Brexit threatens Britain's poorest regions

Britain is home to some of the richest and poorest regions in Western Europe, and the gap between their economic fortunes is getting wider. The UK’s poorest regions had the worst of the Great Recession: Northern Ireland’s private sector shrank by nearly 1.5 per cent a year between 2008 and 2013, while London’s grew by 1.4 per cent.

There are several reasons why regional inequality has grown. The number of jobs in manufacturing and heavy industry, long a source of well-paid employment in poorer regions, has been in decline for 40 years. The services jobs that have replaced them pay less well on average. And high-skilled people tend to move to prosperous cities while the low-skilled stay put.

A British exit from the EU may worsen regional inequality, because poorer regions are more dependent on exports to the EU than richer ones. Exports to the EU account for 15 per cent of private sector output in the North East of England compared to 9 per cent in the South West of England and Scotland. This is because manufacturing still makes up a larger proportion of poorer regions’ economies, and because the EU’s single market is more developed in manufactured goods than services. As a result, London is less exposed to EU demand than the average British region, even with its sizeable financial services exports to the EU.

If Britain signed a free trade agreement with the EU after a withdrawal, it could prevent tariffs from being applied to manufactured goods. But there is a risk that the UK and the EU might fail to agree a deal. EU member-states buy 45 per cent of UK exports, while the Britain only buys 7 per cent of theirs, giving the EU the upper hand in a negotiation. Current alternatives to EU membership suggest that even a goods-only free trade agreement would come at the price of accepting free movement of labour: the Switzerland-EU bilateral treaties require it, for example. This might be too much for the British people to accept.

Without a free trade agreement, the UK could trade with the EU under World Trade Organisation rules. But the EU would apply tariffs on British goods exports. These would hit economic activity in the poorest regions of the UK, where manufacturing tends to predominate, much harder than the richer ones.

While London’s large financial and commercial services sector would be badly hit by a British exit from the EU, services make up less than one third of British exports, and services exports to non-EU markets have grown quickly over the course of the eurozone crisis. As a region, London and its commuter belt in the South East would be among the less affected by British withdrawal.

In order to ensure that ‘Brexit’ did not make regional inequality worse, Britain’s government would have to secure as much access to EU markets as possible. The UK would need to sign up to free movement, EU budget contributions, and many of the EU’s rules and standards. Since it would have next to no power over what those rules are, such an agreement would surely be worse than the status quo.

This article is a summary of the report: 'Disunited Kingdom: Why Brexit endangers Britain's poorer regions'.

John Springford is a senior research fellow at the Centre for European Reform.