Running head: ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 1

Economic Analysis and Policy Recommendations

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 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 2

Introduction

29th March 2017 was a poignant year for Europe and the European Union economic

zone in Particular. On this fateful day, the United Kingdom, one of the biggest economic and

military powerhouses in the European Union, notified Brussels of its plans to exit the common

market arrangement, and in accordance with Article 50 of the treaty constituting the EU.

Consequently, the European Union’s council of heads of state and governments ratified the

ensuing negotiations and discussions between the European Union and the United Kingdom, on

29th April 2017, paving the way for the complete exit of Britain from the treaty. The Exit of the

United Kingdom from the European Union sent shockwaves among EU’s business circles and

partner member states. Ideally, the European Union formation was predicated on a political and

economic union comprised of 28 member states across continental Europe. The operating

mechanism of this giant economic zone was premised on a powerful single internal market

comprised of European economies. The common market involved the creation of a

standardized system of rules and procedures that enabled the unhindered movement of goods,

capital, and people across European country’s borders. Moreover, immigration policies and

passport controls within the Schengen as part of the European Union treaty, enabled individuals

to travel freely across the borders, without necessarily obtaining work permits or encountering

restrictions at customs or border points of respective countries. The architects of this giant

economic block appreciated the fact that the strength of an economic punch lies with the size of

its market. In this regard, hitherto Britain’s exit, the European Union was estimated to cover

more than 7 percent of the global population. Moreover, the EU was estimated to generate a

nominal Gross Domestic Product (GDP) of close to 17 Trillion USD translating to 23% of the
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 3

global wealth. More than half of total nominal GDP of the European Union was generated by

only three economies that included Germany, The United Kingdom, and France. Germany has

always been considered the leading economy in Europe contributing around 21% of the total

EU GDP, followed by Britain at 16%, with France, Italy, Spain, and the Netherlands trailing at

15%, 11%, 8% and 4% respectively. Conversely, the other eleven member states of the

European Union ranging from, Cyprus, Malta, Lithuania, Latvia, Estonia, Croatia, Slovenia,

Bulgaria, Luxembourg, Hungary, and Slovakia contributed a mere 1%of the total EU GDP.

The sheer size of the European Union’s economy exemplifies the extent of financial

ramifications that would reverberate across the world if the Union were to collapse.

Similarly, economic pundits have considered Britain, one of the biggest economic

founding member and generous donor to the European Union, as the most important driver of

the European Union economy before Brexit. Conversely, the European Union has been

considered as having given the British economy the impetus to grow by offering an enabling

mechanism. Britain joined the European Union in 1973 at its inception, and was then upbeat

about its economic future in the treaty. Indeed, Britain’s per capita income grew by a whopping

103% after joining the European Union, a major economic feat that dwarfed other formidable

economies such as the United States, Germany, and France, which grew by 97%, 99% and 74%

respectively (Sampson, 2017). The meteoric rise of the British Economy after joining the

European Union led critics in the economic block to believing that the European Union was

dragging down the British economy, and that time was ripe for the latter to exit.

The main question among the remaining European Union member countries was what

such a drastic action by one of the biggest economies portends for the rest of Europe in terms of

economic growth. Fears that the Exit of Britain from the European Union will spell doom for
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 4

the enhanced and greater integration are rife in many quarters across member countries. Pundits

posit that the exit of Britain from the Union will exacerbate the preponderance of Germany as a

major economic powerhouse, and significantly reduce the Union’s output. Populist views

across Europe contend that Brexit is the canary in the coal mine for the collapse of the

European Union as a block, precipitating major economic upheavals unprecedented in modern

history. The waning Euro-enthusiasm among the British that culminated in the Brexit vote has

been to the extent that European economies have been taking advantage of the liberal

immigration and economic laws subsisting in the European Union, to flood British cities with

immigrants and thus straining its economy by taking up British jobs. Discussions post-Brexit

has been centered on reimagining the treaty and creating a new one altogether ostensibly to

cushion member countries from the aftershocks of Brexit. In this regard, economic pundits

contend that the European Union would be on the verge of imminent collapse on the exit of

Britain from the Block. The pessimism on the performance of the EU economy post-Brexit has

been exacerbated by major disagreements between France and Germany, on how to seal the

fiscal gap occasioned by the exit of Britain from the Union. Ideally, Britain was considered the

titular head of the European Union policy formulation and a major voice in the EU parliament.

