To mark the tenth anniversary of the United Kingdom voting to leave the European Union, the Clark Center’s US and European Economic Experts Panels recently looked – once again – at the vexed issue of Brexit.
Brexit is one of those issues which has the potential, at least in the UK, to provoke a fierce political argument but where the opinion amongst economists is reasonably settled. The vast majority of economists believe that putting trade frictions into a previously mostly frictionless trading relationship will result in less trade and that less trade will, eventually, feed through into weaker competition and lower productivity growth. There is still room for debate as to how much the potential policy-space opened up by leaving the EU – the room for more trade deals, for example, or a different approach to regulation – can offset those costs, but few doubt that the costs are real and large. And there are fleetingly few economists who do not think that the process and form of Brexit that Britain embarked on has not carried a large price-tag.
The degree of consensus was visible when both panels were asked whether “Ten years after the Brexit referendum, the UK has experienced substantially lower growth than it would have done had it remained in the European Union”?
Weighted by confidence, 90% of US panel respondents and 95% of European panel respondents either agreed or strongly agreed. That is as close to unanimity as these things ever really come.
Counterfactuals are, as ever, tricky, but it seems very reasonable to conclude that the 2016 vote had a negative impact on British growth.
The costs began soon after the results with a large fall in the value of sterling helping to push inflation higher and a notable increase in uncertainty, as the UK debated exactly which form of Brexit it would prefer, leading to cancelled and postponed investment and hiring plans. Britain’s eventual decision to leave both the Single Market and Customs Union led, as theory would suggest, to lower trade volumes.
The Office for Budget Responsibility, the UK government’s official forecaster and fiscal watchdog, reckons that Brexit – in the long term – represents a 4% hit to the level of productivity, that import and export volumes will be around 15% lower than they would have been and that potential new trade deals with third parties will have an at best negligible impact on growth.
Other recent papers have found a larger impact. One paper, published towards the end of last year, which made quite a splash in the British press, argued that:
Using a decade of data since the referendum, we combine estimates using macro data with estimates using micro data collected through our Decision Maker Panel survey. These suggest that by the end of 2025 Brexit had reduced UK GDP by 6% to 8%, with the impact accumulating steadily over time. We estimate that investment was reduced by 12% to 13%, employment by 3% to 4% and productivity by 3% to 4%. These negative impacts reflect a combination of elevated uncertainty, reduced demand, diverted management time, and increased misallocation of resources from a protracted Brexit process. Comparing these with contemporary forecasts shows that these forecasts were relatively accurate in the short to medium term, but they underestimated the impact over a decade.
Once again, it is worth emphasizing that counterfactuals are not straightforward. In particular, it can be tricky to separate out some of the Brexit impacts from the pandemic and lockdowns or the global energy price shock that followed the Russia-Ukraine war in 2022. But whether one takes an OBR-like estimate of 4% of GDP or the much larger Bloom et al figure of 6-8% of GDP, either way the answer is not just substantial but macro-economically significant.
Further complicating the analysis – and casting more doubt ahead of the referendum when the two sides traded claims on the economic impact of Brexit – is the fact that economic history is not exactly replete with examples of an advanced economy choosing the exit from a deep trading relationship. It sometimes feels like one of the few silver linings of the whole process has been providing empirical economists with a real-world case study to work with.
The two panels also had reasonably strong views on what should be done about this.
Asked whether “the UK would be substantially richer ten years from now if it immediately began negotiations and domestic preparations with the aim of fully rejoining the European Union”? there was again a strong – although weaker than on the first question – consensus. 74% of European respondents and 64% of US respondents either agreed or strongly agreed.
Your columnist is somewhat more cautious on this. As a purely economic issue, it is clear that Brexit has done a great deal of damage to the British economy and, once again, as a purely economic issue there is a strong case that rejoining the European Union would help to mitigate that.
But Brexit has never been a purely economic issue in British politics. The political economy is much trickier. Even though a majority of British voters, at least according to most polling, now regard Brexit as a mistake, they would not necessarily welcome the issue being reopened anytime soon.
Britain has run through six -and soon to be seven – prime ministers since 2016, and its politics has been reshaped with new parties on the rise and public debate much more divisive.
As several respondents noted, there is a real risk that immediate steps to rejoin the EU could trigger all sorts of unexpected reactions and, even in the best case, serve as a distraction from other, very pressing, economic policy issues.
Gradual and slower steps to smooth over the worst impacts of Brexit and repair the UK’s trading relationship with the EU do not offer as much upside, but they also might be much easier to take.
