The economic impact of Brexit on European regions
The Rafael del Pino Foundation organised, on 19 November 2019 at 7 p.m., the Keynote Lecture "The economic impact of Brexit on European regions" given by Raquel Ortega-Argilés.
Raquel Ortega-Argilés holds the Chair of Regional Economic Development in the Department of Strategy and International Business and the City-REDI research institute at Birmingham Business School, University of Birmingham, UK. Her current research work focuses on productivity, innovation, regional development, SMEs, entrepreneurship and industrial dynamics, and regional and European policy.
Summary:
On 19 November 2019, Raquel Ortega-Arguilés, Professor of Regional Economic Development at Birmingham Business School, gave a lecture on "The economic impact of Brexit on European regions" at the Rafael del Pino Foundation. Professor Ortega-Arguilés explained that in order to measure the impact of Brexit on European regions, international trade and competitiveness databases of countries and regions have been analysed. The analysis focuses on three areas: trade relations, including the effects of global value chains; the effects on competitiveness; and changes and adjustments in governance. The aim is to estimate the impact on regional GDP, labour income and different sectors, always at the regional level. It also analyses the effect of the tariffs imposed, depending on the agreement to be signed, on the competitiveness of the different British and European regions, as well as the different sectors. Finally, the analysis focuses on the resilience that sectors and regions will have, at what level they are prepared for Brexit. The first thing that emerges is that the British regions that voted in favour of Brexit are those that are most dependent on Europe for trade. Moreover, it also shows that the highest percentages of votes in favour of Brexit were in the regions with the greatest economic dependence on relations with Europe. In contrast, the London region had the lowest percentage of votes in favour of leaving the EU and is the least dependent on the EU because its economy is the most diversified of all UK regions. The value added of UK manufacturing exports to Europe is equal, as a percentage of GDP, to exports of services. This fact dismantles the thinking behind Theresa May's proposed deal, which protected manufacturing more than services because she believed it was more important for the UK. Today we are closer to a hard Brexit, because the deal looks like it will never happen. The reason is that the deal proposed by Theresa May was less hard than the one now proposed by Boris Johnson, which is closer to a hard Brexit. According to the data, in the UK, between 10% and 17% of regional GDP is exposed to a hard Brexit, depending on the region. In Ireland, that percentage is 10%. In Germany it ranges from 4.5% to 6.4%. In the Netherlands, from 3.5% to 5%. In Belgium, from 2.8% to 4%. In France, from 1.8% to 2.7%. And in Spain, Italy and Greece, it is below 11TDP3T of regional GDP. Overall, the risk of exposure to Brexit for the UK total is 12.2% of national GDP, while for the European Union it is 2.64%. Finally, the risk of exposure to a hard Brexit in the UK is 4.6 times higher than for the EU. In the case of the United Kingdom, the most diversified regions, such as London or Scotland, are the most resilient to Brexit, while those with a trade structure more similar to Europe, such as the West Midlands, are much more exposed to Brexit. The reason is that their production structure is based on manufacturing, automobiles, machinery, and is very similar to Germany, which means that there are many more products exposed to Brexit. As can be seen, the sectors most affected are primary industry and manufacturing. But services are also affected because many of them are related to the product value chain and to industries that trade a lot with Europe, for example, professional services. For Spanish regions the effect is greater in those where there are primary industries, but also in those where manufacturing accounts for between 1% and 2% of their GDP. To conclude this part, weaker regions are more exposed to Brexit than more prosperous ones. Consequently, Brexit will increase inequalities within the UK, because it has a very prosperous region, London, which will be less affected by Brexit, and all the other regions, for which the impact will be much greater. This is very worrying because the UK is at the top of inequality in the world. Brexit has an impact on industry, but also on the services that depend on it. As a result, more than two million jobs in the UK are exposed to the trade effects of Brexit. Around half a million of these are in the administrative and business support services sector, services that are closely related to the industries most affected by Brexit. In 15 of the 54 industries, between 20% and 36% of value added and jobs are at risk. In the specific case of professional, scientific and technical services, 36% of their value added is at risk with a hard Brexit. In the case of activities auxiliary to the financial sector, the risk amounts to 31% of value added. If imported production were replaced by domestic production, assuming it were of the same quality, 40 industries would grow. But 14 industries, even under such optimistic conditions, would contract. In many manufacturing and primary industries, the positive impacts can reach up to double digits of GDP, but the total effect on GDP is only 3%. However, this is highly unrealistic because there are very few highly competitive sectors in the UK; perhaps only the financial sector. On the employment side, those most affected, at 11.7%, are skilled workers in the primary sector. Machine operators and assemblers would see around 11% of jobs at risk. In conclusion, the overall UK GDP affected by Brexit is 8.5%, based on 2014 data. These effects are normally short-term effects. But as the most affected sectors and jobs are those that contribute most to the UK's current productivity, the long-term productivity of the UK is at risk. As regards the potential effect of the introduction of tariffs, regardless of policies to mitigate these effects, there are direct costs of Brexit that are related to price increases due to tariffs, in addition to the indirect costs associated with them. As a result, the effects of a hard Brexit on production costs are estimated to be larger in UK regions than in European regions. In terms of competitiveness gains and losses, the most affected regions in the UK are those that are currently worst off, thereby increasing inequalities. Only the most prosperous UK regions would benefit from a soft Brexit and they do so at the expense of other regions. As far as the EU is concerned, depending on the type of Brexit, some regions will lose more competitiveness and others less. The effect is, on average, much smaller than for British regions, but can be significant depending on the combination of region and sector. The most sensitive are those most specialised in agriculture and manufacturing, especially in France, Spain, Sweden, Romania and Bulgaria, and the least sensitive in Central Europe.
The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.
The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.
