LONDON — Just before the historic referendum on whether the United Kingdom would remain in the European Union 10 years ago, the government of the day issued a stark warning. A vote to leave the bloc would cause “an immediate and profound shock” to the economy. By a narrow margin, the British decided to leave anyway.
The economic warnings were wrong — but only in timing.
Economists say Brexit has hurt the British economy, and the costs have accumulated over the past decade, far outweighing any benefits. Most visibly, Brexit has also triggered a wave of political instability: the country is expected to soon have its seventh prime minister since the June 23, 2016 plebiscite, after Keir Starmer announced his resignation on Monday.
The turmoil fueled a sense of regret. In a recent poll, almost half of Britons said Brexit turned out worse than expected, a sharp rise from five years ago. Another survey showed that just over half would support returning to the European Union.
It is difficult to accurately measure the cost of Brexit, given other shocks suffered by the British economy since the referendum, such as the Covid-19 pandemic, President Donald Trump’s tariffs and the wars in Ukraine and Iran. This is what recent reports show on the economic impact of leaving the bloc.
The economy was smaller than it could have been
In 2016, the British government assumed that a vote to leave would mean an immediate severing of the country’s commercial ties with the other 27 members of the European Union. In practice, there were years of negotiations. The United Kingdom only officially left the bloc at the end of January 2020 and, even so, it went through an 11-month transition period. This confused the economic effects, because trade rules only really changed in 2021 — four and a half years after the vote.
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The pandemic, energy crisis and other shocks have made it difficult for economists to disentangle Brexit’s specific effect on the economy. Still, many tried. One widely cited study led by Stanford professor Nicholas Bloom estimated that Brexit reduced UK GDP by up to 8%, “with the impact gradually accumulating over time.”
Although other economists dispute the methodology of this work, there is a broader consensus that the British economy today is 4% to 6% smaller than it would be if the country had remained in the European Union — a significant loss of output. This means less tax revenue to finance public spending and a slower improvement in the population’s standard of living.
The Office for Budget Responsibility, an independent body that monitors the United Kingdom’s public accounts, estimates that Brexit will reduce the country’s long-term productivity by 4% — a relevant problem for an economy that had already been losing steam since the global financial crisis.
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New trade agreements did not compensate for the losses
Most of the economic cost came from increased trade friction with a market of 450 million people right next door to the UK.
The trade deal reached in 2021 kept tariffs mostly at zero, but raised other barriers to trade by introducing more paperwork, border enforcement and new rules. According to the Center for European Reform (CER), a research group, Brexit reduced British exports of goods and services to the European Union by around 12% and imports from the bloc by around 16%.
Agricultural and food exports were especially hard hit, with a drop of close to 30%, according to the CER. In some cases, such as seafood producers, extra border inspections have made exports unviable. Many small businesses, in particular, have reduced efforts to acquire European customers because of the increased time and cost.
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UK services trade performed better. But most economists attribute this to the pandemic, which has increased demand for services — especially those provided online. Service providers already established in the country, such as consultancies and law firms, ended up benefiting.
Brexit gave the United Kingdom freedom to negotiate its own trade agreements, replacing treaties previously defined by the European Union. But although the country has since signed 39 agreements covering 72 countries, this has not compensated for the loss of trade with the European bloc.
Despite the additional costs and obstacles, Europe remains by far the UK’s largest trading partner, accounting for more than 40% of the country’s trade – only slightly below the pre-referendum level. In its regular projections, the Office for Budget Responsibility simply assumes that new agreements with countries outside the European Union will have “no material impact”.
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Companies still feel the effects
One of the first and biggest economic effects of Brexit was the freeze on business investment, as companies retreated in the face of uncertainty caused by lengthy trade negotiations and political instability.
Later, investment grew again, but at a slower pace than it could have been, economists say. The National Institute of Economic and Social Research, an independent think tank, recently stated that the uncertainty generated by Brexit reduced long-term business investment by around 4%.
Did anyone win? “The professions and sectors that benefit are consultants, lawyers and probably customs brokers,” said Anton Spisak, senior researcher at the Center for European Reform. Overall, however, Brexit had a “very negative effect” on the economy, he said.
One of the biggest impacts was on migration. Instead of reducing immigration, as many Brexit supporters advocated, there was a strong influx of people from countries outside the European Union. They face different visa requirements and bring different professional profiles, reshaping the job market.
Sectors such as hospitality, food processing, healthcare and social care have faced extra costs and disruption after losing their traditional worker base.
“We are just beginning to understand how this profound shift in post-Brexit UK immigration patterns will play out,” said Sarah Hall, an economic geographer at the University of Cambridge and deputy director of UK in a Changing Europe, a think tank.
London remains a European financial center
In 2016, the financial sector strongly opposed Brexit, which threatened London’s role as a gateway to Europe. A decade later, the city maintained its position as the continent’s largest financial center.
No other European city has established itself as a preferred destination for the sector, said Hall. Still, London lost relevant parts of its business, such as a share of share trading to Amsterdam and part of asset management to Dublin.
It was “like a tire slowly deflating,” Hall said. Instead of an abrupt change, there has been “a series of transfers and now, increasingly, new vacancies that simply stop opening up in London”.
What about the next 10 years?
With the British economy pressured by persistent inflation, high debt and higher financing costs, the idea of reversing part of the effects of Brexit has become more attractive. The favorite to become the next prime minister, Andy Burnham, has called Brexit “harmful”.
Last year, the Starmer government held a summit with European leaders to “reset” the relationship. But more than a year later, progress has been slow. Another summit, scheduled for next month, was postponed by the Europeans after Starmer’s resignation.
Although it wants a closer relationship with the European Union, the Labor Party has ruled out a return to the single market and the customs union, in addition to rejecting the return of free movement of people. Analysts also say that there is little interest in Brussels in renegotiating in depth with the United Kingdom.
“A lot could change in the next decade,” said Spisak of the Center for European Reform. But he does not expect any major changes in the next two or three years, before the next general election.
Therefore, the costs are likely to continue to accumulate — and the biggest of them may be the most difficult to measure, said Spisak.
“The most important cost of Brexit is the opportunity cost,” he said. “In other words, everything that stopped happening because of Brexit.”
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