Publications /
Opinion

Back
The Economic Implications of the Brexit Mess
Authors
June 27, 2016

The referendum in favor of the exit of Britain from the European Union (“Brexit”) marks a sad day for Britain and for Europe. It represents a victory of nationalism over the liberal economic order, in the country that inspired the ideas that lie at its foundations. The referendum probably signals the end of an experiment widely supported by the young, the elites and most economists, but which has failed in the eyes of the majority of British people. For Britain, the economic risks are considerable, but they pale in comparison to the possible political fallout, since Brexit may pave the way for the separation of Scotland, which voted 60% in favor of staying in the EU, and could upset the uneasy peace in Northern Ireland, which voted 56% in favor of staying. Also perilous for political stability is the schism within the ruling conservative party. Of note is the repugnant reaction to the outcome of large numbers in the remain camp. Nearly three million have already signed a petition for parliament to call for a second Brexit referendum. Though the referendum is technically not binding, and there are scenarios under which it could conceivably be ignored or reversed, the assumption now has to be that Britain will leave the European Union. 

Yet, there is no immediate economic revolution. Prime Minister David Cameron has resigned and the application to exit under Article 50 of the Lisbon Treaty is imminent, but the obligations and privileges of Britain’s EU membership will remain fully in effect as it negotiates its exit terms. The term provided for negotiation is 2 years, but a longer period is possible and indeed, given the complexities, likely, by mutual consent. Thus, more than anything, the immediate economic effect of the referendum outcome is to usher in a long period of uncertainty. This interval is likely to have a cooling effect on investment in the UK by both British and International firms. Yet, the UK’s EU-oriented investment has already largely been made and investors are unlikely to suddenly pack their bags, so the effect may not be as dramatic as some fear. Meanwhile, weaker sterling will help support UK export-oriented and import-competing investment, even as it raises the cost of living of its citizens.

World financial markets have reacted with something close to panic to Brexit, an outcome they spectacularly failed to anticipate until the first voting results came in. However, Britain represents only about 4% of the global economy, and the spillover effects of Brexit should not be overstated. Investment that does not go to Britain can go elsewhere. Nor is trade likely to be permanently damaged by Brexit. Provided trade negotiations are not infected by vengefulness or hostage taking, the most likely outcome is a Free Trade Agreement that follows immediately on Britain’s exit and which closely resembles the current arrangement. Very sensitive sectors such as agriculture, garments and autos will prove the hardest nuts to crack. EU negotiators will exact a high price for continued access. In the end, agriculture may actually become a little less distorted than it is now as British farmers are unlikely to be as lavishly subsidized as they are under the Common Agricultural Policy. The investment chapters of the negotiations will probably ensure that foreign investment in both directions will remain about as unencumbered as it is today. Britain’s EU deal will be tailor-made and differ from those governing trade relations with Switzerland and Norway, which are successful but much smaller nations at the periphery of Europe, yet it is unlikely to be materially less advantageous. It is simply not in the EU’s interest to isolate Europe’s most dynamic large economy.

Given the tenor of the Leave campaign, the most important lasting effect on efficiency, one that should not be overlooked, will result from restraints on immigration from the EU as well as curtailed freedom of temporary movement of workers into the UK. Still, in establishing the new immigration and visa policy towards EU members, UK policy-makers will have to consider the reciprocal measures that EU members may adopt vis-à-vis UK nationals, large numbers of whom prize the ability to work and live in Europe. Also, EU negotiators may demand of the UK relatively liberal immigration measures in exchange for trade concessions.

Brexit will also trigger deep soul-searching in Brussels, Paris and Berlin. Though some believe the UK leaving will make for a more cohesive block, and so hope for “More Europe”, the result is far more likely to encourage those who want “Less Europe”. It is difficult to gauge the effect of Brexit on the prospect of a President Le Pen, since the French public has reacted with remarkable indifference to the outcome of the referendum. Brexit clearly strengthens the hand of leaders much nearer to the center of the political spectrum, the likes of Matteo Renzi and Wolfgang Schauble, who want a less Brussels-centric system.

One consequence of Brexit may be to delay the badly needed strengthening of the institutions underpinning of the single currency, including fiscal rules, the Banking Union, etc. But Brexit will not stop these processes. For the 19 of 28 EU members that have adopted the Euro, exit would trigger a massive and unmanageable economic crisis and is therefore not a viable option. But, more importantly, the Brexit mess is likely to be remembered by other EU members as an example of how not to do it. It will be seen more as self-destruction than as the golden path to follow. The dust is yet to settle, and it will not for many months to come, but it is clear already that Brexit will neither derail the European project nor, contrary to the market turmoil, bring the global economic recovery to a screeching halt. 

