With the vote on the UK’s future relationship with the EU approaching rapidly, British news headlines seem, almost daily, to highlight a new group of people warning of the negative consequences of Brexit. Start-up investors have warned of its impact on London’s status as a tech hub. Last week doctors warned that it could harm public health and patient care. On Friday environment professionals warned of the impact on air pollution and Nobel Prize-winning scientists warned of the impact on British science. The following day housebuilders warned that leaving the EU would make building new homes more expensive. Of course, there are many people and groups who, for various reasons, favour Brexit, but with the potential losses of Brexit more concrete than the gains, the wide-reaching negative effects of an EU departure are obvious, at least domestically.
Relatively little attention has been paid to the impact of the vote on the rest of Europe. But Brexit would have huge consequences beyond the borders of the UK, with a report from the CPB Netherlands Bureau for Economic Policy Analysis warning of a particularly severe effect on the Dutch economy. Indeed, the OECD has placed the Netherlands at the top of its list of nations whose economies would be hurt by Brexit – by 2030 it has been estimated that the costs of Brexit for the Netherlands could be as high as 2% of GDP, with the highest costs being related to sectoral adjustments to increasing trade costs.
Of course, the negative impact of Brexit on the Netherlands could be mitigated if the UK and the EU swiftly agreed a new free trade agreement, however, it’s not certain that this would be particularly desirable for the EU as a whole, given that a British EU exit sans punishment could set a dangerous precedent. Elements within other member states would be encouraged to negotiate the EU settlements that suit them best. Those EU member states that would benefit most from a free trade agreement with the UK, such as the Netherlands, Ireland and Belgium, might not be able to muster the necessary support of other member states.
So what’s the most likely outcome? The UK, at a minimum, would only need to comply with World Trade Organization (WTO) regulations. But it’s also possible that the UK would make additional arrangements through free trade agreements. The highest levels of access such as the European Economic Area (EEA) and a customs union are unlikely – those countries that are members of the EEA, such as Norway, Iceland and Liechtenstein, have to pay in exchange for the free movement of people, services, goods and capital within the EU, and they have to comply with EU standards and regulations without having the influence to change them. Such a settlement – with the free movement of people in particular – would likely be unpalatable for the UK given that much of the Brexit debate has centred around immigration, with the Conservative government failing to deliver on its promise to reduce net migration to tens of thousands. Likewise, a customs union such as those the EU has agreed with Switzerland and Turkey is unlikely given that Brexit supporters don’t want the UK to be obligated to comply with EU standards and regulations. The most likely scenarios are the UK turning to WTO regulations, which it is estimated would lead to a 13% increase in the trade costs for services and goods, or some kind of free trade agreement, which would increase the trade costs for services and goods by around 6%.
So what does this all mean for people in the Netherlands? As a Brit, I have to say this is rather awkward news to deliver. When accounting for the increased trade costs, as well as the potential impact on trade-induced innovation, the WTO scenario could reduce Dutch GDP by 2%, or the equivalent of 1,000 euros per person. Sorry about that.
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