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Economic consequences of United Kingdom’s decision to stay or leave the European Union

Research Paper (postgraduate) 2013 15 Pages

Business economics - Economic Policy

Excerpt

Table of Contents

Introduction

Current Economic situation of the EU

Real GDP Growth

Inflation Rate

Unemployment

Current Economic situation of the UK

Real GDP Growth

Inflation Rate

Unemployment

Current Account Balance

The economic benefits and drawbacks for Britain to stay as a member of the European Union

The economic consequences of the UK’s departure from the European Union’s perspective

Conclusion

References

Introduction

Assessing the economic consequences of UK’s decision to stay or leave the European Union will require an understanding of the country’s history and its current position within the EU.

The United Kingdom joined the European Union on January 1st 1973 with the mere intention of being part of a greater economic force. However, after the revolutions of 1989 and the collapse of communism across Central and Eastern Europe, which led to closer ties between European neighbors, the UK never showed interest in adopting, in its entirety, the “single market” concept or the “four freedoms” of movement of goods, services, people, and money (European Union, 2013).

Although, for economic reasons, the UK has consistently shown interest in a deeper European single market, on many occasions, it has demonstrated discomfort with the politics and efforts of other EU members to implement members’ obligations (Kosmopolito, 2011). For the same reason, the country did not adopt euro as its currency in 1999. In addition, and to maintain and control its borders, it did not become a member of the Schengen area and cooperation (European Union, 2013).

The economy of the UK is mainly services-based with a concentration on financial services although it also maintains capacity in high-tech and other industrial sectors (European Union, 2013). With a GDP of €1.9 billion in 2012, the UK’s economy is the third largest in the EU after Germany and France, and accounts for more than 14% of the EU’s total GDP, making it an important member of the European Union (OECD, 2013). On the other hand, nearly half of the UK’s exports go to the EU member countries making EU an indispensable market for the UK’s economy.

In this paper we begin by investigating the current economic situation of the EU and the UK. We will then evaluate the benefits and the drawbacks associated with UK’s membership in the European Union, to conclude on whether the economic situation of the UK would be better if it left the EU.

Current Economic situation of the EU

With only 7% of the world’s population, the EU’s trade with the rest of the world constitutes about 20% of the global non-energy exports and imports making it the biggest exporter and the second-biggest importer on the planet. Nearly two thirds of the EU’s total trade is done between the EU countries. The United States and China are the EU’s first and second most important trading partners respectively (European Union, 2013).

Real GDP Growth

For the first time since the global financial crisis in 2008, the EU’s economy contracted by 0.3% in 2012 (Figure-1). In order to understand the possible causes of the downturn, we shall study the change in the aggregate demand which itself may have resulted from a reduction of one or a combination of consumption, business investment, government spending, or net exports.

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Figure 1- The EU's real GDP growth rate (Source: Eurostat)

According to OECD (2013), the EU’s total consumption in 2012 increased by USD 126 billion from Q1 to Q3. Government expenditure and net exports also increased by USD 35 billion and USD 176 billion respectively for the same period. Therefore, the deteriorating growth of 2012 can only be linked to the lack of business investment in that year.

The European Union’s economy is predicted to shrink by 0.1 percent in 2013, and therefore heading for its first ever back-to-back years of falling production. Nevertheless, the economy is predicted to stabilize by end of 2013, and a GDP growth of 1.4 percent is forecast for 2014 (Eurostat, 2013).

Inflation Rate

The inflation rate in the EU passed the 3.0% mark in 2011 for the first time after the financial crisis (Figure-2). In order to stem the rise in prices, the European Central Bank decided to increase the rates by 0.5 % in the Euro area in 2011 (Figure-3). The rate increase caused companies to become more focused on the preservation of cash flow, and therefore reduced the overall business investment. This in turn led to a reduction in the aggregate demand that resulted in a slower growth in 2011 and a contraction of the economy in 2012.

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Figure 2- The EU's inflation rates (Source: Eurostat)

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Figure 3- The Euro area's interest rates (Source: Trading Economics)

Moreover, weak economic sentiments have continued into the early part of 2013. Therefore, in an attempt to boost the growth, the European Central Bank has cut interest rates by 25 basis points to 0.5% in May 2013. This move is expected to contribute to EU’s economic recovery later in the year (Trading Economics, 2013).

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Details

Pages
15
Year
2013
ISBN (eBook)
9783668077980
ISBN (Book)
9783668077997
File size
905 KB
Language
English
Catalog Number
v309452
Grade
Tags
economic united kingdom’s european union

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Title: Economic consequences of United Kingdom’s decision to stay or leave the European Union