If we wake up on Friday morning to discover that the UK has in fact voted to leave the European Union, little will have actually materially changed.
hat will impact immediately will be market reaction to the decision. The pound has been in subtle decline against both the euro and the US dollar since the beginning of the year when David Cameron began his EU negotiations.
If the markets react badly to Brexit it is quite likely that sterling will depreciate further. If this depreciation becomes more concerning the Bank of England may have to take a decision to raise interest rates. This would have an impact on mortgage holders but also businesses especially large corporations who hold significant foreign debt.
This impact is not certain, but if it does occur it need not be long lasting either. A negative market reaction like this is based on fear and uncertainty. In order to quell this panic, certainty will be needed about exactly where the UK economy is heading and exactly how long it will take to get there. There is no precedent for a member state leaving the EU and so there in no default relationship with the EU that the UK can adopt. All of the options available to the UK have trade-offs.
If we opted to become members of the European Economic Area (EEA) like Norway, we would preserve our membership of the single market and we would retain free movement of goods, people, services and capital. We would also have to pay money into the EU budget albeit at a reduced level to what we pay now.
We could also opt to become members of the European Free Trade Area (EFTA) like Switzerland. The EFTA covers all EU and EEA countries as well. This does not guarantee us access to the single market, but it would give us a practical platform from which to negotiate into it as the Swiss did. We would retain freedom of movement as all citizens of EFTA countries have the right to live and work in all other EFTA countries. These options would mean that whatever disruption that is caused by Brexit could be limited.
However, the Leave campaign have suggested that these options would not give back enough control to the UK. They have tended to favour the option of negotiating a trade deal between the UK and the EU as two separate blocks. The downside to this is that it could take many years for this to come about and it would prolong the uncertainty that has already done significant damage to the economy.
In the event of a Remain vote all of the above becomes academic. In the event of Brexit, very few things would be certain and that is why the immediate market reaction is likely to be negative. Nevertheless, there would also be a range of options and a clear choice whether to limit that uncertainty by agreeing to something like the EEA or the EFTA or to go it alone and look to the longer term for growth and stability.
- Paul MacFlynn is an economist at the Nevin Economic Research Institute (Neri)