Brexit

Macroeconomic implications
for the UK, the world economy & Greece

.
Eurobank Economic Research
April 2017

Page 0
Key findings & summary of views

1. On 29 March 2017, British Prime Minister Theresa May activated the Article 50 of the Lisbon Treaty,
setting in motion the process for the countrys withdrawal from the EU. The Article sets out several
negotiation phases that require the involvement of the European Commission, the Council of the
European Union and the European Parliament.

2. Withdrawal negotiations should address a wide range of issues related to the UK withdrawal itself
and a new association agreement between Britain and the EU. Brexit negotiations may create rifts
and ambiguities for which no clear precedent exists. The Article 50 has never been tested as no
country has ever withdrawn from the EU after the Lisbon Treaty came into effect.

3. Against this background it is questionable whether a comprehensive deal will be reached within the
two-year period foreseen by the EU Treaty or more time will be needed for the two sides to conclude
talks. A negotiation extension could be granted subject to the unanimous approval by the remaining
27 EU Member States.

4. The UK economy defied expectations for economic stagnation in the six months following the EU
referendum. Nevertheless, after the activation of Article 50, the formal Brexit process may start to
have a more visible effect on the real economy as domestic businesses and consumers will need to
adjust their behavior to a long period of increased uncertainty over the terms of the UK withdrawal
and a new association agreement between Britain and the EU.

5. Empirical studies suggest that by leaving the EU, the UK will face potential impacts through certain
channels including, inter alia: (i) external trade with the EU and other economies; (ii) inward FDI
flows; (iii) immigration and labor market; (iv) productivity effects via trade, migration and regulation;
and (v) EU budget contribution.

Page 1
Key findings & summary of views

6. The timing and the content of a new association agreement between Britain and the remaining EU
members as well as the trade agreements that the UK will have to renegotiate outside the EU (so as
to prevent its trade relationships with these countries defaulting to WTO rules) will determine, to a
large extent, the medium- and long-term macroeconomic effects of Brexit on the UK, the remaining
of the EU countries and the rest of the world.

7. There is currently a wide dispersion of views as regards both the potential direction and the size of
such effects. Yet, as regards the UK economy, most studies predict a permanent output loss as a
result of Brexit, though there are a few assessments that point to potential net gains.

8. The main economic arguments in favour of Brexit could be summarized as follows: (i) the UK will be
freed from the obligation to contribute to the EU Budget, (ii) forfeiting the obligation to abide by the
rules and regulations imposed by the Single Market would allow the UK to shed burdensome EU
regulation that is understood to restrain domestic economic activity, and (iii) the UK will regain the
flexibility to strike more favourable bi-lateral trade agreements with third (non-EU) countries by, for
instance, reducing bi-lateral trade tariffs and other non-tariff barriers.

9. Although it is difficult to quantify the impact on the UK economy from the countrys membership in
the EU, most empirical studies point to an overall benefit stemming primarily from the passporting
rights that the UKs financial services sector enjoy and secondarily from significant merchandise
trade linkages between the two regions.

10. As regards the potential ramifications for the rest of Europe, it seems that Belgium, Cyprus, Ireland,
Luxemburg, Malta and the Netherlands are among the EU-27 economies that are most vulnerable to
Brexit risks. Among others, these economies have developed significant bidirectional migrant flows
as well as strong trade and investment ties with the UK, especially if measured as a percentage of
their respective GDP. Furthermore, some of them, due to their role as regional financial centers,
have accumulated sizeable claims against UK financial institutions.

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 Key findings & summary of views

11. As regards the Central, Eastern and Southeastern European (CESEE) economies, Brexit is likely to
be a net negative for the region from a macroeconomic and market sentiment standpoint. Yet, the
overall impact is unlikely to amount to anything resembling a full-blown external shock. This is
because the regions direct trade and FDI ties with the UK are modest, while there are no
significant banking sector linkages. Given that the UK is among the largest contributors to EU
budget, a renegotiation of the EU structural and cohesion funds allocation in 2014-2020 for the
CESEE recipient economies appears to be one of the biggest concerns.

12. With respect to bilateral trade linkages with the UK, Greeces trade balance in services stood at a
surplus of 2.7 bn (2015 data). The respective figure for the goods sector was a deficit of 153.4
mn. Overall, in 2015 the trade balance of goods and services between Greece and the UK was 2.5
bn (surplus) or 1.4% of GDP. Based on the average share in domestic GDP of total Greek exports to
the UK over the past five year period, the first-round effect of a hypothetical 1 percent decline of
the nominal growth of Greeces goods and services exports to the UK would reduce Greek nominal
GDP growth by c. 0.03 percentage points (and vice versa).

13. In a similar vein, a hypothetical deterioration of the growth performance of the other EU economies
triggered by Brexit could negatively affect Greeces trade flows. Ceteris paribus, the first-round
effect of a 1% decrease in the growth rate of Greek exports of goods and services to the EU-27
could lead to a drop of Greeces nominal GDP growth rate by 0.15 percentage points (and vice
versa).

14. Tourism and shipping constitute the two main sectors of the Greek economy that are likely to be
affected by Brexit. The direct contribution of tourism to Greeces GDP and employment in 2016 is
estimated at 7.5% and 11.5% respectively. The UK ranked second in terms of tourists arrivals and
receipts. The main channels through which Brexit might affect the tourism sector in Greece
include: (i) reduced real household incomes in the UK as a result of e.g. permanent output loses
due to Brexit along with higher inflation and exchange rate depreciation, and (ii) changes in the
various processes and costs of travel (e.g. reintroduction of visas for UK residents).
Page 3
 Key findings & summary of views

15. For the shipping sector, whose direct contribution to GDP was ca 3.5% in 2015, the main effect
could come from reduced demand for shipping services in the event of a significant disruption in
global trade caused by Brexit.

