What would happen if Britain left the EU?

Britain’s relationship with Europe is low down on the list of concerns for most voters in the coming election, but the subject of the “Brexit” – Britain’s secession from the European Union – will come to dominate our political lives should the Conservatives find themselves in some kind of power after 7 May. David Cameron has promised a 2017 referendum on our place in the EU, a referendum our survey suggests is favoured by the majority of the population. The result of any plebiscite looks less certain, with those wishing to leave Europe just outnumbering those likely to vote for the status quo, but there are still many undecided.

The arguments on either side are clear. If you’re a Eurosceptic, the impositions of European Union bureaucracy are daily infuriations, with Britain supposedly ceding control to Brussels of immigration policy, of its legal system, of its famously curved cucumbers. Britain contributes a small fortune to the European Union budget each year (somewhere between ￡8bn and ￡20bn, depending on whom you believe) and that’s after the hard-won common agricultural policy rebate secured by Margaret Thatcher in 1984 (when Britain was the second poorest of the EEC members).

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Anti-European feeling, stoked by an aggressively Eurosceptic press (or “Europhobic”, as Peter Mandelson called them), sees British secession from the EU as opening up new vistas of global economic co-operation and integration, while slamming the door on the legions of impecunious eastern European migrants coming to scrounge off the welfare state.

Mark Reckless, the Ukip MP who defected from the Tories because of what he saw as a soft line on Europe, told us: “Many of those who are now saying that Brexit would be a terrible thing for the country were the same people who were arguing very strongly that we should join the euro. The obvious failure of the euro combined with the remarkable growth of emerging markets outside Europe and the relative success of the United States when compared with Europe – all of these are major factors which make it very difficult for people to argue to stay in the EU, and will make people feel that it’s much better for them economically to leave.”

One of the main arguments employed by those in favour of remaining in the EU is simply how difficult it would prove to leave. We are deeply integrated with our European allies – economically, militarily and culturally. It’s likely that Brexit (and what an ugly neologism it is) would lead to plummeting stock markets and an economic recession, with losses to GDP calculated by the Centre for Economic Performance at up to 9.5% – worse than the 2008 financial crisis. Parliament’s joint committee on national security strategy has warned that leaving the EU would risk “crucial connections being missed” in the war on terror. Brexit would mean visas for visits to France, annual driving tests for the British inhabitants of the Costa del Sol (if they’re allowed to stay at all), and could well reignite calls for Scottish independence.

Denis MacShane, Blair’s minister for Europe before a period of enforced seclusion at her majesty’s pleasure following the expenses scandal, has found himself suddenly in demand as an expert on Brexit and the EU, having recently published a trenchant and intelligent book on the subject, Brexit – How Britain Will Leave Europe. “The Italians, Germans, French, Americans, Canadians, they’re all absolutely terrified by the prospect of the referendum, let alone Britain actually leaving the EU,” he says. “They can’t say anything on the record, but they all know that two years of Brexit negotiations will be hell. It will be monumental and destabilising and will dominate our relations with all our trading partners. It’s the first time in my lifetime that a major nation has offered its citizens a referendum on membership of a major international organisation. It’s seen internationally as an act of flippant irresponsibility. A cold-blooded appeasement of Ukip that is genuinely shocking other countries.”

While we don’t know yet the terms under which any secession from the EU would be negotiated, here we set out some of the key potential ramifications of Brexit, drawing on the expertise of a wide range of figures from the worlds of politics and economics.

1. Business

More than 50% of Britain’s trade flows are with the EU, and trading costs in the EU are some of the lowest globally.

Open Europe thinktank

If it really is the economy, stupid, then it will be the winner of the economic arguments that prevails in any potential Brexit negotiation. Leaving aside for a moment implications of uncertainty in the stock market in the run-up to a referendum, we look at the place of British business within, and without, the European Union.