Economically, Britain was considered to pack a far much greater market and political punch

than virtually every other member of the union. The Germans, in particular, have voiced their

concerns about the future of the European Union, contending that there would be a much

slower rate of growth in the Eurozone. Moreover, Germany and her allies posit that the exit of

Britain, a major advocate for smaller budgets, leaner governments, and economic liberalism,

will significantly slacken European economy. The exit of Britain, long considered as the

European Union’s biggest single export market, will sure cause major ripples on the
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Eurozone‘s market outlook. One of the major talking points regarding the effect of Britain’s

exit from the European Union is centered on motley of legal and regulatory frameworks

hitherto fronted by the UK. Evidently, stakeholders agree that post-Brexit, Britain will no

longer contribute to the European Union’s budget, a contribution estimated to be around 9

Billion Euros. In this regard, Brexit will precipitate major economic costs on the European

Union that will result in significant economic repercussions on the Union. The estimated size of

the resultant economic growth that may have a negative impact on the EU’s economy is largely

uncertain but expected to be substantial. This economic policy paper will answer the question

whether Brexit will cause or create Europe to grow faster. The hypothesis in this research and

economic policy paper is

H0- Brexit will cause the economy of Europe to grow faster

Hu-Brexit will not cause economy in Europe to Grow Faster

EU’s Economic Issues Post-Brexit

Motley of economic and political issues is poised to affect the constituent economies of

the European Union after the exit of Britain. In this regard, the divorce bill is projected to

weigh heavily on the rest of member countries’ economies by virtue of Britain’s strategic

importance in the union. Evidently, the economic and political ballgame in the European Union

will dramatically change after the exit of United Kingdom. Nonetheless, the extent of the

economic ramifications that Brexit will have on the remaining member countries’ economies

will significantly depend on the finer details of the negotiation document between Britain and

the European Union. The main variables that will help in determining the effect of Brexit on

European Union economy include Gross Value-added trade flows, foreign direct Investments

(FDI), Migration, Gross Domestic Product, and trade in goods.

Gross Value Added Trade Flows

The economic relationship between the EU and Britain can be explained the extent of

gross value added flows on either side of the economies. In this regard, the role of value-added

trade flows is indicative of the level of import-export relations between different economies.

Gross value added flows is the nominal measure of the general increases in the value of an

economy, as a result of mass production of goods and services. The basic measure of GVA is

predicated on current prices adjusted for inflationary forces, as well as the effects of the

prevailing tax regimes in a particular economy. In this regard, GVA is an important aspect of

describing the performance of the European Union member countries economy post-Brexit. In

analyzing the effects of Brexit on the European economy, it is imperative that the data be used

to show the most recent trends of the value of imports and exports between the two economies,

by eliminating any possible bias brought about by distortions in the market. The answer to the

economic health of the EU post-Brexit through the lenses of GVA lies in the critical analysis of

OECD data regarding the movement of goods and services between the two economies.

Ideally, GVA is considered a good measure of economic performance based on trade activities.

In order to fully understand the impact of GVA on EU-UK economic relations post-Brexit, the

value of imported services in the Eurozone will be subtracted from the total trade activities,

effectively leaving the value of economic activities that happened inside the European Union.

Consequently, the existing data from the OECD will be projected using a simulation of

different scenarios that depict the future of United Kingdom’s relationship with the European

Union. In this regard, the GVA data will consequently be combined resulting to an estimated

value of all the exports of goods and services to the European Union economy. The projected

reductions or increases in EU export markets because of losing market access and the resultant
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economic shocks will thus be analyzed. Figures on the extent of import declines or otherwise to

the European Union will then be presented in terms of percentages to show the deviations in

absolute terms.

