The United Kingdom’s March to a Vote on Brexit

March 1, 2016 11:15 AM

Policy uncertainty fuels market volatility, and the United Kingdom is no exception. It will take four months to resolve the status of Britain within the European Union—for the time being, future institutional arrangements are difficult to predict. So why is the referendum taking place? A lenient interpretation is that the crisis in the euro area, and the steep increase in immigration, made the public question the United Kingdom’s links with the continent more than in the past. A more skeptical interpretation is that a symbolic renegotiation was motivated by internal political competition in Britain.


Bottom Line

Brexit would be costly not only for the United Kingdom; the process would also divert attention from Europe’s pressing problems (it could take years and probably would rekindle the Scottish question), and might tempt other governments to pursue their own referenda. Gianmarco Ottaviano and coauthors from the Centre for Economic Performance calculate that, even accounting for what the United Kingdom would save in fiscal contributions to the European Union, the costs from Brexit would amount to 1 to 3 percent of GDP. The lower bound assumes—optimistically—that no tariffs are increased after exit.