A new study from the Peterson Institute for International Economics (PIIE) estimates Brexit's effects on the UK and the remaining 27 members of the European Union (EU-27) using 12 economic simulation models from currently available empirical research.¹ Except for two models, which were widely criticized for their unrealistic assumptions,² the consensus view is that the Brexit would be damaging for both sides, but the UK would lose the most.

Figures 1 and 2 provide a summary comparison of estimates of short-or-medium-run GDP effects (two-or-three years' time span) from the various models for both the UK and the EU-27 under a soft and hard Brexit scenario.³ The GDP losses are asymmetric and more damaging for the UK (Figure 1). Losses for the UK are larger than for the EU-27 under both scenarios and range from a reduction of GDP of 0.81% (soft Brexit) to a reduction of GDP of 6% (hard Brexit).⁴

Source: Latorre, Maria C., Zoryana Olekseyuk, Hidemichi Yonezawa, and Sherman Robinson (2019)

UK firms would lose preferential access to the EU (the UK's main natural trading partner and largest market) as well as all EU's trade deals with other nations (more than 50 trade agreements to date); as a result, they would not be able to offset the trade that they lose with the EU by trading with third countries.

Furthermore, the UK would incur additional losses due to decreases in foreign direct investment (FDI), declines in sectoral productivity and efficiency losses from a reduction in economies of scale, productivity, and factor remuneration, as well as changes in the structure of production. Other effects include migration of skilled and unskilled labor from the UK to other European countries, and increased vulnerability in the UK economy to macroeconomic shocks that affect interest rates, exchange rates and inflation, since the economy would become less synchronized with the remaining EU-27 economies.

By contrast, EU-27 firms would be able to offset most of their trade losses with the UK by increasing intra-EU trade and by trading more with third countries, which explains the smaller adverse impact of the Brexit on EU-27's GDP growth (Figure 2).

Source: Latorre, Maria C., Zoryana Olekseyuk, Hidemichi Yonezawa, and Sherman Robinson (2019)

The PIIE study also offers a deeper look at the most comprehensive economic simulation model to examine the impact of the Brexit on the UK and the EU-27. The model takes into account 21 economic sectors in each country, FDI, and multinational companies operating in the service industry. Its key findings on the effects of the Brexit scenarios include the following: ⁷

• In both the UK and the EU-27, the reduction in private consumption is projected to be more severe than the reduction in GDP.
• Increases in FDI barriers account for nearly one-third of the contraction in GDP and private consumption in both regions.
• Reduction in wages and capital remunerations are nearly seven times larger in the UK than in the EU-27.
• Following a hard Brexit, industry-wide productivity declines are much more pronounced in the UK than in the EU-27, and the highest reduction in productivity is in the UK food production sector, with a decline almost three times larger than in the EU-27.

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ENDNOTES

¹ Latorre, Maria C., Zoryana Olekseyuk, Hidemichi Yonezawa, and Robinson, Sherman. March 2019. 19-5 Brexit: Everyone Loses, but Britain Loses the Most. Working Paper. Peterson Institute for International Economics.

² The two studies that find positive impacts (0.6% GDP increase for the UK in one case and 1.6% GDP increase in the other) assume that the UK government strikes simultaneously a free trade agreement with the EU and with the rest of the world, and further engages in an ambitious plan of deregulation and liberalization of the UK economy.

³ Soft Brexit means that the UK negotiates with the EU-27 a trade agreement similar to that of Norway and similar to the "Brexit white paper." Hard Brexit means that the UK reverts to World Trade Organization (WTO) rules due to a lack of UK-EU agreement.

⁴ Not all 12 economic models evaluate the impact of the Brexit in terms of GDP losses for the UK and the EU or distinguish between soft and hard Brexit. A few of them, for instance, evaluate the effect of the Brexit in terms of real income and private consumption losses.

⁵ Figure 1 compares only a subset of the models that analyze the effects of the same Brexit scenarios on UK's GDP. As a result, not all 12 models are represented in Figure 1.

⁶ Figure 2 compares only a subset of the studies that analyze the effects of the same Brexit scenarios on EU-27's GDP. As a result, not all 12 models are represented in Figure 2.

⁷ La Torre, Olekseyuk, and Yonezawa (2018). The study's GDP impacts are provided in Figures 1 and 2.