Brexit or Fixit? The Trade and Welfare Effects of Leaving the European Union

Since a speech by the Prime Minister in January 2013 , the Conservative party has been committed to holding a referendum on the UK’s membership of the European Union (EU) in 2017. So this is a good moment to consider what would be the likely economic effects on the UK from such a move (commonly called ‘Brexit’).Eurosceptics emphasise greater national sovereignty from Brexit while Europhiles tend to focus on the importance of ever greater unity to reduce the risks of the political conflicts that ravaged Europe in the first half of the twentieth century. These are important matters, but this analysis focuses on the more mundane (but quantifiable) economic issues, especially trade. The costs and benefits of the UK leaving the EU are complex. Losses due to trade alone could be very substantial. Even under very optimistic assumptions, the sum of the static and dynamic trade losses would be almost 2.2% of GDP. More pessimistic calculations would lead to a long-term loss of almost a tenth of national income. The dream of splendid isolation may turn out to be a very costly one indeed.