On January 1, 1973, the United Kingdom joined the European Economic Community (as the European Union was then known). The belief was that by joining the Community, the UK would be able to strengthen its trading ties with its neighbors in Europe and expand its access to trade, which would result in stronger economic growth going forward. However, the decision was politically controversial, with many in the UK fearing that membership would limit the country's national sovereignty. A 1975 referendum reaffirmed Britain's commitment to staying in the Community, with 67 percent of the electorate voting in favor of continued membership.

    Fast forward to June 2016, and the UK held another referendum on membership of the European Union. The core issue was the same as that which produced the 1975 referendum: a significant proportion of the country felt that membership of the EU was negatively impacting the country's national sovereignty. Flash points included (1) rising immigration from EU member states in Eastern Europe, such as Poland, and concerns that expansion of the EU to include Turkey would lead to even more immigration, (2) the growing power of the EU bureaucracy in Brussels, and (3) the inability of Britain to make its own trade deals with the rest of the world. The Leave campaign won the referendum by 52 percent to 48 percent. Those who wanted to remain argued that, by exiting, Britain would suffer substantial economic harm from the loss of easy access to the EU's large single market. This narrow victory did little to resolve the political controversy. The ruling Conservative government, which itself was deeply split on the issue, now had to negotiate an exit deal with the EU.

    Negotiating an exit deal that minimizes the economic dislocation of exit while satisfying those in the leave camp who want to quickly sever ties with the EU has proven to be a daunting task. The UK government triggered Article 50 of the Lisbon Treaty on March 29, 2017, which gave the UK two years to negotiate its exit from the EU. However, the UK Parliament rejected three exit deals negotiated by Prime Minister Theresa May, forcing the UK to request extensions to the exit deadline until October 31, 2019, and then January 31, 2020. Notwithstanding this, it has already become apparent that whatever deal is finally agreed to, the exit from the EU, or Brexit, has already imposed economic harm on the UK economy.

    A study from a Bank of England economist suggests that, in the referendum in June 2016, the cost to the UK has been running at 2% of GDP a year, which implies a loss of about £40 billion a year. If the UK had decided to remain in the EU, the study suggests that the UK economy would have been 2% larger than it is today. The Bank of England also reports that Brexit uncertainty has reduced business investment by 11%, and that the pound has depreciated by 14% against the US dollar. Another study by the Centre for Economic Performance at the London School of Economics suggests that Brexit has already cost the UK economy 3% percent (a loss of £65 billion) which would have been the case had the decision been to remain in the EU. The S&P report suggests that, in addition to lower business investment, a depreciation in the value of the British pound following the referendum contributed to higher inflation, which has damaged household spending power. The S&P report also notes that while currency depreciation would normally be expected to boost exports, no such effect was observed in the UK case. One explanation for this may be that businesses in other EU countries were unwilling to increase their purchases of UK goods and services, given the uncertainty surrounding Brexit.

Looking forward, there is ample anecdotal evidence that many firms with substantial UK assets will move some production out of the country if the final Brexit deal is not to their liking and the country loses preferential access to the EU single market. Among those making contingency plans to move production out of the UK or reduce UK investments are automakers Honda, Nissan, Land Rover, and Ford; the consumer electronics companies Sony and Panasonic; Dyson, the innovative British consumer products company; aircraft-maker Airbus; and banking giant J.P. Morgan.

   Sources: R. Partington, “Cost of Brexit to UK Economy Running at £40bn a Year,” The Guardian, February 15, 2019; Felix T. et al., “From Dyson to J.P. Morgan, Here Are the Companies Moving Jobs or Operations Out of the UK Because of Brexit,” Quartz, April 19, 2019; J. Edwards, “The Price of Brexit Has Been $65 Billion So Far, Plan an Impending Recession,” Business Insider, April 19, 2019.

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