Three recent reports on the effects of a U.K. exit from the European Union (perhaps better known as the “Brexit”) are all pessimistic about the effects on household incomes, economic growth, gross domestic product, and trade. The first, which describes the process of exit, came in February from the U.K. Cabinet Office; the second was published on 18 March by the Center for Economic Performance at the London School of Economics; while the third, and most comprehensive, was published on 21 March by PwC, commissioned by the Confederation of British Industry (CBI). While the Cabinet Office report purports to be neutral, the CEP and PwC reports are apocalyptic in their warnings about the effects of a Brexit.
The economic effects of Brexit are incredibly complex, affecting trade tariffs, trade, freedom of movement, and membership of the Single Market. Currently Britain’s membership of the Single Market guarantees the four freedoms—freedom of movement for goods, services, capital, and labour within the Single Market area. Things as simple as access to free healthcare while abroad in the European Union will be also affected by a withdrawal.
But what of the effects on regulation? As well as limiting or eliminating EU economic contributions, and preventing free labour migration—the two main arguments in favour of the campaign to leave Europe—many anti-EU campaigners point to savings in the scaling back of EU regulations. The CBI/PwC report estimates that regulatory costs could fall by approximately £12.6 billion a year, against a total estimated annual regulatory cost of £33 billion.
The areas of regulation that are most affected by the European Union include employment and social policy, consumer protection, financial services, competition, product standards, agriculture and fisheries, and environment and climate change. However, some regulations have a “net positive impact on the U.K. economy,” the CBI/PwC report notes, and warns that removing them would mean the United Kingdom would lose these benefits … which means it would be less likely that the regulations would be repealed. It gives an example of the rules relating to health in the workplace, such as protection from exposure to asbestos. It is extremely unlikely that such regulations would be removed wholesale or even piecemeal.
Furthermore, the United Kingdom has chosen to implement regulations in a way that goes beyond the minimum standards required by the European Union, which also, says CBI/PwC, “suggests that U.K. policymakers could be less willing to roll back such regulations.” An example is the U.K.’s retail distribution review that goes beyond the Markets in Financial Instruments Directive (MiFID II) regime “by requiring additional disclosures on the cumulative impact of costs and charges on returns, top execution venues and execution quality for investment firms.”
Finally, some “EU” regulations actually originate from the U.K.’s international commitments as a member of the European Union. To repeal these regulations, the United Kingdom would have to choose to withdraw from these international agreements, which could limit the country’s ability to engage in global trade. Again in the area of financial services, it says, repeal of regulations is “limited by a combination of political constraints and international commitments to global regulatory standards, rather than the EU.” Membership of the G20 is the driving force behind Basel III capital and liquidity requirements for banks, and reforms to derivatives markets rather than membership of the European Union. Even access to EU markets would necessitate compliance with EU regulations. For example, the U.K.’s regulatory regime would have to comply with EU rules in order for U.K. financial institutions to retain access to EU markets.
Both the CBI/PwC and the CEP/LSE reports examine an alternative to full exit: Membership of the European Economic Area, though only the CEP/LSE report uses it as one of the scenarios in which it estimates the effects on household income and economic growth. One of the CEP/LSE report's authors, Thomas Sampson notes: "In the optimistic scenario where incomes shrink by only 1.3% we would—like Norway and Switzerland—have to pay into the EU budget and accept EU regulations that we had no say in deciding. What's more, there would still be free migration of labour.”
However, this alternative would seem an unlikely adoption, since actual savings in contributions to the EU budget would be minima and regulatory costs would not fall at all, because to access the Single Market, countries like Norway or Switzerland must adopt the same regulations as the rest of the EU without, as Sampson says, being able to vote on what these regulations are.
The CEP/LSE report notes that half of the total cost of regulations is estimated to from just two policies: the Renewable Energy Strategy and the Working Time Directive. “Scrapping these regulations,” says CEP “would mean abandoning the U.K.’s renewable energy targets and removing rights such as the entitlement to 20 days paid annual leave.” Both of these moves seem unlikely.
The Cabinet Office report also recognises the effects of Brexit on regulation: “Withdrawal would involve considerable implications for U.K. domestic legislation … including how to maintain a robust legal and regulatory framework where that had previously depended on EU law.” Again pointing to the financial services sector, the report says: “Many financial regulations, such as those governing prudential requirements for banks and investment funds, have direct effect from EU law.” Repealing these regulations would take considerable effort by the U.K. government and would take up enormous amounts of parliamentary and civil service time, adding to the cost of withdrawal, although these would be one-time costs.
Britons of a certain age will remember the “straight banana regulation” from the 1990s. That regulation has already been scrapped; but under most of the current scenarios being contemplated, it does not seem that many other regulations will be.
Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more