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We should strengthen alliances, not isolate ourselves by leaving the EU

By Angela McGowan, chief economist at Danske Bank

Published 19/04/2016

Trading places: it is not known what effect Brexit would have on imports and exports between the UK and Europe
Trading places: it is not known what effect Brexit would have on imports and exports between the UK and Europe

The campaigns for and against the UK remaining in the European Union are becoming ever more vocal, with an increasing amount of media coverage given to the upcoming vote. While it's clear a lot of people are still to make up their minds, the campaign to remain continues to have more support.

In a recent Danske Bank poll, 26% of the 1,000 people surveyed across Northern Ireland said they did not know how they should vote in the Brexit referendum on June 23.

A full 56% said that they wanted to stay in Europe, although around 10% of people surveyed said that they would like to see further European reform. Finally, only 18% of people surveyed in Northern Ireland want to leave the European Union.

The Financial Times has noted that there are few issues that unite economists, but Brexit is definitely one of them. The vast majority of economists believe that a Brexit would cause a serious economic shock to the UK economy. Indeed, a recent Financial Times poll of economists found that 74% of them thought that leaving the EU would damage the country's medium-term outlook.

For every economist found to be supporting a Brexit, nine times as many want the UK to remain in the EU.

Quite simply, economists do not like uncertainty.

A depreciating pound, volatile markets, lower investment levels, higher inflation and, in particular, the lack of a ready-made 'plan B' for UK trade - all have the potential to push the UK into a technical recession in late 2016 or early 2017.

A Brexit would bring with it untold uncertainty which economists cannot simply overlook when reaching conclusions on this subject.

For example, if Britain were to leave the EU there are so many unanswered questions:

  • How long would it take to build up new trade deals with the EU and with other countries around the world? For Switzerland, it took nine years.
  • How long would it take (and how much would it cost) for the UK to start rebuilding its network of foreign offices around the world to negotiate new trade deals?
  •  Sterling would be expected to depreciate, but by how much? Goldman Sachs have estimated that the pound and sterling assets could depreciate by up to 20%. A depreciated pound would push inflation upwards.
  • What levels of capital flight would we expect and would the Bank of England have to react in an attempt to stop it?
  • By how much would investment fall during this period of uncertainty? Foreign investors will shy away from the UK until trade deals are sorted out.
  • As investment drops back between 2016 and 2018 and consumer confidence falls due to the uncertainty - how would this impact GDP levels across the UK? Danske Bank estimates that a vote for Brexit will result in the UK economy contracting by 0.4% in 2017.
  • What tariffs would be imposed on our exports and imports, if we were no longer part of the European free-trade agreement?
  • How would these tariffs on our imports impact household inflation levels? UBS believe inflation could rise by five percentage points with a Brexit.
  • The Bank of England has recently warned that it will adjust monetary policy "to meet the inflation target" - but would it be tempted to focus on the weak economic growth and not inflation?
  • How would we stop financial institutions in the UK from fleeing to the likes of Frankfurt, Paris or Dublin?
  • As the cost of borrowing international money rises for the UK alongside its rising risk profile, how does the government fund the increasingly expensive deficit? Where will the cuts in public spending be made?
  • As Northern Ireland receives higher levels of funding from Europe in the form of CAP, structural funds and Peace and Reconciliation monies - will the UK Treasury be prepared to give Northern Ireland a top-up for the lost EU funding? The UK government already thinks that we get too much public funding as it is.
  • How will a Brexit impact trade between Northern Ireland and the Republic of Ireland - will border posts or customs posts be re-erected?
  • How would a Brexit impact the local labour supply, with many local companies very reliant on European workers? (For example, agri-food production, hospitality and even local universities).
  • Would the UK government be able to replace Horizon 2020 funding for university research projects?
  • The UK could potentially save £8bn a year by not having to contribute to the EU budget, but by not being an EU member how much will it lose in terms of lower trade, lower investment, higher borrowing costs, higher inflation for households and lower GDP?

Most rational people tend to fear the unknown. Walking away from a free trade agreement with the world's largest market, where human rights are respected and democracy prevails, is sufficiently risky without the added problem of having no back-up plan in place.

The economic arguments for staying in the Europe Union are very compelling - lower inflation, ease of trade, higher foreign direct investment, higher GDP and lower borrowing costs.

At a time when the safety and security of global citizens is under threat, it is my opinion that we should be strengthening alliances and institutions with civilised countries - not isolating ourselves and simultaneously tipping the country into recession.

Too many uncertainties mean that the step into the unknown that an exit from EU would bring is just too much of a risk.

In next week's Economy Watch, we hear from PwC NI chief economist Esmond Birnie

Belfast Telegraph

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