25 Years IWH

Brexit – An Economic Disaster?

Dossier

 

In Short

Great Britain's decision to leave the European Union is a political adventure. Prime Minister Theresa May has to organise her country's exit without driving the economy downwards or risking Britain's breaking apart. IWH analyses how markets react and which economic scenarios are likely to occur.

Our expert for this issue

 

Uncharted European territory

Great Britain’s decision to leave the European Union is a highly-explosive political issue since this decision raises questions with many unknowns:

Which strategy is Theresa May going to pursue? How much room to negotiate does she have? Is there any future for Scotland as a new EU-member state, and does Great Britain run the risk of breaking apart? What is London's destiny as Europe's current most important financial centre?

All these questions must be answered by the political scene as fast as possible. And although the public is aware of the fact that the official procedure has already started, nobody can estimate the exact consequences both for the British and the European economy. That is why both should reach an agreement soon.

Already some weeks before the referendum took place, a study by the Halle Institute for Economic Research suggested that the English pound would react strongly to a possible Brexit. Whenever the probability in the polls of a Brexit moved above 50%, the researchers observed a substantial depreciation of the UK pound with respect to most major currencies - including the euro - and a strong decline in bank stock prices. “The markets seem to assume that the financial sector both in the UK and the EU will be most severely affected by a Brexit”, said Reint E. Gropp, president of IWH. And this is what happened: The English pound's cost was temporarily below 1.28 USD, which is the lowest price since 1985. Stocks of British banks had to accept losses of partly more than 20 percent and trade with several stocks was even paused for a short time.

Likewise, before the referendum, overall market volatility was on record highs. “Such dislocations reflect the uncertainties linked to a Brexit decision,” Gropp explains.

Although there were market uncertainties before the votum, the result surprised many people. For whether the British were aware of it or not, the withdrawal of their country will have profound political and economic consequences. “The reactions of the remaining member states are the crucial key now, especially France’s and Germany’s,” says Gropp. “In the short-run however it is very likely that both sides will suffer deadweight losses.” 45% of the overall exported goods and services from the United Kingdom end in the member states of the European Union, whereas only 6% of EU exports go to the UK.

In the long-run, we must take a closer look at the economic climate between the UK and the EU. But there is still much that is unclear. Britain will have to renegotiate its trade relations with more than 60 non-EU countries. Moreover their own status towards the EU is far from certain since the EU will be keen to prevent further disintegration movements in the other member states. Be it only in order to preserve itself.

IWH Publications about this issue

EFN Report Autumn 2016: Economic Outlook for the Euro Area in 2017 and 2017

European Forecasting Network

in: European Forecasting Network Reports , No. 3, 2016

Abstract

During the first half of 2016, investment activity of private firms was weak in most advanced economies and labour producitivity was even decreasing, as was world trade in goods. Consumption of private households, however, kept the world economy afloat. Within this global context, the modest recovery of the euro area economy continues, with important tailwinds from labour markets. Employment ist expanding everywhre, even in those countries, such as France and Italy, where unemployment rates have still not come down significantly. Since monetary and fisical policies will not become more expansive in 2017, the stimulus from cheap oil is fading, and exports to the UK will be dragged down by the fallout of the Brexit votem there is reason to expect the euro area recovery to lose some momentum. GDP will, according to our forecast, increase by 1,6% in this year and by 1,5% in 2017, about as much as potential output in the euro area. Our inflation forecast for 2016 is 0,2%. For 2017, we expect inflation to increase up to 1,2%, as during next year the favourable effects of decreasing energy prices will fade off.

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IWH President: Why London Will Remain Europe’s Most Relevant Financial Center. Three Arguments.

Reint E. Gropp

in: One-off Publications , 2016

Abstract

“Despite Great Britain’s referendum London will retain its dominant position as financial center within Europe. This is what we have learned when the Euro was introduced as the uniform currency of Europe but gets even more obvious when we consider London’s location factors: the size of the city, its regulatory environment and the human capital”, states professor Reint E. Gropp, president of Halle Institute for Economic Research (IWH).

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Kommentar: Großbritanniens Nein zur EU wird für beide Seiten teuer

Reint E. Gropp

in: Wirtschaft im Wandel , No. 3, 2016

Abstract

Die Briten haben sich überraschend klar gegen einen Verbleib ihres Landes in der Europäischen Union entschieden. Das Ausscheiden Großbritanniens aus der EU hat nicht nur politisch, sondern auch ökonomisch tiefgreifende Konsequenzen für das Land selbst, aber auch für das übrige Europa. Entscheidend ist jetzt die Reaktion der verbleibenden Länder auf das Votum, insbesondere die Frankreichs und Deutschlands.

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Aktuelle Trends: Turbulenzen an den Finanzmärkten vor und nach dem Brexit-Referendum

Lena Tonzer

in: Wirtschaft im Wandel , No. 3, 2016

Abstract

Das Votum der britischen Bevölkerung, den EU-Verbund verlassen zu wollen, hat zu Turbulenzen auf den Finanzmärkten geführt. Bereits vor dem Referendum am 23. Juni 2016 war ein starker Rückgang der Kurse britischer Bankaktien zu beobachten, wenn die Wahrscheinlichkeit eines Brexits in den Umfragen über 50% stieg, verbunden mit einer Abwertung des britischen Pfunds gegenüber den meisten anderen wichtigen Währungen einschließlich des Euro.

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EFN Report Summer 2016: Economic Outlook for the Euro Area in 2016 and 2017

European Forecasting Network

in: European Forecasting Network Reports , No. 3, 2016

Abstract

Short run consequences of Brexit for the euro area economy mainly depend on the effects on confidence in the stability of the European Union and the currency area in particular. Anti-European (or indeed anti-globalization) movements are certainly encouraged by the British vote. More important, however, might be a reverse effect: from the perspective of the British turmoil, the euro area might in the near future appear as a zone of relative stability and calm. Against the background of a sluggish world economy, the euro area economy recently performed reasonably well: dynamics have been slowly increasing since 2013, and the rate of expansion in the first quarter of 2016 was one of the highest of the past couple of years. Looking forward, the drivers of the recovery should continue supporting growth in the second half of 2016 and for much of 2017. Our forecast is that euro area GDP will expand by 1.7% in 2016 and by 1.6% in 2017, with only a minor effect from Brexit. This year, like in 2015, average oil prices will probably be markedly lower than they were a year ago, supporting real incomes of private households and lowering production costs of firms, and monetary policy will still be supportive. Labour markets appear to continue improving slowly. Associated with the improved economic conditions, we expect a slight increase in euro area inflation during 2016, 0.3%, with a more marked increase in 2017, 1,3%.

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