Conservative leadership and the curse of the EU referendum

By Daniel Murray: Chief Economist, EFG Asset Management

Added 22nd June 2016

Since the referendum announcement an enormous amount has been written seeking to identify the relative merits, benefits and costs of EU membership.

Conservative leadership and the curse of the EU referendum

Most of that analysis involves a high degree of speculation and hypothesising, much of which is driven by political bias. However, making a true assessment is incredibly difficult to do because there is no precedent; there are no previous examples of a country exiting the EU. This matter has plagued the Conservative Party over the past forty years. Without a decisive referendum result, it is likely to continue to do so.

Costs and benefits

There have been a broad range of estimates associated with the potential costs and benefits of leaving the EU. For example, the Campos, Coricelli & Moretti report of 2014 estimates that being a member of the EU brings a benefit to the UK economy of 20% of GDP, whereas research by Tim Congdon produced for UKIP estimates that being a member of the EU costs the UK 5 to 10% of GDP%.

A separate report by HM Treasury provides estimates under different scenarios regarding the potential impact on UK GDP in 15 years’ time. The central estimate under which the UK negotiates a bilateral agreement with the EU shows a decline in GDP per household of £4,300 per annum after 15 years. The range of estimates HM Treasury provides varies from a decline of £2,600 per annum to a decline of £5,200 per annum.

The analysis behind these reports generally employs sophisticated analytical techniques to try to forecast the impact of Brexit according to various different economic dimensions such as trade, foreign direct investment, immigration, financial markets, productivity and so on. However, being able to forecast any one of these with any degree of accuracy is difficult enough in itself, let alone trying to forecast the joint impact. This explains the wide range of estimates. In truth, it is possible to identify both positives and negatives associated with exiting from the EU but in aggregate we simply do not know what the overall impact would be.

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