A survey of the long-term impact of Brexit on the UK and the EU27 economies

Working Paper N° 366

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This paper reviews a sample of studies on the long-term impact of Brexit on GDP and welfare for both the UK and EU economies. It considers only official and academic studies published before the end of November 2018. The paper highlights the very wide range of results, especially for the UK, reflecting great uncertainty. The negative economic impact is more limited for the EU27 and for most Member States. Small open economies closely related to the UK are more hit than others. This is the case for Ireland due to geographical proximity, for Luxembourg with its economy specialising in financial services and for Cyprus and Malta as they are Commonwealth countries. When only the trade channel of Brexit is estimated, GDP (or welfare) losses are around 1 percentage point of GDP in the Netherlands and in Belgium while these average 0.6 percentage point of GDP in the EU27. For a same Brexit scenario, the results depend on the model specifications, on the channels considered and on some key assumptions. For the UK higher GDP/welfare losses are found for reduced-form approaches, when a productivity shock is added and, also for the EU, for global value chain approaches. Higher GDP/welfare losses are also associated with higher non-tariff trade barriers. Results are sensitive to some parameters such as the reaction of trade volumes to changes in tariffs and non-tariff trade barriers (trade elasticities). Reaching a Free Trade Agreement could limit the GDP/welfare losses both for the UK and the EU Member States compared to an orderly no deal (WTO scenario). If the UK remains in the Single Market or the Customs Union, the GDP/welfare losses induced by Brexit could be even more contained. This justifies the economic interest for both the UK and the EU Member States to reach an agreement on their future relationship.