16. Brexit might have a negative impact on the size of the current EU Budget even if the final
agreement requires some kind of contribution from the UK. There is thus a risk regarding the
available funds for Greece (under EUs Common Agricultural Policy and cohesion policies), which
currently stand at ca. 35bn for 2014-2020.

Page 4
 Section 1
UKs EU membership,
the road to the referendum and
the process of negotiating withdrawal & a new association agreement

Page 5
UKs EU membership: partly in and partly out
Favoring single market and enlargement but opting-out from euro & Schengen

European
Economic 1 st referendum on UK's
Community EEC membership "Yes" M aastricht Treaty
(EEC) wins by 67% to 33% (opt-out for the UK)

European
Steel & Coal UK joins Single Euro
Community EEC European Act introduction

1951 1957 1973 1975 1986 1992 1999

PM Cameron vows to UK and EU negotiate

renegotiate EU a deal, which
8 Eastern membership terms & run partially addresses
European referendum, if his party UK governments
countries wins M ay 2015 election demands
join the EU

nd
Conservatives 2 referendum on
win general UK's EU
Lisbon
election
Treaty membership; Brexit
wins by 52% to 48%

2004 2009 2013 M ay-15 Feb-16 Jun-16

Time (year)
Source: HM Treasury (2016), EU Commission, Eurobank Economic Research
Page 6
Brexit calls gain momentum after the outbreak of the euro area crisis
Daily Express the first mainstream national newspaper to support the case (Nov. 2010)

Source: Daily Express Page 7

Negotiations may well take longer than 2 years
Unless the UK seeks no special access to the single market

European Council Agreement on exit

UK withdrawal provides guidelines for (and transitional?)
notification European Commission arrangement

French German
UK EU Presidential Federal
Referendum Election Election

June 2016 M arch 29 th 2017 April-M ay April 29 th 2017 September October 2018
2017 2017

European Council,
UK Parliaments &
European Parliament
vote on agreement UK leaves EU

Transitional Potential extension

deal? WTO rules?
(unanimous agreement by the
remaining 27 EU Member States
is required)

Late 2018/ Early End-M arch 2019

2019 (Article 50 provides for a two-year negotiation
period after withdrawal notification)

Source: HM Treasury (2016), EU Commission, Eurobank Economic Research

Page 8
 Section 2
Upcoming negotiations on withdrawal &
future association agreement between Britain and EU
A tradeoff between independence and degree of access
to the Single Market

Page 9
Process for negotiating UKs withdrawal from the EU
Article 50 of the Treaty of the European Union (TEU)

UK notifies European Council of its withdrawal intention

The Council (minus the UK) agrees by consensus the guidelines for the
Commission to negotiate withdrawal agreement
Article 50 does not clarify whether exit/new relationship talks should be conducted
simultaneously or consecutively (matter of negotiation)

Possible further stage

The European Commission submits recommendations to the European Council and
the Council (minus the UK), by enhanced qualified majority voting, authorises the
opening of negotiations & appoints negotiator

European Commission undertakes exit negotiations

European Parliament concents to the withdrawal agreement by a simple majority

UK MEPs may be allowed to vote

European Council (minus the UK) agrees to withdrawal agreement by enhanced

qualified majority
No single Member State could veto the deal; at least 20 out of 27 Member States,
representing 65% of EU- 27 population should vote in favour

Source: HM Treasury (2016), Eurobank Economic Research

Page 10
Process for negotiating a new association agreement between Britain and EU
Under the Treaty of the European Union (TEU)

European Commission submits recommendations to the European Council

The Council agrees the opening of negotiations, and appoints negotiator/special

committee
Voting procedure in the Council depends on what the envisaged agreement covers but
a mixed agreement* would likely need unanimity

European Commission undertakes the negotiation

In conjuction with negotiator/special committee

European Parliament is either consulted on the new agreement or has to give its
consent, by a simple majority
Depending on what the agreement covers e.g. whether it is an agreement focused
solely on trade or whether it is a mixed agreement*

European Council consents to the new agreement

Voting procedure in the Council depends on what the agreement covers, but a mixed
agreement* would likely need unanimity

Individual Member States ratify the new agreement in accordance with their
national procedures
If it is a mixed agreement*

* Mixe d agre e me nt is an agre e me nt cove ring a wide range of UK/EU coope ration issue s be yond trade that contains
e le me nts of both EU compe te nce and Me mbe r State compe te nce
Source: HM Treasury, (2016), IMF (2016), House of Commons (2017), Eurobank Economic Research
Page 11
Negotiations will need to address a wide range of issues related to:
the withdrawal itself and a new association agreement between Britain and EU

Article 50 does not set out explicitly what issues need to be resolved
Furthermore, there is no precedent to draw on

o Settlement of UKs EU assets and liabilities (Brexit bill)

o Status & entitlements of EU nationals in the UK (and vice versa)

o Terms of the relationship between Northern Ireland and the Republic of Ireland ( e.g., cross border

co-operation and trade, withdrawal of structural funds)

o A comprehensive framework for UK-EU trade

o Financial services passporting arrangements

o UKs relationships with EU regulatory bodies and agencies

o The status of police and judicial cooperation

o The status of UKs participation in Common Foreign and Security Policy missions

o The location of former EU powers between UK and devolved governments

Reaching an agreement on such a wide range of issues, with a large number of negotiating partners,
each of who would seek to defend their interests, should be expected to be difficult and involve
potentially unpalatable trade-offs.

