April 14, 2016 / 10:31 AM / 3 years ago

From budget to banks: how Brexit could impact the EU economy

BRUSSELS (Reuters) - The European Union’s chief concern over a potential British exit is the political impact on such things as European integration, but there would be a huge economic impact on the bloc from losing its second-largest economy.

A car sticker with a logo encouraging people to leave the EU is seen on a car, in Llandudno, Wales, February 27, 2016. REUTERS/Phil Noble/Files

Below are some of the main economic risks or benefits of Brexit for the remaining 27 EU members should Britons vote in a June 23 referendum to leave.

BUDGET

Most obviously, other EU members would have to fill in at least some of the shortfall from a lack of UK contributions.

In 2014, Britain’s total contribution to the EU budget was 14.1 billion euros, including its rebate and the contribution from customs duties. However, it also received 7.0 billion euros, largely in the form of agricultural and regional subsidies, leaving a 7.1 billion euro (5.65 billion pound/$7.99 billion) gap to fill or just over 5 percent of the total EU budget.

Germany, the EU’s largest member, would inevitably have to provide the most extra cash. Germany’s Ifo institute estimates that would be 2.5 billion euros.

Germany is the largest contributor to the EU budget, based on its gross national income, with additional contributions from VAT and customs duties and sugar levies.

TRADE

The rest of the European Union has a trade surplus of around 100 billion euros in goods with Britain, while Britain exports some 20 billion euros more in services than it imports, the same gap as for financial services.

Imports tariffs could be introduced although, in accordance with World Trade Organisation rules, these would generally be in the low single-digits, albeit with a rate of 10 percent on cars.

Many economists forecast Brexit would at least temporarily reduce UK growth, uncertainty hitting domestic demand and weakening the pound, with a resultant impact on EU goods exports to Britain, which make up some 2.6 percent of rest-EU GDP in 2014.

But a UK “demand shock”, linked also to a possible reintroduction of import tariffs, of 10 percent could lead to a reduction of rest-EU GDP by 0.26 percent.

Brexit campaigners say the EU would want to agree a free trade deal with Britain even if the country left the bloc.

However, Oliver Schulz, an economist at Citi, reasons that could play more into the hands of the EU given that there tends to be more focus in trade deals on goods than on services, and financial services in particular.

Switzerland, where financial services are a larger share of GDP than in Britain, has no general access to EU financial service markets and runs a financial services trade deficit with the bloc.

The EU’s main service export to Britain, tourism, is unlikely to be affected.

The rest of the EU could see a boost of its services trade with Britain, but given Britain’s strength in specific sectors, the EU might have to import them at a higher cost or rely on inferior domestic suppliers, reducing overall productivity.

INVESTMENT

The United Kingdom is consistently the largest recipient of foreign direct investment in the European Union, according to UNCTAD data, with an average of some $56 billion per year in the 2010-2014 period. EU partners supply just under half of this.

Some 72 percent of investors in an EY study in 2015 cited access to the European single market as important to the UK’s attractiveness to FDI.

There is a risk some FDI would be diverted to other EU countries if Britain lost access to the EU single market.

MIGRATION

One of the main arguments for Brexit campaigners is to limit migration of workers from other EU countries, even though both Norway and Switzerland have had to accept free movement of people in return for access to EU internal markets.

If Britain did cap immigration, it could have a negative impact on eastern European countries, from which some 1.2 million workers were in Britain in late 2015.

The impact could be most acute in the countries with the most citizens in Britain - Poland (853,000 in 2014), Romania (175,000) and Lithuania (155,000)

By contrast, other affluent western European countries, such as Germany, could as a result see higher inflows of EU migrants. This might be beneficial economically, if politically difficult.

CURRENCY/BANKING

On the assumption that the British pound would indeed weaken if Britain voted to leave the European Union, the euro-based earnings of European companies with businesses in Britain would fall although currency variations are not new.

Economists also refer to a risk, albeit limited, of a British financial crisis resulting from Brexit, with a huge ripple effect in the rest of the EU, where banks, companies, governments and households held UK assets of some 46 percent of GDP in 2013, according to Citi, many times more than Greek holdings in 2012.

IRELAND, BENELUX HIT HARDEST?

Research by the Bertelsmann Foundation sought to break down the impact by country and determined that the impact of a “soft exit” could be worse in Ireland than in Britain, based on their degree of trade dependence on Britain.

The Benelux countries and Sweden were the next biggest hits, while the impact on Germany would be very limited given that its auto and other manufacturing sectors have many other markets.

DYNAMIC EFFECTS

The Bertelsmann study also looks into “dynamic effects”, such as a potential loss of productivity because a decreased openness to trade reduces international competition and lowers the incentive to improve competitiveness.

With dynamic effects, the long-term impact on German GDP would range between 0.3 and 2 percent below the value if Britain remained in the European Union.

($1 = 0.9015 euros)

(1 British pound = 1.2773 euros)

($1 = 0.8883 euros)

(1 British pound = 1.2563 euros)

Reporting By Philip Blenkinsop Editing by Jeremy Gaunt

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