How EU withdrawal could turn Britain into economic backwater
UK faces an exodus of multinational firms, massive job losses and a fallout in its financial and property sectors if it leaves the euro zone
Britain's economic destiny hangs in the balance in the next few years. The country and the European Union remain on a collision course and, thanks to Prime Minister David Cameron's pledge for a public referendum on EU membership by 2017, a future British exit (Brexit) cannot be ruled out. A deepening gulf between Britain and Brussels and British voters' growing disenchantment towards Europe mean the chances of a messy divorce loom large.
The stakes are high. The fallout from an EU exit could wreak massive collateral damage on the British economy. Britain might not only end up marginalised outside Europe, but its growth prospects could be left badly scarred for decades to come.
The EU has done itself few favours in recent years. The spectacle of Europe's crisis-strewn economy and the image of the EU's bloated, over-regulating bureaucracy have alienated Britain's public opinion.
With the British economy basking in 3 per cent-plus growth right now, it is no surprise that British eurosceptics argue the moment has arrived for the country to break free. They contend that greater national sovereignty is the best passport to faster growth.
They would be wrong to think that way. Britain's economic fortunes are completely intertwined with Europe's, no matter whether the country is in or out of the EU. Mutual economic dependency is so strong that if Britain plugs for an EU opt-out, the damage to both economies would be extensive and long-lasting.
Business with Europe is important to Britain. Export earnings to EU countries are worth up to £240 billion (HK$3 trillion) and support more than four million jobs in Britain. With business with the EU possibly worth up to 10 per cent of Britain's output, withdrawal from the EU would pose serious risks for the country.
Britain is a major beneficiary of foreign investment inflows. Since the early 1980s, multinational corporations have flocked to the country after former prime minister Margaret Thatcher opened Britain's doors to a European free enterprise zone. Companies from the United States and Asia see Britain as their gateway to Europe's single market.
If Britain exits, there is a danger that these overseas firms would leave in droves, shifting their operations to Europe. The potential loss in production, investment and jobs would be catastrophic for Britain.
Britain's financial services sector would be under threat, too. London plays host to more than 250 international banks, accounting for a third of last year's £71 billion financial services trade surplus. Most US and Asian banks headquarter their European operations in London, giving them a passport to provide services across the EU.
If Britain withdraws from Europe, many of these banks would abandon London and relocate to other EU financial centres to guarantee business continuity. The impact on London's financial industry and the fallout on construction and the property market in the southeast could be devastating for the economy.
In the long run, it would be a blow the British economy would struggle to recover from. It would be hard to imagine home-grown British companies rushing to fill the gap left by the exodus of businesses decamping to Europe. It would take years of government nurturing and massive national reinvestment to repair the damage. The dire state of Britain's public-sector finances would tend to rule that out. Britain could turn into an economic backwater.
Right now, Britain has the best of both worlds by being part of the EU, but not the euro and its associated economic risks. Dropping out from Europe's single market and relegation to membership of Europe's free trade association would see a key diminution of Britain's sphere of influence in European policymaking.
Britain's pro-independence politicians are gambling that the country can do better striking out on its own, a risky ploy in an uncertain world. Indeed, the EU needs vital reforms to put its economy back on the road to recovery. In the long run, the better option for Britain may be to Fixit rather than Brexit.