HM Government, February 2016 (The process for withdrawing from the European Union)
Source: HM Treasury, (2016), Eurobank Economic Research
Page 12
Existing trade arrangements with the EU
A tradeoff between access to the single market and independence

Low independence High market access

Independence
Ability to Fiscal Independent to negotiate Ability to
Access to
ignore EU contribution immigration trade deals influence EU Passporting
Single M arket
rules to EU policy with non-EU rules
countries

EU membership Very limited Yes No No Yes Full Full

European Economic
Area (EEA)
Limited Yes No Yes Limited High High
Norway, Iceland,
Liechtenstein

European Free Trade

Association (EFTA) Partial Yes No Yes No M edium No
Switzerland

New UK-EU Free Trade

Agreement (FTA)
? ? Yes Yes No ? ?

W TO rules Yes No Yes Yes No No No

High independence Low market access

Source: OECD (2016), IMF (2016) CER (2016), Eurobank Economic Research Page 13
 Section 3
The economic effects of Brexit
Transmission channels through which it may affect the UK and the world economy

Page 14
The economics of Brexit
What is at stake

Purported benefits from EU membership Purported benefits from Brexit

Ability to unilaterally cut import duties & establish trade
Access to Single Market has boosted UK's output
agreements with more prosperous countries/regions
Trade
EU trade agreements with non-EU partners more UK could quickly negotiate a trade agreement with the EU,
beneficial for the UK than those conducted by the UK itself on better terms

Access to Single Market has rendered UK an FDI magnet

Removal of burdensome EU regulation could boost UK's
Investment
Brexit could force some firms to relocate to other EU business investment
countries to maintain full access to the Single Market

Tougher restrictions on the inward flow of EU migrants

Immigration has increased UK's labor force and thus,
Immigration could improve employment prospects and secure higher
potential GDP growth and fiscal revenue
wages for Britons

EU membership has boosted UK firms' productivity

Freedom from EU regulation would increase productivity
(benefits from external trade)
Productivity Limited scope for further deregulation; important
UK's financial sector would benefit from removal of
regulation (e.g. financial and environmental) would likely
burdensome EU regulation
be retained after UK leaves the EU
Significant concessions on contributions to the EU budget
and migrant benefits have already been granted to the UK UK will save from not having to contribute to the EU budget
Fiscal
Contributions to the EU budget is the price to pay for and from not paying benefits to foreigners
access to the Single Market

Source: IMF (2016), CER (2016), Eurobank Economic Research Page 15

The immediate period following the UKs EU referendum
Expectations for economic stagnation in H2-16 proved overly pessimistic
Economy remarkably resilient to Brexit uncertainty in H2 2016
GDP growth (QoQ%, SA)- rhs The UK economy has defied stagnation
60 1.0
59
PMI composite output index- lhs
0.9
expectations in the immediate aftermath
58 0.7% 0.8
of the EU referendum
57 0.7
56 0.6
0.5% BoEs swift policy response
55 0.5
54 0.4 Postponement of Article 50 activation to
53 0.3 2017
52 0.2 Reduced political uncertainty
51 0.1
50 0.0 GBPs post-referendum depreciation
Q4 2015
Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016
Easier financial conditions & weaker sterling helped to absorb post-referendum uncertainty

178 GBP investment grade corporate bond index, lhs 30 74

173 Real 10-yr Gilt yield (bps), rhs 90
-20 64
168
85
163 54
-70
158 44 UK 5yr CDS, lhs 80
153 -120
GBP index, rhs
34
148
-170 75
143 24

138 -220 14 70
Oct-14

Oct-15

Oct-16
Jun-14

Jun-15

Jun-16
Apr-15

Apr-16

Aug-16
Aug-14

Dec-14
Feb-15

Aug-15

Dec-15
Feb-16

Dec-16

Jun-14

Jun-15

Jun-16
Oct-14

Oct-15

Oct-16
Apr-16
Apr-15

Aug-15

Dec-16
Aug-14

Dec-14
Feb-15

Dec-15
Feb-16

Aug-16
Source: Bloomberg, Eurobank Economic Research
Page 16
 The immediate period following the UKs EU referendum
but Brexit impact may become increasingly visible after Article 50s activation

Sterling depreciation has boosted inflation, undermining Consumer confidence negatively affected by slowing
real wage growth real wage growth; saving rate close to record lows
CPI inflation Real core wages
6.0
%YoY/ 3mma Index Gfk Consumer confidence indicator, lhs %
5.0
10 12
4.0 Household saving ratio, rhs
5 11
3.0
2.0 0
10
1.0 -5
0.0 -10 9
-1.0 -15 8
-2.0 -20 7
-3.0
-25
-4.0 6
-30
2010

2011

2012

2013

2014

2015

2016

2017
-35 5
-40 4

2005

2006

2008

2009

2011

2012

2014

2015

2017
UK PMI: has post-EU referendum rebound come to an end?
UK PMI Composite, output index
60
58
56.7
56 Brexit impact may become more visible
54 following Article 50s activation
53.8
52
boom or bust threshold
50 Behavior of UK businesses & consumers
48 will need to adjust to a prolonged period of
46 increased uncertainty over the terms of
the UK withdrawal and the new
Mar-16
May-16
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16

