Brexit

In 2015, the ifo Institute conducted a study on the consequences of Brexit on behalf of the Bertelsmann Stiftung. Since then, ifo has expanded and updated its findings in further studies. The UK’s withdrawal from the EU has many negative economic consequences for the country, but also for the EU and Germany. In the worst case scenario, free trade would have come to a halt, the rules of the European Single Market would have collapsed, and customs barriers would have been put back into place. Trade would have become expensive, especially for the UK, as the EU market is much more important for the British than the UK is for most EU member states. The TCA now puts relations between the EU and the UK on a new footing; while it averts the most feared consequences of Brexit, it by no means prevents them all.

Brexit Affects UK Trade More than EU

Despite the new trade deal, Brexit is hitting the UK’s trade harder than the EU’s. The EU’s share of the UK’s trade is larger than the other way around, and this is also true for products of which there are only a few suppliers. In 2019, the EU27 was the source of 50 percent of the UK’s imports and the destination for 47 percent of its exports. This makes the EU the largest market for the UK. For the EU27, however, the UK is much less important: in 2019, only 4 percent of the bloc’s exports went there and 6 percent of its imports came from there. Nevertheless, a trade agreement made sense for both parties.

Consequences for Economic Growth

The TCA results in a relatively low level of trade isolation for the UK. Nevertheless, the UK’s withdrawal from the EU coupled with the TCA could cause the country’s real GDP to be 0.9 percent lower than if it were to remain in the EU, when considering pure trade effects. This decline corresponds to EUR 23.9 billion, or EUR 412 per capita. Ireland loses even more – some 1.5 percent of Irish GDP – due to its small size and strong degree of economic dependency on trade with the UK. For the rest of the EU, on the other hand, the economic welfare losses caused by Brexit will be significantly lower. The UK’s trade isolation following withdrawal from the EU and implementation of the TCA causes Germany’s real GDP to be around 0.14 percent lower than if the UK were to remain in the EU. This corresponds to a drop in German GDP of EUR 4.9 billion, or EUR 71 per capita.

Individual industries, however, are affected differently by lower exports to the UK. The largest declines resulting from the soft Brexit – up to 2.2 percent in each case – are expected to come in the pharmaceutical industry and electronic goods. The financial sector, the chemical industry, and the plastics industry will also pay a price. Alongside lost growth, the remaining EU states have to prepare themselves for additional expenditure on the EU budget.

Effects on the Balance of Power

So far the EU has remained stable, with a constant balancing of interests among four powers. While Italy and France tend to give in to protectionist temptations (see EU agricultural policy), the UK and Germany have set great store by free market forces and autonomous policies based on the principle of subsidiarity. This antagonism always forced the parties involved, and thus the entire EU, to compromise. The departure of the UK could upset this balance – likely to the detriment of Germany. It is therefore in Germany’s greatest interest to at least tie the UK as closely as possible to the EU without downgrading the country to a trading colony. For Europe as a whole, it is a question of staying on an equal footing in the international arena alongside China and the US. This position will be difficult to maintain without the UK.