In his most recent speech at the European Policy Centre conference, Donald Tusk, president of the European Council, warned that the United Kingdom had two options to pick from—a hard Brexit or no Brexit. A hard Brexit, as it became known, is a term used to describe a scenario in which the United Kingdom rejects the economic agreements that it previously benefitted from as a member of the European Union. This scenario is particularly harmful for businesses, which will experience higher taxes, tariffs and other costs associated with conducting business with members of the European Union.
“We will conduct the negotiations in good faith, defend the interests of the EU 27, minimize the costs and seek the best possible deal for all,” Tusk said. “But as I have said before, I am afraid that no such outcome exists that will benefit either side.”
Following the Brexit vote, Prime Minister Theresa May promised to activate Article 50—which dictates the process for withdrawing from the European Union—by March 2017. Article 50 gives a country two years to negotiate new terms before it formally withdraws from the European Union. Though there are several possible outcomes of the decision, each is bound to have a major influence on the U.K. economy.
In her speech to the Conservative Conference, May laid out her view of the United Kingdom’s post-Brexit future.
“We are going to be a fully-independent, sovereign country, a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts,” May said. “We are going, once more, to have the freedom to make our own decisions on a whole host of different matters, from how we label our food to the way in which we choose to control immigration.”
A hard Brexit could have severe economic consequences for the United Kingdom, though there is no agreement as to how badly the EU and U.K. economies will be hurt by the decision.
An analysis published by the U.K. treasury prior to the Brexit vote analyzed the annual loss of GDP per household as a result of a Brexit. The document considers three existing models: a membership in the European Economic Area, a negotiated bilateral agreement and trading under the rules set by the World Trade Organization. The results claim that after 15 years of leaving the European Union, each household will lose 2,600 pounds if the United Kingdom enters an EEA membership, 4,300 pounds if it negotiates a bilateral agreement and 5,200 pounds if it follows rules set by the WTO.
“The negative impact on GDP would also result in substantially weaker tax receipts, significantly outweighing any potential gain from reduced financial contributions to the EU,” the analysis states.
The analysis goes on to claim that even after the United Kingdom stops contributing to the European Union, the tax receipts would drop by 20 billion pounds a year if the country had an EEA membership, 36 billion pounds under a negotiated bilateral agreement and 45 billion pounds as a WTO member.
The Organization for Economic Co-operation and Development had its own take on the consequences of a hard Brexit.
“Brexit would, rather like a tax, hit the wellbeing and the pockets of UK citizens. Unlike most takes, however, this one will not finance the provision of public services or close the fiscal gap. The ‘Brexit tax’ would be a purely deadweight loss, a cost incurred with no economic benefit,” Angel Gurria, OECD secretary-general , said.
The OECD document, titled “The Economic Consequences of Brexit: A Taxing Decision,” predicts that by 2020, United Kingdom’s GDP will be over 3 percent smaller than what it would have been if it stayed in the Eurozone, resulting in a cost of 2,200 pounds per household.
In the long term, capital, immigration and technical progress will be negatively impacted. Labor productivity will drop due to decreases in foreign investment and the number of skilled workers will fall as a result of lower immigration rates. By 2030, the GDP will be 5 percent smaller, resulting in a cost of 3,200 pounds per household. In a more pessimistic scenario, the cost could reach 5,000 pounds per household.
The OECD notes that the future of the U.K. economy will be influenced by access to the single market, along with the costs that the United Kingdom will pay to access it. This means that the next two and a half years will have a strong impact on the future of the U.K. economy and the fall in the value of the pound, which fell to its lowest rate against the dollar in 31 years.
The effects of the Brexit are already being felt by the U.K. businesses and their customers. Most recently, the BBC reported that Unilever would raise the prices of its products in the United Kingdom to compensate for the falling price of the pound.
In response, Tesco, one of the U.K.’s largest retailers, pulled Unilever products off its website, though they are still available for sale in stores.
The article also cited a survey in which 75 percent of respondents noticed a price increase on some of the most commonly used household items.
Toward the end of his speech, Tusk referenced a cake metaphor used by some U.K. politicians who hope that they could leave the European Union without losing membership benefits.
“The words uttered by one of the leading campaigners for Brexit and proponents of the ‘cake philosophy’ was pure illusion: that one can have the EU cake and eat it too. Too all who believe in it, I propose a simple experiment. Buy a cake, eat it, and see if it is still on the plate,” Tusk said.