Economic Effect of a Brexit on the German and European Economy

Tasks

Following the United Kingdon's referendum on EU membership and in the run-up to the negotiations of its exit ("Brexit"), the political, economic and legal perspectives for Germany and the European Union's relations with the United Kingdom are extremely uncertain. The British government's comments on Britain's exit from the European single market, and possibly also from the EU customs union, have fuelled uncertainty and highlighted risks for both the German and the European economy todate .
In addition to an evaluation of the bilateral economic and trade relations between the United Kingdom and Germany and the EU, respectively, this study provides an analysis of the potential impact of Brexit on the British, German and European economies. It also evaluates the implications of Brexit for various industries. Different scenarios for designing future EU-UK relations are examined on the basis of bilateral, sectoral trade and economic links.

Methods

Descriptive presentation of bilateral economic and trade relations between the United Kingdom and Germany and other EU countries, respectively.
Use of a quantitative foreign trade model to simulate exit-scenarios and their net costs.
Use of econometric results to assess long-term effects.

Data and other Sources

Destatis, Eurostat, World Input Output Database, OECD International Migration Data-base, WITS-TRAINS and IDB.

Results

The results of the study show that Brexit will be significantly more expensive for the United Kingdom than for Germany in all events. In the scenario of a comprehensive and ambitious free trade agreement between the EU and the United Kingdom, real gross domestric product would, in the long-run, be 0.6 percent lower in the UK and 0.1 percent lower in Germany and the EU respectively. In the absence of a bilateral agreement and therefore a relapse to most-favoured nation tariff rates under the World Trade Organization, the effect on GDP in the UK would be -1.7 percent in the long-run, -0.2 percent in Germany and -0.3 percent averaged over the EU27 countries. A Brexit would affect EU27 states differently. Overall, the further the geographic and cultural distance from the UK, the lower the losses for the respective EU27 states.

The largest relative drop in value added in the German economy would potentially be seen in pharmaceutical products, as well as the automotive and machine-building industries. In the United Kingdom, the automotive industry, aircraft construction, the metal and chemical industries, and the wholesale sector are among the sectors that would be most negatively affected; as these sectors are typically strongly integrated into the European value chain. In Germany, however, some service sectors may stand to benefit from a Brexit, including the financial sector and IT services. The United Kingdom could expect to generate added value, particularly in food industries.

Publication