Jul-16
Sep-16
Nov-16
Jan-17

association agreement between Britain

and the EU
Source: OECD, Bloomberg, Eurobank Economic Research
Page 17
Most studies predict a permanent UK output loss due to Brexit
Direct and indirect effects of reduced trade with the EU; lower labor productivity

Source Brexit effect on the UK economy

-3.0% to -0.6% of per capita GDP (static estimate)
Bertelsmann Stiftung (2015)
-14.0% to -0.2% of per capita GDP (dynamic estimate)
-2.6% to -1.3% on incomes (static long-run trade effects)
Dhingra et al. (2016a, 2016b)
-9.5% to -6.3% on incomes (dynamic long-run trade effects)
-6.0% to -3.6% of GDP (short-run)
HM Government (2016c, 2016d)
-9.5% to -3.4% of GDP (long-run)
-2.6% to +1.1% of GDP
Mansfield (2014)
+0.1% of GDP (most likely scenario)

NIESR (Baker et al., 2016, Ebell -2.3% of GDP (short-run)

and Warren, 2016) -7.8% to -1.8% of GDP (long-run)
-3.3% of GDP (medium-term, up to 2020)
OECD (2016)
-7.7% to -2.7% of GDP (long-run, up to 2030)
-2.2% to +1.6% of GDP
Open Europe (2015)
(Politically realistic range: -0.8% to +0.6% of GDP)
Ottaviano et al. (2014) -1.1 to -3.1% of GDP

Oxford Economics (2016) -3.9% to -0.1% of GDP (long-run)

-5.5% to -3.0% of GDP (medium-term)
PwC (2016)
-3.5% to -1.2% of GDP (long-term)
Minford (2016) +4.0% of GDP

Source: IMF (2016), Eurobank Economic Research Page 18

The effect of Brexit on selected & export oriented sectors of the UK
Financial & Insurance Sector
Manufacturing Sector Financial & Insurance Sector
Manufacturing Sector Sectors likely to be accounts for 7.5% of GVA in
(excluding Construction but
including Aerospace,
affected by Brexit UK (EU-28: 5.4%)
sum up to ca 31.1% Short term risks: Uncertainty
Automobiles, Pharmaceutical
over the terms of Brexit may
& Energy) accounts for of GVA in UK have a negative effect on the
10.2% of GVA in UK (EU-28: (2014 data) UKs financial sector (e.g.
15.5%).
increased funding costs for UK
Short term risks:
banks)
Uncertainty over the terms of
Longer term risks: Financial
Brexit may have a negative
passport if abolished may hurt
effect on the sector (e.g.
Agro Sector the sectors activities in EU-27
postpone investment
Agro Sector accounts for
decisions and FDI)
only 0.8% of GVA in UK
Longer term risks:
(EU-28: 1.5%) Real Estate
Imposition of tariffs,
Short term risks: EU Real estate accounts for
decreased R&D spending,
CAP subsidies a 12.6% of GVA in UK (EU-28:
lower FDI and a trade
secondary issue but still 11.6%)
agreement less efficient
important for those that Short term risks:
than the current EU-28 or
receive them Uncertainty might cause a
EEA arrangements may
Longer term risks: sudden stop in real estate
adversely affect the sector
Impositions of tariffs related flows
may have a negative Longer term risks: Deflation
effect on domestic (via of commercial real estate
imports) & exported prices as a result of the firms
goods relocation

Source: Eurostat, IMF, Eurobank Economic Research Page 19

UKs large CA deficit requires substantial inflows for its financing
Or else, a slowdown in domestic demand (investments), an increase of national savings
and/or a permanent exchange rate depreciation to restore external equilibrium
Gross Capital Formation (% of GDP)

The UKs current account deficit has

2016-2018:
External Funding European increased substantially in recent years; it
Investment > Savings Commission Winter stood at 4.4% of GDP in 2016, not far
(February 2017) from a multi-year peak of 4.7% of GDP
forecasts
recorded in 2014
Gross National
Saving Rate (% of GDP) Persistently high external deficits would
be difficult to sustain in an environment
of reduced inward direct and other
investment in the post-Brexit era
(potential downside risks for the sterling)

Moreover, refinancing of government debt

Current Account Deficit
(~90% of GDP) could potentially come
under pressure in case of significant
sentiment deterioration caused by a delay
to reach an agreement, especially taking
into account that a large part of it (c.
25%) is currently held by foreign
investors
Current Account (% of GDP)

Source: European Commission AMECO Database (February 2017), Eurobank Research Page 20
External Trade
The UK has traditionally had strong trade linkages with the rest of the EU

Trade in Goods (2015)

The EU-27 is the UKs largest trading

partner in goods and services

If the UK were to leave the EU without

first securing a new trade arrangement, its
trade relations would be governed by WTO
rules

Under such a scenario, the UK would be

free to reduce import tariffs currently
imposed under the EU customs unions
terms
Trade in Services (2015)
However, besides higher administrative
costs for UK firms, export tariffs and non-
tariff barriers for UK exports to the EU
would increase. Exports to the EU would
have to be subject to the EUs Most
Favoured Nation (MFN) tariff regime
compared to the zero tariff policy currently
applied due to the UKs EU membership

Source: Eurostat, Eurobank Research Page 21

 External Trade
The EU is much more important for the UK economy than the UK for the EU
Export & Import market shares between the UK and the While the total value of the UKs exports to the EU-27
EU represents 13% of the UKs GDP, the value of exports
Goods and services (% of origin country/region GDP) from EU-27 to the UK accounts for just 3.0% of EU-
27 GDP