Similarly, the import reductions or otherwise as a result of Brexit will be compared

relative to the existing GDP baselines, ostensibly to discern economic shocks. GVA data is

particularly important in explaining economic decline or otherwise as a result of the occurrence

of a major phenomenon such as Brexit. In this regard, the European Union was formed to

promote trade and flatten immigration procedures within Europe and thus, a decline of trade or

otherwise is a key performance indicator of the effects of Brexit on constituent economies

within Europe. GVA is an important variable in determining the presence of heightened trade

activities and capturing the main impacts of productivity as a result of Brexit. In this regard,

trade in the context of European Union and Brexit aftershocks is concentrated on the activities

of financial intermediaries who often bear the shocks of major market realignment such as

Brexit. The use of GVA as a measurement variable helps in bringing to the fore economic issue

affecting both the high and low productivity sectors within the EU post-Brexit, with a view to

analyzing the economic effect of the phenomenon in question. The import and export share

value of goods and services between the remaining European Union member countries and the

United Kingdom post-Brexit, will thus be critically examined, the differences in different

shares in the various market segments will be examined, and the results tabulated for synthesis

and interpretation (Sampson, 2017). The net effects of bilateral trade data from the OECD will

help in determining the general economic direction of the European Union member countries

with respect to the exit of Britain from the Union. Any substantial decline in GVA figures
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would be indicative of the fact that the view of European traders on the value of British

produced goods and services have materially diminished because of Brexit.

Similarly, the collated data from the OECD will help in explaining the reason for

relative decline or otherwise of value-added exports among the EU member country

economies, in the period to the run-up of the Brexit Vote (Sampson, 2017). The resultant

absolute value-added exports will be juxtaposed against market projections, and the various

peaks and slumps would be explained in conjunction with other variables. Any declines in

commerce volumes between the European Union and the United Kingdom will be explained

Foreign Direct Investments

Economic interdependences with reference to relations between the European Union

and the United Kingdom will be analyzed and the resultant findings juxtaposed against

previous year’s figures before the implementation of Brexit. Indeed, trade activities and foreign

direct investment are both complementary and substitute in reference to economic effects of

Brexit in the European Union (Sampson, 2017). Non-tariff barriers and single market

platforms as exemplified by European Union common market majorly influence foreign direct

investment. In this regard, FDI is the engine of economic growth for the majority of European

Union economies, and the effects variations of such variables would have a direct bearing on

the economic well-being of EU member countries. In this regard, there is a high likelihood that

the flow of FDI to the European Union will be materially diminished because of Brexit. British

firms will subsequently cut their overseas investments in Europe because of this significant

market development. Evidently, multinational firms have ingenious and complex supply chain

networks, and the effects of market uncertainties occasioned by Brexit will invariably lead to

major market disruptions in the Eurozone. Economic pundits posit that hitherto Brexit, there
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 9

were heightened trade activities in the European Union primarily because of Britain’s

membership in the block. Hitherto the activation of Brexit, the European Union economy has

seen a sustained growth in foreign direct investment a feat that is unlikely to be replicated post-

Brexit.

Migration

The presence of open borders across the European Union created a conducive

environment for the movement of goods and services that translated to heightened trade

activities for both the European Union and Britain. The sustained growth in United Kingdom

population has had a ripple effect on trade activities across the Eurozone, which would result in

a major decline post-Brexit. 2004 OECD estimates indicate that close to 2 Million Britons live

and work in the Eurozone outside the United Kingdom, exemplifying the extent to which this

variable has affected trade among European Union member countries (Sampson, 2017). The

subsequent exit of the United Kingdom from the union would, therefore, deal a major blow to

the economies of the remaining member countries. In this regard, the exit of Britain from the

European Union would herald a new chapter in the economic progress of the remaining

member countries due to the shifts in human capital because of changes in immigration laws

precipitated by Brexit.

