Brexit poses ‘significant’ cost to EU

A leading economics group in London said yesterday that the effects of the rest of the EU — including Ireland — “could be significant” if Britain were to vote to leave the EU.

However, Capital Economics — which has, in the past, questioned more than most the benefits of EU membership to the UK — maintains that “the costs and benefits” on Britain itself leaving the EU “would be small”.

The two-day EU summit starting on Thursday is widely seen as the best opportunity for Britain to strike an agreement with the EU over revised terms if its to stay in the EU.

British prime minister David Cameron may call a UK referendum for voters to decide on continuing EU membership as early as June if agreement is reached this week.

Analysts say that a failure to strike agreement could pull the sterling lower against the euro.

In its assessment, Capital Economics said Ireland is among a group of countries that could benefit by enticing financial firms to relocate from London.

“If the UK left, businesses based in London might shift to other EU financial centres such as Paris, Frankfurt, Amesterdam, or Dublin, which are currently less important,” said Capital Economics’ senior European economist, Jennifer McKeown.

HSBC gave more credence to this threat by saying yesterday that it would consider relocating its head offices to Paris from London if the UK exited the EU.

However, Ms McKeown believes that many of the financial firms would stay put in London because the disruption and costs of relocation would be too high.

“Firms might therefore opt to set up brass plate subsidiaries in remaining EU countries, while still conducting the bulk of their business in London,” she said, adding that the EU may tap some of the the £50bn (€644bn) in foreign investments if the country were to vote for Brexit.

However, when outside the EU, the UK might respond by increasing incentives to foreign firms which would partly offset some of the negative effects.

Across the EU, Capital Economics said some countries run large trade surpluses with the UK and the effects could be significant for Germany under Brexit.

But that may mean that it would be to the advantage of both the Germany and UK to preserve the existing terms of trade by striking a bilateral trade agreement if Britain were to leave.

In terms of confidence and influence, the EU could be an overall loser under Brexit, said Capital Economics.

“The EU is in a precarious state already, with GDP in most countries still below its 2008 level, refugee inflows adding to pressure on resources and policy makers struggling to respond,” said Ms McKeown.

“What’s more, Brexit would confirm that the union is not irrevocable and, if the [UK] did well, others might be tempted to follow.

“So it would deal a damaging blow to sentiment within the region and perceptions from outside and may even present an existential threat.”


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