News & Events

Brexit Effects

July 12, 2016, Author: Jan Švejnar

There are and will be major gyrations in the financial markets until things clear up; depending on the resolution of the Brexit crisis, there may be negative spillovers on economic growth worldwide.

Britain:

Political crisis – the Conservatives have to deal with the discontent of the anti-Brexit public (demand for a new referendum) and at the same time negotiate the exit – they would like to do it slowly after selectin new leadership, but they are pushed by many in the EU 27 to do it fast; British public administration will be overwhelmed for months and even years with these negotiations;the Europeans will want the UK out fast and on tough terms, which is not conducive to a favorable negotiated outcome for the UK; the Scotts and Northern Irish may want to be in the EU and hence organize a referendum of their own. All this will be a source of major uncertainty if not a government crisis

Economics – there will be a reduction in trade with Europe, especially if UK imposes restrictions on immigration and cannot automatically qualify for an EFTA status; the depreciation of the Pound will have a beneficial effect on exports and import substituting producers, which will mitigate the negative effect of Brexit; overall Brexit will have a chilling effect on investment in the UK (some of which receives EU subsidies that will disappear) and this is going to be especially important in R&D sector (some of which receives EU subsidies that will disappear); a positive effect may be found in the reduction of the regulatory burden but the uncertainty that has been created will outweigh this benefit, especially since the leaders of Brexit do not have a prepared strategy and roadmap of where they constructively want to go; in the short run, all new investments will be put on hold.

Europe:

Politics – this period represents a major test of Europe’s leadership - will the politicians come up with a strategy of how to keep the EU united and on a path to prosperity, or will they wander aimlessly in arguments and fail to lead, thus giving in to centrifugal forces represented by the extremist, nationalistic movements?; public administration will be busy negotiating British exit and hence predisposed to inertia on other important fronts;

Economic effects – Some economic activity (e.g., in the financial sector) will move from Britain to the Continent, but there will also be a decline in investment in Europe due to increased uncertainty about whether the EU will survive and in what form; reduced trade with the UK will have some negative effect on the EU; If the EU were to fall apart, much would depend on whether this would be orderly (keeping the free trade zone and common labor market) or disorderly, resulting in trade protectionism and restrictions on labor mobility.

Czech Republic

Politics – a big question if CZ will start playing a more active role in Europe with the aim of keeping it together, or, in a case of unravelling, making the disintegration orderly so CZ can keep as much of the economic benefits of EU, and military benefits of NATO, as possible – in other words, this is about whether the Czech leaders can fight effectively for national interest!; This may require not only more active and effective approach within the country, but also in terms of coalition-building within the EU. An important aspect will be to prevent the founding 6 members of the EU to predetermine the outcome for all 27 members (there are signs that this is what is already happening). It is not at all clear that the current CZ leadership, or leadership of the CZ opposition parties, is capable of doing this.

Economic aspects – Economic welfare (living standards) of CZ rise and fall with those of the EU and Germany in particular. If the economic effect of Brexit on the EU as a whole were to be small, CZ would not feel a major negative effect. However, if a disorderly disintegration were to occur, the effect on CZ would be huge because it is a very open economy. In the latter case, the key would be to maintain a common market (and actually, if possible, a currency union) with Germany.

Worldwide:

There are and will be major gyrations in the financial markets until things clear up; depending on the resolution of the Brexit crisis, there may be negative spillovers on economic growth worldwide.

The negative scenario, given that the current EU still constitutes over 20% of the world production, would lead to a reduction in investment and consumption on the expectation of global economic slowdown. This could generate another global recession.