Trade in Goods

Trade volumes between the European Union and the United Kingdom have been one of

the biggest economic pillars of the Union’s economic health. Indeed, the European Union has

over the years been enjoying massive trade surpluses in its trade activities with the United

Kingdom. OECD statistics peg the value of European Union’s exports to Britain to be more

than 300 Billion Euros, with the resultant British exports to the Union being close to about 184
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Billion Euros, exemplifying the importance of the British economy to the European Union

member countries’ economies(Sampson,2017). To further cement the general feeling among

the remaining EU member countries on the effect of Brexit, Britain’s percentage share of trade

with the Union in comparison with the GDP is close to 2.5 %(Sampson,2017). The massive

trade deficit of the United Kingdom against other Eurozone countries exemplifies the extent to

which these countries would suffer once Article 50 is triggered. Similarly, OECD statistics

indicate the chronic dependency that the smaller European Union member countries have in the

United Kingdom mostly in financial aid. In fact, Germany with its thriving automobile

industry imports close to 2.8% of its GDP to Britain, while other smaller economies such as

Belgium, Ireland, and the Netherlands, and import more than 6% of their GDP to the United

Kingdom (Sampson, 2017). In terms of member States, the biggest economies In terms of trade

in volumes include Germany with value worth 34 Billion Euros, with France, Netherlands,

Ireland and Belgium following with 20, 19, 19 and 13 Billion Euros respectively. The market

size of these economies post-Brexit reveals a major fiscal hole occasioned by the exit of Britain

from the fold of the Union.

Some of the leading sectors in terms of exports from the European Union to the UK

which are projected to materially diminish as a result of Brexit include machinery and transport

sector, with an estimated value of 127 Billion Euros, road vehicles at 59 Billion Euros,

manufactured goods at 70 Billion Euros, chemicals at 51 Billion Euros, food Products at 32

Billion Euros and other minerals and mineral products at 11 Billion Euros. The resultant effects

of Brexit on the European Union’s economy are rather drastic with figures from OECD

indicating massive slumps, which have greatly affected the performance of the European Union

Economy. The comparative advantage currently being experienced by the European Union
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against other formidable economies globally would be expected to decline if the UK pulls out

of the Union, and this may have far-reaching ramifications on the economic performance of the

remaining member states of the economic block.

Methodology and Hypothesis Proving

The quantitative assessment of the effects of Brexit on the general performance of the

European economy post-Brexit will involve a model-based simulation, which will take in

consideration the various economic aspects of the pullout and the expected effects on the

European economy in the end. Almost invariably, while the intended simulation model may not

capture all the macroeconomic aspects of the effects of Brexit on the European economy, it is

projected to give a general direction of the Union’s economy sans Britain. The general

hypothetical assessment of the key variables in the whole issue of Brexit and its effect on the

EU’s economy will be primarily be predicated on the position of Baseline GDP with regard to

the aforementioned variables.

Almost invariably, the envisaged model will simulate the different scenarios available

for the European Union economy post Brexit. The general hypothesis of the model will involve

simulating the future impact of the exit using a range of probable scenarios ranging from

“optimistic” ‘pessimistic” and central. The optimistic scenario assumes that both the European

Union and the United Kingdom will each enjoy the same privileges that prevailed hitherto post-

Brexit, and nothing much will change in terms of tariffs and other market restrictions because

of the exit. Nevertheless, the recent pronouncements by the British government regarding the

impending fiscal adjustments with regard to Brexit have largely hinted on some levels of

restrictions that may materially affect trade between the United Kingdom and the remaining EU

member states. The pessimistic scenario in the model, on the other hand, assumes trade
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agreements than include motleys of tariffs and non-tariff market engagement between the

European Union and the United Kingdom will be reduced to the WTO baselines, and will

materially alter landscape before activation of Article 50. The pessimistic scenario is otherwise

referred to as hard Brexit in trade and diplomatic circles across Europe.

The impact of Brexit on the GDP of member countries using the aforementioned key

economic performance will be the main concern for this model. The impact of trade flows

between Britain and the European Union has been observed to diminish in various studies

across the globe. OECD estimates indicate that the value of European Union’s export to the

United Kingdom will drastically fall by close to 30% on the basis of WTO most favored nation

status (m.f.n) that the two economies are projected to enjoy after the activation of article 50.

