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Jun

The self-inflicted dangers of the EU referendum

Written on June 22, 2016 by Waya Quiviger in EU Expansion, Europe

What were they thinking? It is extraordinary to read a succession of official reports arguing, rightly, that a vote to leave the EU would impose long-term damage and a short-term shock. What sort of government would run such a risk, particularly when the economy has barely recovered from the financial crisis of less than a decade ago? The answer is one that has put the needs of short-term party management above its responsibility for the country’s welfare. David Cameron, prime minister, might soon be known as the man who left the UK in far-from-splendid isolation.

The Treasury has already argued that leaving the EU might lower real gross domestic product by between 3.4 and 9.5 per cent in the long term. This is broadly in line with estimates from other reputable forecasters. Patrick Minford of Cardiff University, a proponent of leaving, argues that the UK would enjoy a jump of 4 per cent in aggregate economic welfare after leaving the EU and adopting free trade (an unlikely choice). But this result is an outlier. It rests on implausible assumptions, not least on

The Treasury has now followed up with a report on the short-term consequences of a vote to leave. In summarising the results, George Osborne, the chancellor of the exchequer, has stated that the UK would suffer a “do-it-yourself” recession if it decided to leave. One might better call it a “do-it-himself” recession. For it was the government’s decision to take this risk.

The new report’s main scenario predicts that GDP would be 3.6 per cent lower after two years than if the UK voted to remain, unemployment would be 520,000 higher and the pound would be 12 per cent lower. Under a worse scenario, GDP could be 6 per cent lower, unemployment 820,000 higher and sterling 15 per cent lower. The Institute for Fiscal Studies adds that, instead of an improvement of £8bn a year in the fiscal position, as the net contribution to the EU fell, the budget deficit might be between £20bn and £40bn higher in 2019-20 than otherwise, sharply slowing the planned fiscal consolidation.

Indeed, the Treasury argues, plausibly, that the very possibility of a vote to leave is already having an impact on the economy. But an actual vote to do so in June’s referendum would crystallise this risk and create significant and immediate effects, via three channels. The first of these would be the tendency of households and businesses to adjust at once to becoming permanently poorer. This would lead to significant cuts in consumption and investment. Read more…

MARTIN WOLF, May 26, 2016

 

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