There is a 35% to 40% chance that the UK could vote to leave the European Union in the 23 June Referendum, according to analyst IHS.
“Should the UK decide to leave the EU, the outcome of the move is dependent on terms of the exit,” says Howard Archer, chief European and UK economist for IHS Global Insight, and one of the authors of the report, entitled “UK in or out of the EU: The economic considerations”.
“There would be a two-year timeframe from when the decision to leave was made and the exit actually taking place,” Archer says. “One issue that would have a significant influence on how the UK economy fared over this period is how amicable, constructive and successful the UK’s negotiations were with the EU.”
The most favourable outcome to a vote for the UK to exit the European Union would be what IHS terms a “soft” exit. Under this scenario, the UK would conduct amicable and constructive negotiations with the EU resulting in full trade agreements and full UK access to the European Single Market.
On the migration front, the UK would attract highly skilled workers, perhaps through the adoption of a points system as used by Australia. A reduction in the number of less skilled workers coming into the country would have an upward impact on UK earnings; though, this scenario would also hurt the UK’s competitiveness by putting upward pressure on unit labour costs, IHS says.
Under a “hard” exit scenario, the exit could be contentious and lengthy. The UK would struggle markedly over the short and longer term and would find itself excluded from, or having limited access to, the European Single Market. With the UK having limited access to the European Single Market and struggling for trade agreements, there would be significantly lower levels of new foreign direct investment. The City of London’s position would be compromised and it would lose appreciable business to Frankfurt and Paris.
Finally, under this scenario, the UK’s migration policy would result in a lack of incoming workers needed for lesser-skilled jobs, and the resultant reduced workforce would limit potential UK growth.
Any assessment of the economic implications of a UK departure from the EU on the remainder of the bloc needs to take into account the fact that political and economic consequences are closely interrelated in this matter, IHS says. What seems certain, however, is that the opening of such a Pandora’s box would render any quick agreement between the EU and the UK on new trade regulations extremely unlikely. This would ensure a lengthy period of high uncertainty about counter-party risk that would significantly dampen international trade and investment activity within Europe for at least two years and probably longer.