University of Oxford and a BSc (Honours) in Economics from Aston University. She focuses on monetary policy.