The UK runs a current account deficit with the rest of

the EU, but a current account surplus with non-EU
countries

The UKs current account deficit with the EU is

mostly in goods trade, while it runs a surplus in
services and particularly in financial services

Empirical studies suggest that losing full single

market access, the UK will likely experience a fall in
UK Current account balance with the EU
trade income; however, there is no conclusive
(% of GDP)
evidence as regards the potential degree of
deterioration

A key issue is whether the UK will be able to seal a

bespoke agreement with the EU. Whether it will
manage to rapidly come to new trade arrangements
with non-EU economies is also important especially
as the UK may not be able to ensure continuity of
existing trade agreements that have been negotiated
by the EU

The content of these arrangements compared to those

under its EU membership, is also crucial
Source: Office for National Statistics, OECD, IMF, Eurostat, Eurobank Economic Research Page 22
Financial sector: a key component of the UK economy
Highly susceptible to loss of access to the single market (passporting)
Financial & Insurance Activities the UK Services Exports by category, 2015
(share of total gross value added, %)
Intellectual property Other
(15.8 bn) (9.2 bn)

Communications, computer
and information services
(21.9 bn)
Financial services
Transportation (87.7 bn)
(33.2 bn)

Travel
(41.2 bn) Other business services
(97.2 bn)

Employees in Financial & Insurance Activities

(share of total employment, %)
The UK financial sector generates about
8% of national income, c. 50 percent above
the EU average

The UK economy employs proportionally

more people in the financial sector than
other major EU economies

UK financial and insurance services

account for over a quarter of the UKs total
services exports

Source: IMF, Office for National Statistics, Eurostat, Bloomberg, Eurobank Economic Research Page 23
Financial services: a key component of the UK economy
Highly susceptible to loss of access to the single market (passporting)

Overall trade in financial services (% of GDP) UK trade in financial services as a percentage of

GDP has risen significantly since early 90s,
much faster than in other major EU economies.
The largest share of financial services exports
goes to the EU, accounting for nearly half of
total financial services exports

The UKs financial sector has grown

considerably in recent years owing much to EU
passporting rights provided to UK-based
financial services companies due to the
countrys EU membership. Under this scheme,
such firms are authorized to offer services or
set up branches in any other EU state across
borders without the obligation to meet the
different regulatory requirements of each
individual country where they want to set up
UK: Share of Financial Services Exports, 2015 (%)
business

Consequently, the UK exit from the EU and loss

Rest of the world of the EU passport could adversely affect the
(25.1%)
financial sector. Amid concerns over higher
European Union costs, regulatory uncertainty and reduced
(44.2%)
market access to the EU internal market, a
Japan
number of UK firms may decide to relocate
(6.7%)
elsewhere in the EU in order to retain
United States of America
(24.0%) passporting rights and full access to the single
market

Source: OECD, Eurostat, Office for National Statistics, Eurobank Economic Research Page 24
The UK economy is highly dependent on inward FDI
Much of this comes from other EU countries
Share in FDI inflows to the UK
Share in FDI inflows to the EU-15
2015 annual average %
(annual average %)

The UK accounts for the largest share of EU

total FDI inflows partially owing to the
Inward FDI to the UK countrys role as a gateway to the EU internal
By country/region of origin (GBP billion)
market

The total stock of FDI in the UK exceeds 1

trillion GBP, representing around 57% of the
countrys GDP. Almost 50% of it comes from
the rest of the EU

If access to the single market were lost, the

UK might become a less attractive destination
for FDI inflows, with negative repercussions
for investment, export capacity and
productivity

Source: OECD, Eurostat, Office for National Statistics, Eurobank Economic Research Page 25
EU immigration to the UK
Increased number of EU migrants with higher employment rates than UK natives

Long-term international net migration by citizenship

The number of EU migrants to the UK has

increased considerably in recent years,
accounting to nearly half of net migration
flows

EU migrants tend to have higher employment

rates than UK natives and almost all other
migrant groups, with the majority of them
coming from countries with high
unemployment rates

Employment rates by country of birth (people aged 16 to 64)

A body of research suggests that EU migrants
(average employment rate 2000-2015) make a net positive contribution to the UK
budget on the grounds that they tend to be on
average younger than UK natives, claiming
less unemployment benefits and making less
use of public health services than the average
Briton

Empirical analyses on the UK labour market

do not provide conclusive evidence that EU
migrants have caused job losses and lower
average wages for UK natives

*Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia.
Source: Office for National Statistics, IMF, Eurobank Economic Research Page 26
EU immigration to the UK
Considerable contribution to UK output & productivity

Real GDP growth contributions (in pps) Empirical analysis suggests that EU migrants
are on average more skilled and better
educated than UK natives, making
considerable contribution to UK GDP and
productivity growth

EU migrants have assisted UK firms to

allocate workers to jobs for which they are a
better match, enabling them to operate more
efficiently and less costly

After Brexit, likely imposition of more

restrictive migration policies, could lead to a
reduction of net migration. Any potential
Change in total employment by country of
impact on the UK economy will be subject to
birth contributions (in pps)
the types of restrictions that may be applied
(e.g. a highly skilled migrant programme for
EU workers, as is currently the case for non-
EU nationals)

UKs withdrawal from the EU implies that the

deal the UK government reached with EU
leaders at the February 2016 EU Council
meeting envisaging inter alia, a so-called
emergency brake on in-work benefits for EU
workers and reduced child benefits for EU
migrants, will not be implemented

