Economy

If UK Leaves EU, National Relationship Negotiations Could Last Years

Douglas A. McIntyre

Published: June 18, 2016 6:38 am

Last Updated: January 13, 2020 6:40 am

The International Monetary Fund (IMF) recently released an examination of the U.K. economy that was upbeat. Tempering its comment was anxiety among IMF experts about the results of a split from the European Union. Much of this revolves around the prolonged negotiations the United Kingdom would need to establish economic and trade relationships with many of Europe’s nations.

The IMF’s periodic examination of the U.K. economy was titled “Uncertainty Clouds the United Kingdom’s Economic Prospects” and reported:

Economic growth has consistently been near the top among major advanced economies, the employment rate has risen to a record high, the fiscal deficit has been reduced, and major financial sector reforms have been adopted, the report notes.

Nevertheless, there are risks to the outlook, including the possibility of a reversal in recently buoyant housing markets, a wide external current account deficit and low household saving rate, and continued slow productivity growth. The referendum on the U.K.’s continued membership in the European Union, to take place on June 23, is a major source of uncertainty.

And:

If the U.K. stays in the EU, macroeconomic policies should focus on promoting steady growth while reducing these vulnerabilities. Monetary policy should continue to support the recovery until inflationary pressures become stronger. Despite major progress since the crisis in reducing the fiscal deficit, it remains relatively high, and the government’s plan to steadily reduce the deficit and rebuild buffers is appropriate. However, government should still look for opportunities to encourage growth within the existing budget—for example by increasing spending on infrastructure, paid for through tax and pension reforms that could boost revenues or reduce outlays.

In specific comments about the break up:

A decision by U.K. voters to exit the EU would set off negotiations between the U.K. and the rest of the EU over the terms of its withdrawal and over the details of its future relationship with the Union. The U.K. would likewise need to renegotiate trade relationships with the 60 non-EU economies where trade is currently governed by EU agreements.
These negotiations could drag on for years, leading to a period of heightened uncertainty and risk aversion, which in turn would discourage consumption and investment and roil financial markets. In the long run, most formal assessments agree that the U.K. would be worse off economically if it were to leave the EU, as higher trade and financial barriers would lead to lower output and incomes.

Despite a huge number of arguments about the danger of a break-up, the polls show the vote will still be close.