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Will Britain leave the European Union?

By Michael Knox - posted Friday, 8 April 2016


The British attempted to quite literally ‘get around the problem’. They formed an association which included themselves and many of the other countries which had been excluded from the original Treaty of Rome. This was called the European Free Trade Association (EFTA). This was established on 3 June 1960. It was composed of seven countries. These included Austria, Denmark, Norway, Portugal, Switzerland, Sweden and the United Kingdom. Iceland joined the group in 1970 and Finland in 1986. This group was a very successful free trade area. This group was also very successful in generating access for its members to join the EEC.

Both the United Kingdom and Denmark left EFTA in 1973 to become part of the EEC. Portugal joined the EEC in 1986. Finland and Sweden joined the EEC in 1995 as did Austria. Currently only Norway, Switzerland, Iceland and Liechtenstein (a small principality which is bordered by Switzerland) remain members of EFTA.

The case of Norway and Switzerland is especially relevant. In both cases their governments wanted to join the EEC. In both cases this move was defeated by national referendums. The EEC is now the EU (European Union). Should Britain vote to leave the European Union, it may then return to membership of EFTA with Switzerland and Norway.

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The Economics of Brexit

It is apparent from our discussion above that Great Britain put an enormous amount of effort over a period from 1960 to 1973 in getting in to the European Union. We now examine the potential economic results of turning their back on all that effort and leaving the European Union.

Put simply, Britain is ‘a banking system with a country attached’. What is another country in Europe that is ‘a banking system with a country attached?’ The country which most comes to mind is Switzerland. Lord Christopher Patten, the last British Governor of Hong Kong and now the Chancellor of the University of Oxford, once remarked that if Britain left the European Union, it would be ‘like Switzerland with the bomb’.

Perhaps the best analysis of the economic effects of Britain leaving the European Union has been prepared by the consulting group Oxford Economics. A chart from the report on the economic consequences of leaving the EU can be seen in Chart 1. This chart was published by Bloomberg on 22 March 2016.

Oxford Economics examined nine different scenarios for Britain leaving the European Union. They then calculated the impact of those scenarios for the British economy by 2030.

What happens next?

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It is not so important that Britain leaves the EU. It is very important what happens next. The impact of British exit upon the British economy is essentially determined by the mix of policies that Britain enacts after it leaves the EU. The drive to leave the EU is essentially populist. Populists both in Britain and in the United States share two essential motivations. They attempt to restrict free trade and they attempt to restrict immigration.

What Oxford economics shows is that the damage to the British economy after leaving the EU is directly proportional to the success that populists then have in restricting trade and immigration. The more open the trade regime and the more open the immigration regime after leaving the EU, the less the damage. The more restrictive the trade regime and the more restrictive the immigration regime, the greater the damage will be after leaving the EU.

Chart 1 shows us nine different combinations of openness to trade and openness to immigration. The most open to immigration is shown as LIB or Liberal. The least open to immigration is shown as POP or Populist. Moderate or MOD is half way in between.

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Disclaimer

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.



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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

Other articles by this Author

All articles by Michael Knox

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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