Source: OECD, Office for National Statistics, Eurobank Economic Research

Page 27
UK is already among the least regulated markets in the developed world
How much room for additional gains from de-Europeanising Britain?
OECD Product Market Regulation Indices Comparison, 2013
Blue colour denotes EU countries, yellow colour denotes non-EU countries OECDs comparative indicators for
product & labour market regulation
suggest that EU membership does
not constrain deregulation

UK ranks 2nd among the EU in

terms of product market
liberalization and has lower
employment protection than other
major European economies

On the other hand, the UK scores

relatively poorly in domestically-
OECD Strictness of Employment Protection- individual dismissals
controlled regulations (e.g.
(regular contracts), 2013
Blue colour denotes EU countries, yellow colour denotes non-EU countries planning regulations and other
restrictions on housing
construction; licensing and permits
systems) that are not required by
the EU (IMF, 2016)

Doubts exist as to the extent of

additional gains that may be
generated by de-Europeanising
Britain, especially as many
regulations now imposed at the EU
level would need to be replaced by
domestic equivalents
Source: OECD (2016), IMF (2016)
Page 28
UKs gross contribution to the EU budget among the lowest as % of GDP
How large might the gains from Brexit be?
UK makes one of the largest nominal
Nominal gross contribution to the EU budget
gross contributions to the EU budget, as
it is one of the largest European
economies. However, as % of GDP its
contribution is among the lowest in the
EU

Furthermore, UKs contribution is

partially offset by inflows from the EU
budget under various spending programs
(e.g. for R&D and scientific research) and
the UK rebate

UKs net contribution to the EU Budget

has averaged c. 6.0bn per annum (c.
UK is a net contributor to the EU budget 0.3%-of-GDP) in 2005-2015, lower than a
number of major EU economies

If the UK were to retain some access to

the single market it would find it difficult
to avoid payments to the EU budget (e.g.
the Norwegian and Swiss models of
association come with fiscal costs)

Furthermore, it would also probably have

to make up by itself for the shortfall
created by discontinued EU structural
funding and CAP subsidies

Source: European Commission, IMF, Eurobank Economic Research Page 29

 Section 4
The economics of Brexit
Potential implications for the EU-27 and the CESEE region

Page 30
Brexit: implications for the EU-27
Luxemburg, Ireland, Malta, Cyprus, the Netherlands and Belgium are relatively more
susceptible to Brexit risks
High direct trade ties with UK High FDI exposure
% of individual country GDP, 2015 % of individual country GDP, 2015
30% 500
Exports G&S/GDP UK FDI stock abroad
Imports G&S/GDP 450 FDI stock in UK
25%
400
350
20%
300

15% 250
200
10% 150
100
5%
50

0% 0
Luxembourg Ireland Malta Cyprus Netherlands Belgium Luxembourg Ireland Netherlands Malta Cyprus Belgium

Migrants in the UK Financial Sector Claims (ultimate risk basis)

% of origin country population 2015 % of individual country GDP, 2015
12 80
70
10
60
8
50
6 40
30
4
20
2
10
0 0
Germany
Denmark
Portugal
Latvia

Bulgaria
Estonia

Serbia
France

Spain
Czech Rep

Finland
Ireland

Slovenia
Croatia
Malta

Austria
Belgium
Slovakia
Cyprus

Romania
Poland

Luxemburg
Greece
Sweden

Italy
Hungary

Turkey
Netherlands
Lithuania

Germany

Denmark

Latvia
Spain

France
Ireland

Finland
Switzerland

Austria
Malta
Luxemburg

Cyprus

Norway
Netherlands

Belgium
Hungary
Italy
Sweden

Canada

Lithuania
Source: BIS, European Commission, Eurostat, ONS, S&P, UN, Eurobank Economic Research Page 31
 0%
4%
5%

1%
2%
3%

0
1

0.2
0.4
0.6
0.8
1.2
Latvia Bulgaria
Lithuania
Cyprus Czech Rep.
Malta
Hungary
Estonia
Slovakia
Poland
Croatia
Bulgaria
Belgium
Czech Rep. Latvia
Estonia
6% % of individual country GDP, 2015

Portugal Lithuania

% of individual country GDP,2015

France
Spain Hungary
Sweden
Romania Poland
Croatia
Denmark Romania
Germany

Remittances inflows from UK

Italy
Slovenia
Greece
Modest regional direct trade ties with UK

Norway
Slovakia
Netherlands
Turkey
Serbia
Imports G&S/GDP
Exports G&S/GDP

Luxembourg
Brexit: implications for the CESEE region

Source: European Commission, Eurostat, ONS, Eurobank Economic Research

10
12

2
4
8

0
6

10
20
30
40
50
60
80
90

70

0
100

Spain
Poland France
bn

Italy
Spain
Sweden
Romania Denmark
Germany Germany
France
Portugal
Portugal
Hungary Italy
Czech Rep. Finland
Greece
Austria
Slovakia
Croatia Greece
% of individual country GDP, 2015

Bulgaria Poland
Austria Slovakia
Lithuania
Czech Rep
Latvia
Estonia Hungary
Slovenia Turkey
Finland
Low regional FDI exposure
Net negative for growth short-term but not anything resembling a catastrophic event

Estonia
Sweden
Ireland Romania
Belgium Croatia
Netherlands
FDI in UK

Latvia
Denmark
Cyprus
Slovenia
UK FDI abroad

Malta Bulgaria
Luxembourg
EU funds 2014-20: CESEE may receive less than planned

Lithuania
Page 32
 Section 5
The economics of Brexit
Potential implications for the Greek economy

