What Britain’s Vote To Leave the EU Means For the Economy

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UPDATE: June 24, 3:48 a.m. — The results are now official.  The United Kingdom has voted to leave the European Union. The result is a surprise — polls were tight for weeks but had seemed to shift in favor of the anti-exit “Remain” camp in the final days of the campaign. Betting markets, too, had predicted a win for Remain. So now the question is what this means for the economy in the United Kingdom and around the world.

What follows is the author’s earlier analysis, written before the votes were cast.


Imagine that the states of the Northeastern U.S. — New York and New Jersey, plus New England — don’t like the outcome of November’s election (not that far-fetched!) and decide they would rather split off on their own. After all, the Northeast is culturally different from the rest of the U.S., it has the most prestigious universities and the dominant financial capital, and it pays far more in taxes than it gets back in benefits. Why should people there let leaders they didn’t vote for impose policies they dislike?

That is more or less the scenario that could play out across the Atlantic next week when Britons go to the polls to decide whether the United Kingdom should leave the European Union. It’s a monumental decision: The U.K. accounts for about 13 percent of the EU’s population and nearly 15 percent of its economic output — a bit less than the share of the U.S. made up by the Northeastern states. The outcome is highly uncertain; after enjoying a comfortable lead in the polls for weeks, the pro-EU “Remain” coalition trails narrowly in the most recent polls. (Campaigning on both sides of the issue was suspended on Thursday after Jo Cox, a member of Parliament, was killed by a gunman.)

Supporters of a “Brexit,” as a British exit from the EU is known (because of course it is), argue that the EU has flooded the U.K. with immigrants, forced it to accept burdensome regulations and charged billions a year in dues, all with little in return. Opponents counter that Britain is going to have to deal with the EU no matter what, so it might as well remain a member and preserve its voice in Brussels.

Of course there are critical differences between a Brexit and a breakup of the U.S. Most obviously, the EU isn’t a country. Britain already has its own government, military and currency (Britain never adopted the euro). And while the details of a country’s leaving the EU would be complicated, no one is suggesting that Europe fight a war to keep the union together.

The impact of a Brexit would be mostly economic, not political. The “Remain” camp, which includes the leaders of the two biggest British political parties, argues that leaving the union would deal Britain a crushing economic blow. Many economists agree. And many experts also contend that a breakup of the EU could cause trouble for the rest of Europe and even the U.S. On Wednesday, Janet Yellen, chair of the U.S. Federal Reserve, cited the possibility of a Brexit as one reason for the Fed’s decision to leave interest rates unchanged.

The reality is, though, that no one really knows how bad a Brexit would be, either for Britain or for the rest of the world. No country has ever left the EU, and there has never been another institution quite like it, so there are no true historical parallels. And, just as importantly, no one really knows what Britain’s relationship with the EU would look like after it left.

There are three big unknowns. First, what would happen to trade within Europe? Trade between the U.K. and the rest of Europe has long been vital to economies on both sides of the English Channel, and it has become even more important since the EU removed tariffs and other barriers. If Britain leaves, it will have to renegotiate those deals or see trade decline significantly. (Britain would also have to negotiate new deals with the U.S. and other non-European countries that have trade deals with the U.K. through the EU.) The “Leave” campaign and its backers argue that Britain would quickly reach new deals since doing so would be in all sides’ interests. But the EU would likely insist that Britain agree to many of the rules and regulations that Brexit-ers find so objectionable in the first place — and Britain would have much less leverage to write those rules to its advantage.

The second unknown is what a Brexit would mean for London’s status as a world financial capital. The City, as London’s version of Wall Street is known, has grown to rival New York in importance, in part because of its status as a gateway to the rest of Europe. Losing that status could take a major toll on the British economy, which has become heavily dependent on the finance industry (for better or worse). But most experts expect a slow withering rather than a sudden demise, and some argue that the finance sector would in fact do better if freed of Europe’s regulation. (There is a similar debate over how a Brexit would affect investments from multinational companies, many of which set up their European headquarters in Britain.)

The third unknown is the most important to the U.S.: how global financial markets would react to a Brexit. The sudden shift in the polls in recent weeks has already roiled markets and weakened the pound. Betting markets still expect “Remain” to eke out a victory, which means a loss would come as a surprise, which could further spook investors. The longer-run issue is that a Brexit could call into question the future of the EU itself at a time when Europe is still trying to get its economy moving again after a nearly decade-long slump. Markets don’t like uncertainty; they like depressions even less.

Ben Casselman is FiveThirtyEight’s chief economics writer.

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Lincoln Cahill

A man who likes the simple things.
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7 years ago

As the Hitch Hikers Guide To The Galaxy said “DON’T PANIC!”

Leaving the EU is indeed a massive step into the unknown but nobody knows what the consequences will be.

Initially Britain and those investing in Britain may ‘take a hit’ but, equally, everything may stabilise again quite quickly. Remember, we are the 5th largest economy on the planet so don’t write us off just yet!

Ultimately the EU itself is to blame for the vote. Perhaps, unlikely I know, it may actually realise that ‘ordinary people’ throughout Europe don’t actually want a monstrous political behemoth ruled from Brussels and chose to reform in a big way acceptable to ‘ordinary peopel’.

They want a free trade zone beneficial to all nations. They want sovereign governments to remain sovereign and not become ‘state legislatures’ governed from Brussels.

I suspect the EU will not accept the will of ‘the people’ and will continue blindly on with their great experiment until they implode and it ends.

That would be sad. It may even result in conflict in Europe. That however will not be a result of Britain leaving nor any other country leaving. It will be the result of the EU becoming something ‘ordinary people across Europe’ didn’t want.

The EU will continue to ignore ‘ordinary people’ at it’s peril – but I bet it does.

Glenn R. Geist
7 years ago

Me too, to say the least.

7 years ago

It has hurt us as well.

Glenn R. Geist
7 years ago

Crooked Donald the Worm opined that this is the sort of thing he’ll do to make America Great again. Great meaning demolished. They wanted to take back their borders and their money he said with a smug expression as though to illustrate that we are so bloody ignorant we don’t know they don’t use the Euro. Yes, here as there, cutting ourselves off from the world and hiding behind the Great Wall of Stupid will make America Great again.

This has cost me a fortune already this morning. Trump would cost us everything.

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