Brexit

Britain has chosen to exit from the European Union (EU). Europe and the rest of the world had expected the British people to at least choose narrowly to remain in the EU. The choice to leave the EU was an unexpected result of the referendum and hence a shock for the global financial markets which have been left to come to terms with the consequences of Brexit.

The immediate reaction of the equity and currency markets has been to fall steeply in expectation of the worst case scenarios of Brexit consequences to play out: recession in the United Kingdom (UK); political turmoil in Britain as demands for the exit of Scotland and Northern Ireland from the UK resurface; the spread of political and economic contagion in EU and the Economic and Monetary Union (EMU) as other EU and EMU member countries seek to exit; and finally, the fragile economies of the EU and the global economy being pushed into recession. But really, what can be the consequences of Brexit?

UK is a small economy. It had a GDP of about 3 trillion USD in 2015. It ranks second behind Germany in Europe and mostly trades with the EU and the United States. Brexit only increases the trade friction between the UK and the EU until new trade agreements both with the EU and bilaterally with specific European countries are entered into. The exit negotiations of the UK from the EU after the invocation of Article 50 of the Lisbon Treaty are expected to take about 2 years and therefore there would be no immediate effect on trade and hence no immediate repercussions for either the UK or the EU economies.

The global economy is far too big for the temporary fall in the British pound and the euro to affect it too negatively. If anything, British and EMU goods would be cheaper for other countries thus boosting UK and EMU exports. Brexit, having come at a time of global economic slowdown, by hampering UK and EU recoveries could slow global economic recovery but will not adversely affect it.

The future of Britain could be similar to that of Norway and Switzerland. Frankfurt could become the second major financial center after London in Europe and that would be good for the continent as a whole.

Though the possibility of secession of Scotland and Northern Ireland from the UK is real, it is premature to expect the unravelling of the EU and EMU because of Brexit. To go on with the European project of ever closer economic and political union, the EU needs to focus on economic recovery to address unwarranted nationalist sentiments and requires responsible political leadership at a time of change.

The financial markets will subside in a few weeks after the Brexit shock.

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