RELATED CONTENT

  • May 20, 2022
    Traders have worried that the war involving Russia and Ukraine could stoke inflation, further disrupt supply chains and derail the global economic recovery. Scarcity of food has led to ri ...
  • April 29, 2022
    Following on the heels of the COVID-19 pandemic and severe drought in North Africa, the Russian invasion of Ukraine – large exporters of food and, in the case of Russia, energy— may inflict increased hunger on the food insecure in Morocco – despite mitigating measures by the government. Morocco is so far successfully shielding its large poor and vulnerable population by subsidizing essential commodities. With memories of the violent protests during the 2007/08 food and fuel crisis s ...
  • Authors
    March 15, 2022
    The war in Ukraine is bringing substantial financial, commodity price, and supply chain shocks to the global economy. Sanctions on Russia are already having a significant impact on its financial system and its economy. Price shocks will have a global impact. Energy and commodity prices—including wheat and other grains—have risen, intensifying inflationary pressures from supply chain disruptions and the recovery from the pandemic. The push toward relative deglobalization received fro ...
  • Authors
    December 6, 2021
    Between January 2020 and June 2021, the world spent about US $16.5 trillion (18% of world GDP) to fight COVID-19, and this amount does not even include the most important losses such as deaths, mental health effects, restrictions on human freedom, and other nonmonetary suffering. Nearly 90% of this amount was spent by developed economies; the rest by emerging market and developing economies. Low-income countries spent just US $12.5 billion, or less than 0.0001% of the total. Moreove ...
  • Authors
    December 30, 2020
    According to this month’s OECD economic outlook, global GDP --- which took a huge hit from the pandemic and is still 3% below its level of a year ago – will not recover its pre-pandemic level until the end of 2021. In a downside scenario, the return could take almost a year longer. The OECD predictions, which imply high and protracted unemployment, are in line with the view of many other official and private organizations. The arrival of effective vaccines such as Pfizer-BioNTech wa ...
  • Authors
    December 18, 2020
    Avec du suspense jusqu’à la dernière minute, comme l’Union européenne (UE) aime le faire, le 10 décembre 2020 le Conseil européen a finalement donné son accord pour le budget de l’Union 2021-2027 (1,8 milliards d’euros[1]) et du Fonds de récupération et de relance pour faire face aux conséquences économiques et sociales de la Covid-19 dans les pays de l’UE. Le Fonds répartira entre les États membres 750 milliards d’euros entre 2021 et 2023 (sous le nom de « EU Next Generation »), 36 ...
  • Authors
    August 6, 2020
    La COVID-19 a asséné un puissant coup de massue à l’économie mondiale, en combinant une terrible pandémie à un effondrement de la production dû au confinement de la moitié de la population active mondiale. L’incertitude générée par le choc médical et économique paralyse les consommateurs et les investisseurs, et la dispersion des prévisions économiques à court terme est plus grande qu’elle ne l’a jamais été dans l’histoire moderne, environ six fois plus que lors de la grande crise f ...
  • June 24, 2020
    La réputation, concept majeur s’il en est, est un indicateur de l’estime accordée à une personne physique mais aussi à une entreprise ou encore à une entité étatique. Constituée d’une somme de perceptions, elle est la résultante globale de l’ensemble d’images, d’appréciations des actions et comportements de celles-ci. Ainsi, la bonne réputation d’un gouvernement est déterminée et mesurée par son aptitude à faire face aux épreuves que traverse le pays, à affronter les bouleversements ...
  • Authors
    Seleman Kitenge
    March 30, 2020
    Illicit financial flows (IFFs) have become a serious threat to the attainment of global development goals. On February 28th, 2020, the President of the United Nations General Assembly, Tijjani Muhammad-Bande, and the President of ECOSOC, Mona Juul, have announced a high-level panel on international financial accountability, transparency, and integrity (FACTI) as a means to address this challenge, which inhibits financing for the Sustainable Development Goals. This paper provides an ...
  • Authors
    Matheus Cavallari
    Tiago Ribeiro dos Santos
    July 19, 2019
    Multilateral Development Banks (MDBs) have two financing windows, with different terms, dedicated to low- and middle-income countries. Countries are presumed to cross those windows as their income per capita rises, with middle-income countries (MICs) eventually “graduating” to a non-client status once they reach some criteria. However, due to what may be called “middle-income traps”, such progression toward graduation has been limited to a small number of countries. ...