James Ind of Man GLG, one of the City’s leading asset managers, told us that most British businesses recognise that it is not to their benefit to leave the EU. “There are very few businesses who would see it in their interests to push for European exit,” he says. “There are some that might feel they’d be better off negotiating with non-European nations, particularly emerging markets, as a UK entity. For instance in India, where the EU has put through some bad deals, all bundled together, and perhaps we could put together some better ones on our own, but those are very much the minority.”

 If we left Europe… foreign-owned car production would probably move out of Britain if it was no longer guaranteed access to European markets. Photograph: Bloomberg/Getty Images

For the Eurosceptics, Brexit would free our businesses, particularly our financial services, to operate on a global stage. Robert Oulds, director of the Bruges Group, a thinktank that advocates cutting ties with Europe, has researched extensively the impact on business of a post-Brexit world: “If we left, we’d be outside the reach of the financial transactions tax [proposed by the EU and due to be introduced in January 2016], which is worrying many in the City and will certainly drive financial business outside of the EU. We’d also have the ability to get out of EU rules like the cap on bonuses in the City.”

Membership of the EU is costing British business more than ￡150bn each year.

Professor Tim Congdon

One of the areas of focus for the coalition government has been a renewed concentration on industry and manufacturing in the UK, a recognition that the economy had become too reliant on the service sector. Denis MacShane sees Brexit as a threat to this old industry renaissance. “If you look at our motor car industry, it’s entirely foreign-owned, a lot of it Asian money. Now they’re investing here because they have completely unfettered access to the EU through us. If we left, why wouldn’t they choose to base their big investment projects in another EU country? There are plenty of places with labour that is just as skilled but much cheaper. Romania, Bulgaria – they could pick up all the Japanese and Indian motor car investment.”

2. Integration

Leaving Europe to join the world is really the North Korea option, out in the cold with few friends, no influence.

Gordon Brown

In a recent speech in support of Ed Miliband, Tony Blair focused on the dangers of leaving the EU. He said that secession would leave us “diminished in the world, do significant damage to our economy and, less obviously but just as important to our future, would go against the very qualities and ambitions that mark us out still as a great global nation”. This is the central line of those seeking an “in” vote (or wishing to avoid a referendum altogether): that Brexit would not only leave us poorer financially (something that, at least in the short term, even Eurosceptics concede), but it would also mark a kind of moral failing, a sign that we were in retreat from a golden age of British internationalisation.

Brexit is often presented as a Catch-22, where we are so enmeshed in the EU that any separation must produce intolerable pain, at least in the short term. John Springford, senior research fellow at the Centre for European Reform who has carried out a lengthy study of the economic costs of Brexit, says: “The trade-off is an uncomfortable one for Britain if it votes to leave. It’s leave the EU and get your sovereignty back, regulate your economy as you see fit, but lose market access and damage your economy. Or you leave the EU, sign up to the EEA [European economic area] or try to have a bespoke trade agreement with the EU like the Swiss one. But that would mean you’d have to sign up to most of the regulations – you’d have no control over them – and you’d have to agree to the free movement of labour. It seemed to us that both of these alternatives are far worse than EU membership.”

With the Commonwealth’s overall GDP set to overtake the EU’s in 2019, the UK should look to embrace the global market.

Rory Broomfield, director of the Freedom Association

Mark Reckless is more optimistic about the prospects for post-Brexit Britain: “We’re paying ￡20bn into the EU budget each year. Because of our membership of the EU, we’re not able to trade freely with the rest of the world, and the EU has a poor record of opening their markets to our exporters, particularly high-value-added business services. The prospect of being able to sell British agricultural and food markets to the world would leave the British economy in a much better condition post-Brexit than it is now.”