Based on the sheer size of the two economies and the attendant volume of trade, there is a valid

projection in the value of trade between the two economies after Brexit. The ensuing market

sensitivity across the Eurozone is thus projected to occasion major shockwaves that may

greatly influence the economy of remaining European Union member countries. Specifically,

the impact of Britain’s withdrawal from the European Union on smaller and dependent

economies such as Ireland, and Belgium is expected to materially affect these countries

performances in terms of trade deficits, and consequently diminish the economy of the

European Union after reconstitution. Belgium and Ireland for instance, as other European

Union member countries are projected to face massive trade reductions in their total exports

ranging from 4% and 3%, a major development expected to greatly affect the individual

performance of these economies, and subsequently the entire European Union economy after

Brexit. The general reduction in GDP performance of the 27 member countries of the European

Union is expected to get a massive hit from the Brexit developments. On average, there are
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 13

possible loses of close to 0.11 to 0.52 percent declines in the GDP levels across the European

Union post-Brexit for both the optimistic and pessimistic scenario respectively(Gee, Graham,

Lucas & Rubin 2017). The cumulative results of the GDP concerns for both the optimistic

pessimistic scenarios are then evenly distributed across a 10-year period and the simulated

projections are juxtaposed against the probable impact of GDP slumps for the remaining

economies. In this regard, according to OECD figures, the projected declines because of the

impact of Brexit would range from 0.01% to 0.05%.

The optimistic model thus projects that the impact of Brexit based on the attendant

models, would be rather insignificant and would not materially affect the remaining 27-member

states economies post-Brexit. In this regard, the post-Brexit impact would be insignificant on

the European Union economies, and would be hardly felt or noticed at the general

macroeconomic levels. Nevertheless, individual sectors within the remaining 27 state members

may have to contend with the aftershocks of Brexit that may materially diminish the capability

of these economies in the short run after activation of Brexit clause. The projected loss for

European economies in relation to Brexit would be in the range of 1.4% to 3.5% loss relative to

their respective GDPs(Morris, Moss,Mucciarelli, & Paulus, 2018). In this regard, it is estimated

that the ratio of the United Kingdom’s economy relative to the European Union is 1:5, a factor

that is projected to accentuate the effects of Brexit on the remaining member countries’

economies. Nevertheless, a motley of economic theories posit that there will be massive losses

on both sides, but this will be more pronounced on the European economies side with

devastating consequences to future growth prospects of respective member countries, as well as

collectively. Almost invariably, it is economically believed that larger economies eventually

shed an insignificant amount of loses in case of major market realignments such as Brexit.
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 14

Ideally, both sides of the Brexit divide are projected to make significant losses after the

activation of Article 50 that ends Britain’s economic dalliance with the rest of European Union

member countries. Subsequent models by the OECD and the British national treasury indicate

significant losses on both sides of the market with European economies being the worst hit by

the Brexit aftershocks (Morris, Moss, Mucciarelli, & Paulus, 2018).

Similarly, models by the treasury department and the OECD indicate that variables such

as foreign direct investments (FDI) have a direct bearing on volumes of trade between the

European Union and the United Kingdom. Foreign direct investment has a direct bearing on

economic factors such as research and development that eventually lead to innovation and

subsequent economic competitiveness in any economy globally.

The general operation of the proposed model to gauge the impact of Brexit European

economy will be based on empirical estimates from the OECD and the national treasury in the

United Kingdom. The measurable variables with respect to key economic performance

indicators will be assessed based on their cost-reducing effects on the UK and the EU economy

or otherwise (Armstrong & Portes, 2017). In this regard, the model to be used will evaluate

post-Brexit effects, which will range from the Schengen agreement that has a direct bearing on

immigration as a variable, the tariffs and non-tariff barriers expected to be introduced post-

Brexit, as well as the various market realignments. In this regard, the gravity model will be

used to distinguish between goods and services, and assign economic values to the various

economic indicators. On the basis of trade elasticity, the extent to which Brexit is expected to

create new trade barriers or otherwise that would invariably lead to sluggish European

economic growth. The application of trade barriers simulation on the effects of Brexit is

particularly important since the Union was predicated on a common market. In this regard, the
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 15

presence of trade restrictions presupposes a sluggish economy on either part of the two divides.

