You were in the United Kingdom just last week. What’s the situation like at the moment?
“Lots of people are mobilising. One group thinks: this is taking much too long, just give us the Brexit we were promised. The other group – last weekend over a million people demonstrated – says: perhaps we shouldn’t do this. There’s increasing discussion about the advantages and disadvantages. Which is obviously very overdue.”
Frank van Oort is Professor of Urban and Regional Economy at Erasmus School of Economics. Together with colleagues in the Netherlands and the United Kingdom, he has conducted research into the economic impact of Brexit. Here is a clear overview of the Netherlands Environmental Assessment Agency.
How did a Dutch professor get involved in this research?
“We were approached by the British Economic and Social Research Council, soon after the referendum of June 2016. They wanted to know the economic impact of Brexit. Actually, that question should have been answered before the referendum, but you need an awful lot of data. About trade. About who trades with whom. About what happens when you start imposing excise duties. And then you preferably also need data about cities and regions in Europe. Coincidentally, we – the Netherlands Environmental Assessment Agency, Erasmus University, the University of Groningen and the universities of Birmingham and Sheffield – had all that data. We’d just never been able to use it.”
So you were actually waiting for something like Brexit?
“For an economist, this is a treat. You find yourself experiencing a very unexpected shock that no one is able to anticipate on. You can then study the impact, what happens before and after. Nevertheless, it’s not a happy situation.”
You studied how regions are connected. And how price levels and competitive positions change as a result of that interconnection when the United Kingdom leaves the EU. What is the mechanism here?
“We analysed all kinds of scenarios, including a hard Brexit. That means that there are suddenly borders again. So, just like the Americans and Russians, Europe will have to pay duties on everything it imports from the United Kingdom. Likewise, the Brits will have to pay duties on everything they import from Europe. That’s the direct effect. But there’s also the indirect effect: because parts of products come from all over Europe too. A good example is a car drive shaft, for which the first parts are made in Italy and Germany, travelling via Newcastle, Spain, back to Germany, Wales, Birmingham, Chester, before ending up in a car. That part alone crosses the border with the United Kingdom four times. So you’ll have to pay import duties four times.”
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Who will suffer most?
“Most exposure and price rises are expected to occur in the United Kingdom itself and in Ireland. The most vulnerable regions are those that depend heavily on import and export. Take Birmingham, Newcastle and Wales, for example: regions with a lot of chemical factories, auto industry and mechanical engineering. These are areas that lag far behind London in terms of welfare. Ironically, these are also the regions that had the highest ‘leave’ vote.
“In third place are the Netherlands and Germany, in terms of exposure. The German auto industry is very interconnected with UK value chains. The Netherlands has a big agricultural sector, which exports some of its products to the United Kingdom. For example peppers from the Westland. But it’s also about re-export: products that we import in Rotterdam, which are then shipped to the other side of the Channel.
“Another region that will suffer badly from Brexit is the Belgian province of Luxemburg, according to our analysis. We couldn’t quite see why, but later we realised that they have a huge chocolate factory, which is very dependent on the Brits for its import.”
Does anyone benefit from Brexit?
“There are no real winners. There are a few regions that are benefiting from the relocation of financial services: banks that are leaving London to settle on the Zuidas in Amsterdam, or in Frankfurt or Paris. But such a financial organisation has a very different structure and social impact than a car factory or nursery. Generally, consumers – the lower incomes in particular – will pay the price, in the United Kingdom and in the Netherlands.”
One of the main promises of the Brexiteers was: we pay much more net to the EU than we get back, and we’ll invest that money into our own economy. That seems fairly logical, doesn’t it?
“That calculation could have some logic if the United Kingdom manages to enter into a free trade agreement like Switzerland and Norway have done. However, negotiations are not going so smoothly, to put it mildly. And then there’s the argument that Brexit would create jobs, because the Brits would make the products and services that they used to import. The so-called substitution effect. But here you forget the fact that production will become a good deal more expensive.”
At the moment it is totally unclear how things will proceed; the political situation is changing day by day. What do you expect to happen in the coming months?
“When we were approached to do the research, they said: just for fun, look at the effects of a hard Brexit too. That’s no longer unthinkable. Or even worse. If there’s a no-deal, people might panic. A country has never left the EU, let alone from one day to the next. That creates huge problems: medicines that are no longer supplied, shortages of important products, a run on certain shops. Landing rights at Heathrow are organised at European level, so that means chaos. Long queues at airports, but also in the Port of Rotterdam, because people don’t have the correct documents. For agriculture, which receives European subsidies in the United Kingdom, there’s still no alternative. The agricultural sector is wondering: will we all go bankrupt?
“Above all, it’s the uncertainty that’s so harmful. That’s why investors and big companies are saying: we’re not going to invest money in anything, we’ll first wait and see what happens. And that’s been the case for nearly three years.”
In the Netherlands, those queues for ferries and planes will only feature briefly on the evening news, but won’t cause any significant damage, will they?
“In the long term, our competitive position may deteriorate. The chemical industry may lose market share to the Ruhr Area, trade and transhipment may move from Rotterdam to Antwerp. All sorts of things may move. A country has never left the EU before, so we’re not sure. Nevertheless, I think it’s safe to say that no one will benefit from it.”
In the Netherlands, people have been toying with the idea of leaving the EU, for example Forum voor Democratie, the big winner from the Provincial States elections. Do you think it will ever happen?
“If so, I hope that we do this kind of analysis beforehand. Only then do you see how integrated the European economy is, how what happens in one region affects other regions. In many cases, such a free trade agreement has more advantages than disadvantages.”
Do these figures make a difference?
“Me and my colleagues presented the research in London, Leeds, Edinburgh and Birmingham, also to representatives from the UK government. At one point, someone said: this is the price we pay for our freedom. There’s no answer to that. Although I feel it’s a very high price.”