Malta, Cyprus and Luxembourg set to be biggest Brexit losers – KPMG report

KPMG's chief economist Yael Selfin says the countries with which the UK has a large trade surplus, like Malta, will have the greatest interest in securing a good deal when Brexit negotiations get underway

The Republic of Ireland, Cyprus, Malta and Luxembourg look set to be the biggest losers from a deterioration in relations between the U.K. and the European Union post-Brexit, according to new research from KPMG.

KPMG's chief economist Yael Selfin said that these smaller economies – countries with which the U.K. has a large trade surplus – will have the greatest interest in securing a good deal when negotiations are scheduled to get underway at the end of this month.

The new relationship with the UK will need to be agreed by all 27 of the remaining EU countries and take into consideration wider issues than trade, including the movement of people and capital. The impact of such a scenario is likely to differ across the EU27 and influence respective negotiating positions and willingness to compromise in order to reach a more favourable agreement.

The UK’s large trade deficit with the EU – almost £70 billion, equivalent to 3.7% of GDP in 2015 – and the share of UK’s total economic output destined for Europe, is far greater than the proportion of European output destined for the UK.

So this suggests that the UK would face far greater disruption than the EU from the introduction of barriers to EU-UK trade.

But the UK has a trade surplus with four EU countries: Cyprus, Greece, Ireland and Malta. Despite being net importers of UK goods, these markets are almost insignificant for the UK, with only exports to Ireland noticeable when compared to GDP (1.5% of UK GDP).

So the UK is an important export market for Malta: it is exposed to the UK for exporting goods (9.1%) as are Luxembourg (10.1% of GDP), Malta (9.1%), Netherlands (7.6%), Belgium (7.3%) and Slovakia (5.2%), as highlighted in Figure 1 on the right.

Cyprus, Malta and Luxembourg also export a large amount of services relative to GDP, whilst Spain runs the biggest trade surplus with the UK, as it continues to be the top destination for UK residents visiting abroad.

Migration from EU countries to the UK can also have a number of impacts on their economic growth, as it can act as a drag on both their production capacity and potential consumption.

Although Poland, where remittances from the UK amount to 1% of GDP, has the highest absolute number of citizens in the UK (over 700,000 according to some estimates), this amounts to just 1.8% of its population, far lower than the 10.7% of Irish, 9.7% of Cypriots and 7.6% of Maltese citizens living in the UK.

So for many countries, one of the most important factors to influence the impact from Brexit will be the goods and services they export to the UK. The effect on domestic economies of migration may be ambiguous.

For many Eastern European countries, protecting the workers in and remittances from the UK may be the most important priority, and countries such as Luxembourg, Malta and Cyprus rely on British workers.

Spain, however, may be glad to stem the flow of British pensioners to the economy, whilst Germany may be glad to see greater immigration from Eastern Europe and to repatriate some of its own workforce.

Ireland may have the most to lose from a deterioration in economic relationships between the UK and EU, as well as Cyprus, Malta and Luxembourg. The EU’s largest economies – Germany, France and Italy – face some risks to their exports of goods, while for Spain, curtailing the inflow of holidaymakers may prove undesirable.