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 a breakup. IWH analyses how markets react and which economic scenarios are likely to occur.

Our expert for this issue

 

Political uncharted territory

Great Britain has decided to leave the European Union – a politically highly-explosive 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-memberstate - and does Great Britain run the risk to go to pieces? What is London's destiny as Europe's current most important financial center?

All these questions have to be answered by policy as fast as possible. And although the public is aware of the fact that the official procedure will start in March, 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 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", says Reint E. Gropp, president of IWH. And this is what happened: The English pound's cost was temporarily below $1,28, 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 the markets showed strong financial dislocations. "We seriously worried about this because such dislocations reflect the uncertainties linked to a Brexit decision", Gropp explains.

Although there were market uncertainties before the votum, the result in the end surprised many people, and the leaving of the British will have far-reaching 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 – contrary to goods and services of the EU where just 6% are exported to the UK.

On the long-run we definitely have to take a closer look at the economic climate between the UK and the EU. Despite all the uncertainty relating to the Brexit votum, a less economic-friendly climate can be expected in terms of a higher number of regulations in the EU. One of the major problems for Great Britain are the trade relations with about 60 countries (e.g. USA, India, China, Japan and Australia) which are up to now based on EU agreements. Hence, they have to be renegotiated individually. The EU instead will have to think about the proper role in this power game since it is in her interest to prevent further desintegration movements in the member states. This is probably her major interest: To preserve herself.

IWH Publications about this issue

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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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Brexit (Probability) and Effects on Financial Market Stability

Thomas Krause Felix Noth Lena Tonzer

in: IWH Online , No. 5, 2016

Abstract

On 23 June 2016, there will be a referendum in the United Kingdom (UK) on the stay of the country in the European Union (EU). Based on recent poll data, the share of supporters and opponents of an exit varies around 50%. Opponents of the UK breaking up with Brussels („Brexit“) refer to high costs in terms of stagnating economic growth if the UK leaves the EU. The risk of reduced trade, declining foreign direct investment, and a lower degree of financial market integration is high following an exit of the “single market”.

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