 If we left Europe… some say we’d be in a better position to sell agricultural products to the world. Photograph: Ian Dagnall / Alamy/Alamy

3. Financial services

Every few months, there seems to be a cry from certain sectors of the City of London that government interference (usually in the form of higher taxes or caps on bonuses) or EU regulation (the dreaded financial transactions tax) will drive our financial services into the arms of Switzerland or Singapore. Some Eurosceptics see Brexit as a great opportunity to remodel Britain’s economy, increasing our reliance on financial services and using Switzerland as a model for future success freed from the shackles of the EU.

The City won’t just survive but prosper if the UK leaves the EU.

Helena Morrissey, chairman of the Investment Management Association

“Switzerland isn’t suffering economically at the moment because it’s not part of the EU,” Robert Oulds says. “It’s able to trade financial services and commodities with whomever it wants. For our financial services, if we left the EU and remained in the single market, the only difference would be that we would not be under EU regulators such as the European Banking Authority. There’s a whole host of EU agencies that are incredibly powerful and have the ability to shut down one of our financial institutions pretty much at whim. This is a worry to some people in the City.”

Denis MacShane notes that “Dubai and Singapore are making huge bids to get financial services to move there, offering huge tax-free incentives, but of course nobody actually wants to live in these countries”. As for Switzerland, it’s a mistake to suggest that it is trading with the EU without signing up to EU regulation, he says. “The Swiss are hanging on by their fingernails. I was over in Berne talking to the Swiss Bankers Association about Brexit a few weeks ago and they’re tearing their little hairs out because they’ve got a very tricky renegotiation with the EU coming up. They had this crazy vote to cap immigrants last February. And the EU said, ‘No way! If you enforce that, you’re out of everything, none of the existing agreements – research, trade, business – can stand.’ The Swiss are going to have to offer another vote [on immigration] in 2017, would you believe it, and businesses and the government will then come steaming out of the traps to ensure that the relationship with the EU is maintained. I think this is what would happen if Britain left the EU. There’d be the mother and father of all political crises in Britain. Cameron would just walk away and hand the problem over to someone else and it would be their job to go grovelling to Brussels to let us back in.”

James Ind agrees that using Switzerland or Dubai as a paradigm for our financial future is misguided. “We shouldn’t use as a model a much smaller country that provides the sort of services that larger, regulated economies can’t,” he says. “The British financial services industry is not about offshore private banking, it’s about world-class asset management, insurance, reinsurance, banking, retail banking, commercial banking – these kinds of unsexy parts of the financial services industry which Britain does very well – I can’t see how any of these are better off outside of Europe.

 The Dubai financial market. Photograph: STR/Reuters

“The financial services sector is likely to find itself in an uncomfortable position outside of Europe. Europe is the biggest consumer of the UK’s $60bn of financial service exports. And even beyond Europe its access to markets would have to be renegotiated if it no longer fell under the EU’s trade agreements and regulatory framework. The industry might struggle to regain all its relationships from outside the tent. As Britain’s largest industry in terms of contribution to GDP, this is likely to have a material impact on the economy.”

4. Immigration

Control of EU immigration has been one of the most headline-grabbing arguments in the Brexit debate so far, with Ukip and the Murdoch press pushing for the UK to adopt an Australian-style points system where immigrants are graded on their potential use to the economy before being granted visas.

EU migration has increased significantly and is now almost at a similar level to non-EU migration.

Migration Watch

John Springford believes that one of the benefits of a referendum debate would be that it would allow people to understand the myriad benefits conferred by EU membership, rather than the knee-jerk reactions encouraged by sensationalised newspaper reporting of the subject. “I think it might be cathartic to have a referendum, with people understanding a bit more about what the trade-offs are. So maybe they don’t like immigration and they don’t like rules being imposed from Brussels, but when you speak to people, they don’t really understand what the benefits of these are. The campaign may draw them out and force them to think about that.”

