This document summarizes the potential economic impacts of Brexit based on several studies. It finds that Brexit could reduce UK GDP by 3.4-9.5% according to the UK Treasury, 2.1-7.8% according to NIESR, and 2.7-7% according to the OECD. Rabobank estimates GDP could fall by 10-18% depending on the deal. Exports are also projected to decline substantially. The EU economy may also take a hit. The document argues for continued EU-UK coordination on state aid to limit trade barriers and distortions given the countries' economic integration. The UK has historically influenced EU state aid rules but its role may change after Brexit.

1. E.CA Economics
Brexit and State aid control
Antitrust in a globalised world
Vincent Verouden, Ph.D.
Firenze, FCP Annual Conference, 20-21 October 2017

2. Context: EU is UK’s most important trading partner
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Source: Rabobank, Assessing the economic impact of Brexit:
Background report (2017)

3. About half of all FDI in the UK stems from the EU
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Source: Rabobank, Assessing the economic impact of Brexit:
Background report (2017)

4. Impact of Brexit - estimations
• Numerous studies into the effect of Brexit on GDP, trade, productivity, wages,
employment
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Impact on GDP (cumulative, until 2030)
Soft Brexit FTA Hard Brexit
HM Treasury (2016) -3,4% to -4,3% -4,6% to -7,8% -5,4% to -9,5%
NIESR (2016) -2,1% -3,2% to -7,8%
OECD (2016) -2,7% to -7%
CPB (2016) -5,9% -8,7%
Rabobank (2017) -10% -12,5% -18%
….

5. Impact on UK GDP – Rabobank (2017)
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Source: Rabobank, Assessing the economic impact of Brexit:
Background report (2017)

6. Impact on UK exports – Rabobank (2017)
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Source: Rabobank, Assessing the economic impact of Brexit:
Background report (2017)

7. Impact on euro area GDP – Rabobank (2017)
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Source: Rabobank, Assessing the economic impact of Brexit:
Background report (2017)

8. The case for a continued EU-UK state aid control system
• Basic premise: trade = good (for welfare creation)
−Increased trade zone allows for more specialisation (comparative advantage),
scale economies, enhanced competition
• An effectively integrated trade zone requires removing/addressing obstacles to
trade:
−Tariff barriers
−Non-tariff barriers
−Distortive subsidies/state aid
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9. The case for a continued EU-UK state aid control system (2)
• The cost of obstacles to trade directly linked to the potential for geographic
areas to trade with each other
−Principle of “economic gravitation”: most trade happens to occur nearby …
 the benefits of a state aid control system increase with the
extent to which trading partners are close
• But other factors are also determinative, notably the propensity of the trading
partners to subsidize
−Ability to subsidize (relative budgets)
• vertical (decentralised vs. centralised)
• horizontal (among decentralised entities)
−Incentive to subsidize (cf. “national champions”)
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10. The common interest: how to define?
• EU approach to state aid: State aid in principle prohibited, but derogations when
the aid can be deemed in the “common interest”:
• aid pursues a sound public policy objective
• distortions of competition and negative effects on trade are limited
• How will the EU and the UK interpret apply the common interest objective? How
to deal with “cross-Channel” negative effects? What about Irish cross-border
effects?
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11. Impact of Brexit on EU rule making?
• UK, traditionally, has had an important influence on EU rule making, incl. in the
field of State aid control
− Risk Capital Guidelines
− State Aid Action Plan (SAAP), 2005
− SGEI Package, 2012
− State Aid Modernisation (SAM), 2012-2014
• Background: UK views on
−Role of the state/public intervention in the economy
• UK not a ‘subsidy oriented’ country
• Emphasis on ‘modern’ uses of aid such as risk capital, R&D, renewables, …
−Economic insights/efficiency arguments (vs. formalism)
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Thank you!
Vincent Verouden, PhD
Director
verouden@e-ca.com
+32 2 808-46 98
E.CA Economics
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