Page 33
Brexit: implications for Greece
Transmission channels of Brexit negative effects to the Greek economy
Potential transmission channels
1) Trade in goods registers a deficit of -0.2 bn
UK accounts for 4.2% (1.1bn) of total Greek exports of goods
UK accounts for 2.9% (1.3bn) of total Greek imports of goods
2) Trade in services registers a surplus of 2.8 bn mainly as a result of tourism & shipping
revenue
UK accounts for 16.4% (4.6bn) of total Greek exports of services (tourism & shipping revenues)
Trade in Goods & Services
UK accounts for 17.3% (1.9bn) of total Greek imports of services
(2015 data)
Total balance at surplus of 2.5 bn or 1.4% of GDP
3) Indirect effect through trade with other EU countries
A possible deterioration of the growth performance of the other EU economies triggered by Brexit
could negatively affect Greeces trade flows. E.g., ceteris paribus, a 1% decrease in the growth rate
of Greek exports of goods and services to other EU countries could lead to a drop of Greeces
nominal GDP growth rate by 0.15 percentage points (Eurobank Research )

1) Direct contribution of tourism to Greek GDP & total employment at 7.5% & 11.5% respectively in
2016
2) UK ranks second in terms of tourists arrivals and receipts in Greece (2.9mn persons & 1.9bn
Tourism respectively in 2016)
3) Tourism revenue sensitive to changes in processes and costs of travel (i.e. Visas for UK
residents instead of free movement, transaction costs from changes in aviation regulation, etc)
and the / exchange rate movements both in the transitional period and the post-Brexit period

1) Disruption of global trade due to Brexit may result in reduced demand for shipping services
2) Potential downgrading of London's status as a shipping hub may imply significant costs for
Shipping indusrty Greek shipping companies that might decide to relocate
3) Greece could benefit but lacks the infrastructure for attracting shipping companies that plan to
relocate
Ca. 35bn available for Greece via the EU Budget 2014-2020 (European Structural and Cohesion
EU structural & agricultural Funds plus Common Agricultural Policy funds). Brexit might have a negative impact on the size of
funds the current EU Budget even if the final agreement requires a contribution from the UK.
Consequently, available funds for Greece may be reduced

Source: ELSTAT, European Commission, World Travel & Tourism Council, Eurobank Economic Research Page 34
 Greece 2007-2016
From a Great depression to a Great stagnation?

2016-2018: European Commission Winter (February 2017) forecasts

2016: realized real GDP for Greece (growth rate = 0.0%)
Real GDP (Index 2007 = 100)

Cypriot Crisis: 2011-2014

-10.4% (real GDP decrease)

Stagnation 2013-2016

Source: European Commission AMECO Database (February 2017), Eurobank Economic Research Page 35
Brexit: impact on Greece
Relatively low direct merchandise trade linages with the UK

Shares of total Greek exports in goods (%)

Shares of total Greek imports in goods (%)

Source: Eurostat, Eurobank Research Page 36

What kind of goods does Greece export to the UK (2016)?
Shares of total goods exports to the UK (1.1bn) - Food & live animals dominate
5th Miscellaneous 10th Commodities and
manufactured transactions not
articles 0.0% in
classified by category
2007

4th Machinery and 8.8% in

2007
transport equipment
1st Food and
17.0% in
live animals
2007
24.3% in
2007

9th Beverages
17.9% in
3rd Manufactured 2007 and tobacco
goods classified 0.7% in
2007
chiefly by raw
material 1.5% in
2007
6.6% in
22.2% in 2007 7th Crude
2007
materials,
0.9% in inedible, except
2nd Chemicals and
2007
fuels
related products, n.e.s 6th Mineral fuels,
8th Animal lubricants, etc
and vegetable
oils and fats
Source: Eurostat, Eurobank Economic Research Page 37
What kind of goods does Greece import from the UK (2016)?
Shares of total imports from the UK (2.1bn)

1st Machinery and transport

equipment Machinery and transport
equipment, chemical and related
2nd Chemicals and related
products, n.e.s products and miscellaneous
manufactured articles dominate
Greek imports from the UK
3rd Miscellaneous
manufactured articles

7th Beverages
4th Manufactured and tobacco
goods classified
chiefly by raw
material 8th Crude
materials,
inedible,
5th Food and except fuels
live animals
6th Mineral fuels,
lubricants, etc 9th Animal and
vegetable oils
and fats

10th Commodities
and transactions
not classified by
category

Source: Eurostat, Eurobank Economic Research Page 38

UKs contribution to the Greek external balance of goods
Marginally negative

Greeces external balance of

Goods (2016)
Total:
-18.6bn (10.6% of GDP) deficit
Contribution:
Non EU-28 47.3%
EU-27 51.9%
UK 0.8%

Greeces external
balance of goods
with the UK ( mn)

Source: Eurostat, Eurobank Research Page 39

Relatively strong trade ties between Greece and the UK in services
Mainly, travel and transportation services
Shares of total Greek Shares of total Greek
exports in services (%) imports in services (%)

Source: Eurostat, Eurobank Economic Research Page 40

What kind of services does Greece export to the UK (2015)?
Shares of total services exports to the UK (4.6bn) Travel & transportation dominate
4th Telecommunications, computer
3rd Other business services
and information services

5th Insurance and 1st Travel

pension services
32.4% in
Probably this 2014
drop reflects the
effect from CCs

6th Construction (0.9%)