The facts about the effects of migration on the UK economy, wages and employment are often distorted, difficult to understand or poorly explained. Government research from 2014 suggests that immigration actually has very limited impact on levels of employment, while a wide-ranging study by the Oxford University-based Migration Observatory showed that a 1% rise in immigration depressed wages by only 0.3%. Looked at over a longer timescale, immigration actually boosted wages. The research did point out, however, that the benefits were not spread across all income groups and that those at the bottom tended to suffer. “The greatest wage effects are found for low-waged workers. Each 1% increase in the share of migrants in the UK-born working-age population leads to a 0.6% decline in the wages of the 5% lowest-paid workers and to an increase in the wages of higher paid workers.” Crucially, migrants are far less likely to claim benefits than native Britons (although EU migrants are marginally more likely to claim than their non-EU counterparts).

There is a gulf between people’s perception of immigration as a national issue, and one that affects their own lives.

Peter Kellner, YouGov

5. Freedom of movement

 If we left Europe… a million British citizens living in Spain would become illegal immigrants. Photograph: Alex Segre/Alamy

There are nine countries within the EU that have British expat communities of 20,000 or more, all of whom would be dramatically affected by Brexit. More than one million Brits live in Spain alone. British secession from the EU would bring with it any number of consequences, some of them foreseen, others less so. For example, we’d need to apply for visas in order to take our holidays in France, says Denis MacShane, fill out endless forms for any European business we wished to do. “In Spain, every non-EU resident has to pass a driving test and file five years of tax returns.” He adds that another Scottish referendum could become a possibility, with Nicola Sturgeon already having made clear her position on Europe – that Scotland should remain an EU member whatever Britain decides to do. More recently, Fabian Picardo, chief minister of Gibraltar, has said that he would want a separate referendum on EU membership if Britain sought to leave.

Some 2 million UK citizens in EU countries would find themselves becoming illegal immigrants overnight.

Dominic Grieve, former attorney general

Then there’s the problem of the border between northern and southern Ireland. Relatively fluid and even continental under the current system, it would become a major international frontier, manned by border patrols and customs guards. The taoiseach is already setting up a special unit to investigate the situation. Currently, Britain exports more to Ireland than to China, India and Brazil combined, trade worth over €1bn a week. “We cannot afford the potential deep uncertainty that would inevitably result from a fundamental change in the EU-UK relationship, let alone the concrete difficulties which could arise,” says the Irish European minister, Dara Murphy.

 If we left Europe… this sign would become a major international border. Photograph: Alamy

If the Conservatives win power in the coming election, we should prepare ourselves for two years of claim and counter-claim on Europe, immigration and Britain’s place in the world. We shouldn’t assume that, just because everyone from Richard Branson to David Cameron himself wants us to stay in the EU (and make no mistake about it, Cameron offered the referendum as a sop to his grassroots and a defence against Ukip; he doesn’t want Britain to secede), the vote will be clear cut or predictable. We have a Eurosceptic press that will be fighting for an “out” vote and the way Nigel Farage’s message has chimed with voters (at least in local elections) highlights the fact that the British have never really embraced the grand European project. Denis MacShane says that “the working assumption has to be that we could easily vote to leave Europe. No major referendum anywhere on Europe in the last 15 years has voted in favour, so why should we be different?”

Brexit would spell disaster for these islands, and nowhere more so than in Northern Ireland.

Alasdair McDonnell, SDLP leader

The pro-Europeans have to hope that the British will realise that we have too much to lose by leaving the EU. We would feel the cold economic wind of a post-Brexit world and we’d draw back from the edge. As James Ind puts it: “The arguments when you look at them objectively for staying in Europe may not be as emotionally appealing, but they do appeal to self-interest. And I think if you look at the Scottish referendum as a playbook for that, you can get a lot of headlines about why people should leave the union, but when it really comes down to cold hard choices, people vote with their wallets.”

• This article was amended on 19 April 2015. Denis MacShane said no major referendum on Europe in the last 15 years had voted in favour … not 50 years as we had it. Also, when talking about driving tests for non-EU residents in Spain, he said these had to be done when taking up residence there, not every year, as reported. These have been corrected.

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