Conflict and Cooperation, Future of Europe
giStrat | Jun 2016

The UK and the EU

Updated: Jun 24
  • UPDATED: Jun 24

    UK Votes to Leave the EU

    The UK referendum resulted in a close victory for Brexit as 52% of British citizens voted to leave the European Union.

  • UPDATED: Jun 20

    Pound Surges as Polls Indicate a 50-50 Split Three Days Prior to UK Referendum

  • PUBLISHED: Apr 12

    The UK and the EU

    In June of 2016, the United Kingdom will vote on whether or not to exit from the European Union. This referendum will have far-reaching economic and political consequences for both the United Kingdom and the rest of Europe. giStrat and Acertas applied agent based simulations and game theory impact modeling to estimate the outcome of the UK referendum. Below are the key results of this joint analysis. We predict the UK will vote to remain in the European Union after wresting moderate concessions from EU member states.

    Download the full report here.

UK Votes to Leave the EU

The UK referendum resulted in a close victory for Brexit as 52% of British voters cast ballots to exit the European Union. In April 2016 giStrat estimated a 67% chance of the UK remaining in the EU at a very narrow margin.

Concerns Over Migrant Access to Welfare Benefits and National Sovereignty Outweighed Fears of an Economic Fallout

In evaluating the preferences of voters seeking to exit the EU, game theory-based impact analysis from April 2016 showed pro-Brexit voters were most concerned about migrant access to welfare and UK sovereignty. The results of the referendum reveal that the risk of a devalued currency and the potential cost of disruption to trade did not deter the majority of UK citizens from voting to leave the EU.

Impact of the Brexit

A Brexit will likely result in more significant reductions in migrant access to welfare benefits, stronger Eurozone safeguards, and more authority placed back in the hands of UK parliamentary and executive bodies. giStrat’s impact analysis indicated the value of the pound would potentially decrease following a Brexit. This has turned out to be true as the pound has fallen to a three decade low following the vote to leave the EU. Impact modeling also suggests access to the EU internal market, EU foreign direct investment (FDI), and trade will be reduced while the UK attempts to renegotiate terms.

What is Likely to Happen Now

  • Greater restrictions on migrant welfare benefits
  • Greater Eurozone safeguards
  • Reduced access to EU internal market
  • Full end to EU political integration
  • More sovereignty in the hands of Parliament and executive bodies
  • Decreased value of the pound

PostBrexitUpdate

Options Following the Brexit

The UK will have a two year window to renegotiate alternatives to EU membership. A recent June 2016 poll indicated UK citizens would overwhelmingly prefer a “Norway style” arrangement following a Brexit. Under this option the UK gains access to the EU single market as part of the European Economic Area (EEA) while maintaining its political sovereignty, but it would have to pay for a portion of the EU budget while maintaining regulatory standards. Another option is the “Swiss model” whereby the UK negotiates a series of bilateral agreements with the EU on selective access to the single market while paying for a portion of the EU budget.

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A Look at the UK Referendum Using Advanced Analytics and Game Theory

In June 2016 the United Kingdom will vote on whether or not to exit from the European Union. This referendum will have far-reaching economic and political consequences for both the United Kingdom and the rest of Europe. giStrat and Acertas applied agent-based simulations and game theory impact modeling to estimate the outcome of the UK referendum. Below are the key results of this joint analysis.

Analysis

Our analysis is best understood in two phases. The first looks at whether or not UK voters are likely to elect to remain part of the European Union. The second examines the concessions UK Prime Minister Cameron negotiated with other EU leaders and the impact it may have on the June 2016 referendum.

 

Will the UK Stay in the EU?

An aggregate of six recent polls shows a 50% split between those wishing to remain and those preferring an exit. With +-3% margin of error the outcome remains uncertain to many analysts.  Our analysis indicates a 67% likelihood of remaining in the EU. 

England and Wales Monte Carlo

England and Wales Monte Carlo – Despite large fluctuations, Monte Carlo runs show England + Wales voters likely to remain even in the face of shocks.

 

Remain vs Exit Camps

Game-theory modeling of voter preferences indicates that, for UK voters who prefer to remain in the EU, worries over the economic risks associated with an exit are more significant than issues related to the costs of migrant benefits and the loss of national sovereignty.

For voters preferring to exit the EU, our analysis shows these voters placing the issues of migrant welfare benefits and UK sovereignty as the most serious concerns. For these voters the risk of a devalued currency and potential cost of disruption in trade are not a serious priority.

Under the scenario where the UK remains in the EU, the payoffs for both voter blocks are positive, and the divergence of opinions is not as significant as in an exit scenario. This is partially attributed to benefits gained from Prime Minister Cameron’s already negotiated concessions. The results clearly show that remaining in the EU achieves the highest net gains for the UK as a whole. 

Gaining Momentum for the Remain Camp

Our modeling indicates support will grow for remaining in the EU as Cameron gains more support from small-to-medium sized businesses and as more conservative party members see the economic benefits of remaining in a business relationship with the European Union. Calculations indicate that remaining in the EU is clearly the less risky option for the UK.

 

The Effect of Concessions

Prime Minister Cameron has negotiated a series of concessions aimed at keeping the UK in the EU.  For each of the five issues we ran a series of computer simulations to determine the current and future positions held by each of the EU countries on these concessions. 