The Gravity model is then used to perform an aggregated regression for goods and services in

the current composition of the European Union.

Existing Literature on Effects of Brexit on European Economy.

The effect of Brexit on the economic performance of the European Union has been a

controversial topic among policy experts and pundits. Various studies have been conducted

regarding the contribution of the United Kingdom to the European Economy, and how Brexit

has changed the balance of economic power. Sampson posits that the biggest losers in the

Brexit deal will not entirely be the European Union member countries, rather, the British

economy will be hit due to the lost markets. The imposition of trade barriers to the UK because

of Brexit will herald a new chapter in increased cost of production and trade for both

economies leading to sluggish growth (Sampson, 2017). Studies by Mihela and Simonescu

delve into the effects of trade barriers, immigration policies, and their bearing on the European

Union’s economic outlook. Brexit is projected to occasion massive layoffs, austerity measures

and mass closure of companies in the Eurozone due to the drastic changes in rules of operations

and budget constraints because of Brexit (Mihela & Simonescu 2016)

Data Sources

The policy paper will rely on OECD data and the relevant information from statistics

bureau and Bretton woods institutions market outlook policy papers. Moreover, accommodate

research articles by various economic researchers on the effects of Brexit have been

accommodated in arriving at a conclusion of the study in the paper.

Conclusion
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 16

Based on the data from the different think tanks and Brexit watchers, as well as the

results of the economic model therein, it is apparent that there will be a significant disruption of

trade links between the United Kingdom and the European Union, with far-reaching

ramifications to both economies. Nevertheless, the extent of such an economic hit on the EU

economy will be disproportionately measly due to the presence of bigger economies such as

Germany and France, who are expected to fill the trade vacuum left by the United Kingdom

Regression Model Output

SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.5204778
R Square 0.2708971
Adjusted R Square 0.14938
Standard Error 222.62848
Observations 8

ANOVA
df SS MS F Significance F
Regression 1 110491.35 110491.35 2.229291408 0.186025797
Residual 6 297380.65 49563.441
Total 7 407872

Standard Upper
Coefficients Error t Stat P-value Lower 95% 95% Lower 95.0% Upper 95.0%
- - 61571. -
Intercept -94368.677 63729.455 1.4807702 0.189169016 250309.0342 7 250309.0342 61571.68081
- 124.20 -
X Variable 1 47.067669 31.523851 1.4930812 0.186025797 30.06841618 4 30.06841618 124.2037545
 ECONOMIC ANALYSIS AND POLICY RECOMMEDATIONS 17

Policy Recommendations

Based on the regression model, it is apparent that the levels of disruptions as a result of

Brexit on the European Union Member countries’ economies will not be significant enough to

warrant a reimagining of the treaty. In fact, most of the economic shocks will be felt by the

United Kingdom itself due to the lost volumes of trade as well as immigration benefits to

citizens. The European Union Economy is projected to experience heightened trade activities

from Germany and France, scrambling to fill the void left by the exit of Britain leading to new

bursts of energy on the economic prospects of the Union.

References

Armstrong, A., & Portes, J. (2016). Commentary: The Economic Consequences of Leaving the

EU. National Institute of Economic Review, 1(236), 1-5.

Gee, B., Rubin, L., & Trybus, M. (2017). Leaving the EU? The Legal Impact of ‘Brexit’ In the

United Kingdom. Institute Of European Law, 1(1), 1-84.

Mihaela, C., & Simionescu, M. (2017). The Impact of BREXIT on the Foreign Direct

Investment in the United Kingdom. Romanian Academy Journal, 1(1), 1-18.

Morris, H., Moss, G., Muciarelli, F., & Paulus, C. (2018). Cross-border Insolvencies after

Brexit: Views from the United Kingdom and Continental Europe. Center for

International Governance, 1(17), 1-32.

Sampson, T. (2017). Brexit: The Economics of International Disintegration. Journal of

Economic Perspective, 31(4), 163-184.