2nd Transportation 53.8% in

2014 7th Financial services (0.5%)

8th Maintenance and repair services n.i.e (0.4%)

9th Personal, cultural and recreational services (0.4%)

10th Charges for the use of intellectual property (0.1%)

11th Government goods and services n.i.e (0.1%)

12th Manufacturing services on physical inputs owned by others (0.0%)

13th Services not allocated (0.0%)

Source: Eurostat, Eurobank Economic Research Page 41

What kind of services does Greece import from the UK (2015)?
Shares of total imports of services from the UK (1.9bn) Transportation dominates

1st Transportation 6th Charges for 10th Construction

the use of
2nd Travel 11th Government
intellectual
3rd Telecommunications, property goods and
computer and services n.i.e
information services 7th Financial
services 12th Manufacturing
4thOther services on physical
business services 8th Personal,
cultural and inputs owned by
5th Insurance recreational others
and pension services
services 13th Services
9th Maintenance not allocated
and repair
services n.i.e

Source: Eurostat, Eurobank Economic Research Page 42

UK has a significant positive contribution to Greeces external balance of services
Travel and transportation services dominate

Balance of Services in Greece (2015)

Total (2015): +16.9 bn surplus (9.6% of GDP)
Contribution:
1st Germany 19.3%
2nd UK 15.8%
3rd USA 11.3%
4th Switzerland 9.6%
Greeces external
5th France 7.7% balance of services
with the UK ( mn)

Source: Eurostat, Eurobank Economic Research Page 43

Brexit and the Greek tourism sector
A source of potential risk for Greece

Arrivals by Country of Origin Travel Receipts by Country of Origin

(ml. persons, 2016) ( bn, 2016)

2016 direct contribution of tourism sector to Greek GDP & total employment at 7.5% & 11.5% respectively
UK ranks second in terms of tourists arrivals and receipts in Greece (2.9mn persons & 1.9bn respectively in
2016)
Brexit represents a potential downside risk for the Greek tourism sector, depending on, inter alia:
o Final agreement on visas
Visa-free travel needs to continue so as to prevent adverse effects on tourist inflows from the UK
o UKs participation in the European Single Aviation Market (ESAM)
Suspension could increase transaction costs for UK-based carriers, with negative effects on the cost of traveling abroad
and thus on Greek tourism
o The / exchange rate movements both in the transitional period and the post-Brexit period. For example, a post-
Brexit depreciation of the pound sterling against the euro will likely make the Greek tourism product more expensive for
UK residents

Source: Bank of Greece, World Travel & Tourism Council, Eurobank Economic Research Page 44
Brexit and the Greek shipping sector
Market turbulence but not major worries in the medium term

Top-20 countries in terms of merchant fleet's beneficial Greek M erchant Fleet by

ownership Flag of Registration (2016)
(2016, dwt, thousands) Greece 22.37%
M arshall Islands 19.35%
Liberia 19.28%
M alta 16.50%
P anama 7.67%
Bahamas 5.81%
Cyprus 5.68%
Isle of M an 1.32%
Singapore 0.96%
Hong Kong 0.46%
Bermuda 0.38%
Italy 0.11%
Norway 0.04%
Denmark 0.03%
UK 0.03%
Indonesia 0.01%

Shipping sector contributed directly 3.5% to Greek GDP in 2015. Total direct and indirect contribution estimated
above 6.1% (FEIR (2013))
Greece ranks 1st in the world at 16.4% in terms of merchant fleet beneficial ownership while the UK ranks 9th with
2.9% of the worlds fleet beneficial ownership (dwt, 2016, UNCTAD)
No direct effect from Brexit on Greek merchant fleet since just 0.03% is under UK flag. Indirect effects include:
o The disruption of global trade due to Brexit may result in reduced demand for shipping services
o The potential downgrading of London's status as a shipping hub may imply significant costs for Greek shipping
companies that might decide to relocate
Greece still lacks the infrastructure for attracting significant number of shipping companies that plan to relocate

Source: ELSTAT, UNCTAD, Eurobank Research Page 45

Greeces overall external trade balance in goods & services with the UK
Based on FY-2015 data

Greeces external balance of services with the UK (2015)

(surplus +2,678 mn)

Total balance
(+2,525mn or
1.4% of GDP)

Greeces external balance of goods with the UK (2015)

(deficit -153.4 mn)

Source: Eurostat, Eurobank Research Page 46

Disclaimer

This document has been issued by Eurobank Ergasias S.A. (Eurobank) and may not be reproduced in any manner.
The information provided has been obtained from sources believed to be reliable but has not been verified by
Eurobank and the opinions expressed are exclusively of their author. This information does not constitute an
investment advice or any other advice or an offer to buy or sell or a solicitation of an offer to buy or sell or an offer
or a solicitation to execute transactions on the financial instruments mentioned. The investments discussed may
be unsuitable for investors, depending on their specific investment objectives, their needs, their investment
experience and financial position. No representation or warranty (express or implied) is made as to the accuracy,
completeness, correctness, timeliness or fairness of the information or opinions, all of which are subject to change
without notice. No responsibility or liability, whatsoever or howsoever arising, is accepted in relation to the
contents thereof by Eurobank or any of its directors, officers and employees.

Contributors
Dr. Platon Monokrousos, Group Chief Economist
Anna Dimitriadou, Ioannis Gkionis, Stylianos Gogos, Olga
Kosma, Paraskevi Petropoulou, Theodoros Stamatiou

Page 47