The Five Concessions

Ending Commitment to an “Ever Closer Political Union”
Under this agreement UK and the EU symbolically reaffirm British sovereignty through a treaty that formally ends the British commitment to an “ever closer political union” with other EU states. The draft deal states that “the references to an ever closer union among people are compatible with different paths of integration being available for different member states and do not compel all member states to aim for common destination.

Increasing Access to the Single Market by Boosting Free Trade and Cutting Red Tape
Under this agreement, the UK and the EU have agreed to an aspirational goal of initiating an effort to cut red tape on access to the internal trading market by reducing administrative costs and improving regulations on participation in the European Economic Area (EEA) under the European Free Trade Association (EFTA). How exactly the EU will implement a reduction red tape remains unclear.

Safeguarding Against Eurozone Financial Rules
Under this deal any British money spent in any future potential Eurozone bailout will be reimbursed. The deal also requires implementation of institutional safeguards aimed at preventing Eurozone regulations from being imposed on the UK financial services industry. The deal also states that the UK will maintain the pound as its national currency, while continuing trade within the Eurozone without fear of discrimination.

A “Red Card” for National Parliaments
Under this concession, EU legislation can be blocked if 55% of national parliaments object to it, that is, a “Red Card” can be raised and legislation stopped.

Limiting EU Migrant Access to Welfare
Prime Minister Cameron’s deal on EU concessions changes child benefits afforded to migrant workers by adjusting payments to reflect the cost of living in migrant home countries.  Under the negotiated concessions, the UK will exercise the option to limit work benefits of EU migrants for the first four years living in country. This option can be exercised for up to seven years.

Monte Carlo Analysis

Monte Carlo Analysis is a statistical method that allows us to simulate a number of imaginary futures. By showing how unexpected events are likely to influence the outcome of an issue, we can see how elastic positions are on a given subject. We ran these for each of the five concessions above, and this revealed which issues are the least and most likely to achieve agreement on.

In the graphs below you can see that in nearly all of our simulated futures, the issue of “Ever closer political union” keeps voters in the remain camp.

Union_Small
However on the opposite end of the spectrum we can see a wide variance in the reactions surrounding “EU migrant welfare”. This means that as conditions change around this issue, voting behavior on the referendum is far less predictable, and that this is a much more contentious issue.

Migrant Welfare_Small

View the Monte Carlo runs on other three concessions:


Eurozone_Small
Red Card_Small
EU Market_Small

Modeling a Path Forward

We looked at the most likely pathway to achieving the above five reforms. Assuming it is easier to gain momentum by going from least to most contentious on issues, simulations suggest the following sequence:

  • 1. Ending commitment to an “ever closer political union”
  • 2. Increasing access to the single market by boosting free trade and cutting red tape
  • 3. Safeguarding against Eurozone financial rules
  • 4. A “red card” for national parliaments
  • 5. Limiting EU migrant access to welfare

Consequently, those advocating for exiting the EU will likely focus on the most contentious issues first – migrant welfare benefits and sovereignty. Therefore, a campaign to convince UK voters to remain in the EU will require messaging to counter the negative messaging on these difficult issues. This back-and-forth will become a race to gain a majority vote in the referendum. Impact model simulations indicate that under this estimated tit-for-tat strategy, the majority vote will lean in favor of remaining in the EU.

EU Will Be the Biggest Loser Regardless of Outcome

giStrat’s impact model shows that the primary losing entity in the UK referendum debate is the EU itself. Our calculations indicate that the EU as a body will incur negative payoffs whether the UK stays or leaves the Union. For the EU, neither the concessions required to keep the UK as a member, nor the consequences of them leaving, will produce an outcome as advantageous as the status quo.

If the UK remains, the EU is forced to make costly concessions. Under the exit scenario, the EU partners will be further restricted on flow of labor, travel, and trade to and from the UK.

While neither scenario is ideal, EU members realize, and our calculations confirm, that the cost of keeping the UK as a member is much less than the cost of a British exit.

Conclusion

The upcoming vote on whether or not the UK will remain in the EU is likely to be close. While the effects of unforeseen events cannot be discounted, giStrat and Acertas estimate a 67% likelihood that UK will remain in the EU.

Methodology

Senturion Agent-Based Model

This forecast is conducted using a validated agent-based game theory model called Senturion. Developed by Acertas, Senturion incorporates computational analytics applying proven theories of behavior from the fields of psychology, political science, and microeconomics to anticipate political outcomes. In 2014 the State Department selected Senturion as the most accurate model for predicting conflict and crisis outcomes at a 90% accuracy level across 200+ cases.

Game Theory Impact Model

giStrat and Acertas estimated game theory-based benefits (payoffs) of various voter blocks for the upcoming EU Referendum by ranking their known preferences across 6 issues. giStrat and Acertas then calculated the range of combinations for these determinants to estimate how the British public will vote in the 2016 referendum.

 

Contributors

Global Impact Strategies

Amir Bagherpour, PhD, Chief Political Scientist
Shaun Donaldson, Senior Analyst
Matthew Scharpnick, Creative Partner
Alaina Johnson, Visual Designer

Acertas

Mark Abdollahian, Ph.D., CEO
Patrick Neal, Director of Engagements

 

 

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