European Union

Forget Grexit – What About a Brixit?

Professor Moorad Choudhry
City of London
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The United Kingdom has never been the most ardent fan of the European Union. And is it any wonder? When it originally joined the "European Economic Community" just over 40 years ago, it had no idea that legislators based in Brussels would end up telling it that convicted prisoners must be allowed the vote, or that only certain types of bananas could be stocked in a supermarket.

Just recently the perennial debate about Britain's place in the EU has been heating up again with talk about referendums and whether the country can readjust its relationship within the rest of the Union.

Membership of the EU appears to be one of those topics on which protagonists hold default positions seemingly from birth, and little objective discussion ever takes place. (In that respect it is up there with an "independent nuclear deterrent" and "maintaining our influence in the world", two realities that don't actually necessarily benefit the British citizen in any meaningful quality-of-life way but someone cannot ever be challenged, as if merely by asking "what if" we open the door to hellfire and damnation).

But this is a column on macroeconomics. What would be the economic impact if Britain was to leave the EU?

In some respects, minimal. The ordinary citizen is not going to notice a material difference. But in due course, he or she will certainly notice cheaper food prices, as the effects of the Common Agricultural Policy wear off (surely the most pernicious misallocation of taxpayers' funds ever, if one discounts maintaining an expeditionary army for 10 years in a country that is no material threat to you).

But what of the big picture? Much of what Europhiles assert would occur should Britain leave the EU has a striking similarity to what numerous commentators were stating during the debate about joining the euro. The most notable charge, that much foreign direct investment in manufacturing and financial services would exit the country in the event of a "Brixit", is not backed up by any actual fact or historical corporate behavior.

The City of London is always subject to this sort of scaremongering. Foreign companies routinely state that "access to European markets" is a reason for expanding geographically, but if access to European markets really was as core a causal factor as investors suggest, why not locate in Paris or Frankfurt, which are closer still to Europe and also within the euro zone? London's existing strengths have already resulted in it being a center of euro trading and it is expected to be the center for offshore trading in renminbi as well – something unconnected with EU membership and which will draw in Asia-Pacific banks. There is no evidence that being out of the EU would impact this, especially since financial services would not be subject to any punitive tariffs. If anything, the City would become more attractive to foreign institutional investors as it would be exempt from business-destroying EU measures like the financial transactions tax or the short-selling ban, while confidence would be maintained because its regulatory approach is expected to be even more stringent than Basel III. The City is more likely to benefit from a Brixit.

Of course, there is much more to the British economy than the City. But we have to remember that the EU has to abide by existing World Trade Organisation rules, it couldn't simply shut the UK out of its markets and slap punitive tariffs on it (some sectors like food and textiles are more protected, but the UK isn't known for its garment exporting strength anyway). And no country, in or outside the EU, could afford to raise trade barriers with a country as dominant in world trade as the UK, it would find the impact as painful for its consumers as the UK would for its exporters.

The simple fact is that no-one can be certain of what the impact of leaving the EU will be, and just as being in the Union has pros and cons, so does leaving it. The vast majority of British voters see pressure to adopt all manner of odd Brussels directives that suggest that the institution has lost the plot. So while there may or may not be a referendum on this issue in the future, we should at least be able to conduct an objective debate based on logic, rather than suggest that the country would automatically be worse off if it did leave the "Union".


Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.

"The views expressed in this article are an expression of the author's personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment."