Economic consequences of Brexit

Here are my two pence on some of the consequences of Britain’s vote to leave the European Union.

A key goal of the EU was to allow freer movements of goods, services, and people across countries. The potential economic benefits of such freedom are well known. Access to a broader market means both buyers and sellers can secure better deals than would be available domestically. Relocation of workers to a place where they can be more productive should mean a larger size for the total economic pie.

But that’s very different from saying that everybody’s piece of the pie gets bigger. Some individuals are better off and others are worse off as a result of free trade or migration. For example, employers clearly benefit from hiring cheaper foreign labor, and for the foreign workers it is also a better opportunity than they had before. But this arrangement means a lower wage for the domestic worker who used to have that job. For those Britons who have seen themselves falling farther behind each year, the benefits of staying in the EU may not have seemed all that clear.

Balancing the competing interests of winners and losers is one of the goals of EU regulation. But getting free from the tens of thousands of EU standards, laws, and court decisions became the number one reason voters gave for exit. Some Britons questioned whether free trade should mean being forbidden to buy items such as incandescent light bulbs or powerful vacuum cleaners,

There will surely be some loss to UK GDP as a result of the move. But it is not as if leaving the EU suddenly tosses Britain into a trade war with the rest of the world. The U.S. and Canada have a huge volume of trade with Europe without being part of the EU. Notwithstanding, adjusting will be costly. Here’s Paul Krugman’s take:

Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects of leaving the EU, but it will be substantial. True, normal WTO tariffs (the tariffs members of the World Trade Organization, like Britain, the US, and the EU levy on each others’ exports) are low and other traditional restraints on trade relatively mild. But everything we’ve seen in both Europe and North America suggests that the assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders; revoking that assurance will, over time, erode trade even if there isn’t any kind of trade war. And Britain will become less productive as a result.

Where I have bigger concerns is what happens next. Our term “Brexit” for Britain’s exit from the European Union was preceded by discussion of “Grexit”– the possible exit of Greece from the euro. And although Greece’s economy is 1/10 the size of Britain’s, Greece’s exit from the euro would have been a huge, huge deal. Negotiating new trade agreements is one thing; abandoning a currency is altogether different. If Greece were to exit the euro or fail to honor its debts, it would mean big capital losses to banks and lenders. Fears that this might happen drove borrowing rates sky high in 2011-2012 and sent Greece into a depression from which the country has yet to recover. And in the case of Grexit, too, the worry was that not just Greece but a number of other countries might be forced to abandon the euro and default on their debt. Those fears put broader Europe into a second recession in 2011-2012 at the same time that the rest of the world was recovering.

My key concern therefore is whether Britain’s exit from the EU is just the opening volley of something much bigger. Immigration has been a huge strain and politically divisive issue throughout Europe. Which might be the next country where the possibility of opting out will move closer to reality? If that question and the future of the euro itself are actively put on the table, destabilizing financial flows are likely to follow.

23 thoughts on “Economic consequences of Brexit

  1. Bruce Hall

    It is unlikely that trade between GB and the EU will grind to a halt. GB’s economic path may be temporarily obstructed by the adjustments Brexit will require; however, GB is now free to pursue bi-lateral trade agreements that may be more to its needs in markets such as India, China, and Australia. To some degree, trade with the U.S. will be influenced by who becomes the next president.

    The question yet to be answered is whether GB has chosen a path to the summit or a path to the pit. The near-term bump in the road is neither.

  2. Paul Mathis

    “Immigration has been a huge strain and politically divisive issue throughout Europe.”

    Immigration would not be a problem at all if GDP growth were sufficient to support job growth and rising incomes. But EU leadership has opted for “stability” instead of growth so unemployment has caused the “huge strain” in the EU.

    In the U.S., by contrast, more than 10,000,000 new private sector jobs have been created during Pres. Obama’s administration which is nearly 10 times the number created during the last 2 GOP presidencies COMBINED. During Pres. Clinton’s administration, TWICE as many private sector jobs were created as during Obama’s administration.

    So Obama’s approval rating is now 55% on the economy and the next president Clinton is leading Trump by 12 percentage points.

    1. Jan Smith

      “Immigration would not be a problem at all if GDP growth were sufficient to support job growth and rising incomes.”

      This assertion is false. Immigration would not be a problem even at zero GDP growth if the immigrants were culturally and socially indistinguishable from the natives. It follows that the immigration problem would be much reduced if the natives and immigrants had extensive knowledge of one another’s respective cultures. That is to say, antagonism toward immigrants is not caused by income stagnation but, instead, by ignorance and paranoia. An uneducated person living in an isolated hinterland will be a hateful bigot regardless of his economic failure or success.

      1. Bellanson

        you are pointing out an important cultural aspect to immigration – which needs to be addressed. However, I feel that you oversimplify. England, has traditionally had a big issue with immigration from Ireland – a culturally closer “country” is hard to imagine.
        Here in the US, we recall the problems with the dust-bowl movement of “Oakies” to California.

        I believe that financial impact is even more important than cultural impact. If I had the ability to somehow increase the income of all Trump supporters by 20% I suspect that their concerns with “The Great Wall of Trump” would evaporate substantially

  3. 2slugbaits

    JDH You addressed some of the possible second and third order effects from Brexit, such as the effects of exiting a common currency as well as the increased likelihood that other countries (e.g., France, Spain, Netherlands) exiting the EU. And of course the EU is (or at least was) an economic vehicle intended to drive greater political union. But in your analysis I think you and Paul Krugman tend to downplay the second and third order effects on Britain as well. The economic consequences of Brexit will not just be the transition costs and the loss due to diminished trade effects. My concern is that the reaction of downscale British voters made worse off by Brexit will not be to see the error of their ways and demand more open trade agreements that would partially undo the bad effects of Brexit. Instead, those downscale voters are more likely to double down on their ignorance and push for more trade restrictions and even less immigration. So I don’t think the comparison to US/Canada trade is entirely appropriate. True, in theory a sensible British electorate could mitigate the effects of Brexit by negotiating sensible trade agreements with the EU countries. But after Brexit we may not be talking about a sensible electorate. And without Scotland what is to stop England from turning itself into Mississippi?

  4. Jokumi

    Possible positive: the EU adjusts to make itself more attractive to members and potential members. JDH, you note Krugman’s comments about trade, but he’s also pounded on German intransigence about capital flows, creditor rights, etc. The EC was set up to prevent war through economic cooperation and to set up W. Europe as a counter-balance to the Soviet Bloc. The EU advanced that idea into social and political union. But now, I’d say there’s a real question in this era whether the institution is that meaningful: do you need actual “Union” to allow movement of people and goods with little problem? do you need Brussels bureaucrats deciding elements of cheese production? The alternative need not be absolute 19thC style nation states but rather sensible arrangements facilitated by modern technology. And frankly, one reason the EU was set up was to generate market size for both production and consumption and now the world is shifting to become more drastically global both in production and demand.

    As a final note, I find it humorous to see the City complaining about the vote because the UK remained on the pound largely because the City feared losing its place to somewhere like Frankfurt if the UK ran on the Euro.

  5. John Wake

    Outsider’s View of Brexit

    “Never let a good crisis go to waste” Brexit will be used as justification to do what people wanted to do anyway. UK banks will keep “crisis” talk going until they get the profitable reforms they always wanted anyway.

    Can I go long the lobbying industry in UK? Seriously. UK will be negotiating a new trade regime & many others.

    UK now in the denial and anger stage. Next up negotiation and acceptance.

    UK will become a non-member member along the lines of Switzerland or Norway. Keep the free trade stuff. Drop the rest.

    Trade relations with US could become even stronger.

    Good for China to have new player kissing up to them on trade agreements.

    Good for EU. Incredibly ossified EU bureaucracy might be forced to loosen up due to loss of revenue from UK. The Brussels bureaucrats’ first reaction will be to try and increase taxes on remaining members to maintain current bureaucracies.

    Brexit is creative destruction. It shakes up an ossified institution. Both EU and UK could end up stronger.

    UK was always the outsider within EU. Didn’t do euro, etc. EU may be more unified now. Can agree on needed action.

    Market had a tantrum as those who bet on Remain had to cover their bets. It will blow over.

    The coming massive regulatory and statutory changes in the UK will tend to benefit the politically powerful.

    1. Macca

      No doubt there are many that believe Brexit can be used as justification to do what people wanted to do anyway, namely make England into the Hong Kong of Europe. The challenge is that bulk of Britons who voted for Brexit want a more protectionist Briton not less. For some reason they don’t want all their manufacturing jobs outsourced to China and India. Of course they may not get a vote on that.

  6. person1597

    The EU referendum was decided by just over half the population of Great Britain. More than half of those voters elected to leave the EU for various reasons, some cultural, some economic, and all seemingly, political…

    If one accepts the O’Neillian Summation “all politics is local” then how does that qualitative aphorism apply to the quantitative choice made to localize political control?

    Cherry-picking some internet…

    “Between 1993 and 2014 the foreign-born population in the UK more than doubled from 3.8 million to around 8.3 million…” (Is there a more recent number for comparison?)

    OK I’ll stop right there. The population of foreign born in 2014 amounts to 12% of the present total using United Kingdom’s population mid-year estimate of 65.1 million. No doubt the foreign born numbers rose since 2014, but is indicative that tolerance of social chaos has reached a tipping point, a threshold at which social discontinuities become self-reinforcing.

    By comparison, 2015 saw a foreign born percentage rise to 13.7% according to USA Today. (Maybe a more recent estimate of UK’s FB would yield an improved comparison…) This metric suggests that we are either more demographically tolerant, or are approaching a similar econo-physical tipping point. (I choose the former.)

    From the point of view of the referendum’s exit voters venting their frustration, the status quo was the problem — that globalization (if that word can be used in this context) impinged upon their cultural and economic sovereignty. The decision to leave the EU was a net sum of voting individuals’ integral tension, based on years of UK’s citizenry’s personal experience.

    In other words, the last refuge of those afraid of foreign invaders is nationalism. But globalization isn’t an invasion per se, it is an integration of disparate socio-economic constructs also known as consumers.

    People have needs and how those needs are met contributes mightily to the stability of the system. Americans get to go at it with regular elections — the messier the better since airing all grievances allows the system to make adaptations. The people who voice their opinions and work towards their objectives pursue continuity through adaptive behavior. If the system is allowed to adapt through regular samples of the national mood, it adapts on that same regular basis, unlike the parliamentary systems whose update frequency is irregular and lacks resonance with a populist society.

    What does it boil down to?

    “In particular, physical agents driven by causal entropic
    forces might be viewed from a Darwinian perspective as
    competing to consume future histories, just as biological
    replicators compete to consume instantaneous material

    That conclusion is really drilling into my psyche. It explains why people do things that aren’t necessarily in their own best interests. It eviscerates the notion of rationality, but doesn’t undermine the ability of the system to adapt. It enhances it in the long run, apparently.

    1. dilbert dogbert

      Re: Foreign Born
      Needs definition. Who is foreign born? Danes, Germans, French, Spanish and the rest of the members of the Union or just Poles, Africans and Muslims?

      1. person1597

        Good point… definition adds clarity… Cherry picking wiki…:

        Foreign-born population of the United Kingdom includes people originating from Australia, Bangladesh, China, France, Germany, India, Italy, Jamaica, Kenya, Nigeria, Pakistan, Philippines, Poland, Republic of Ireland, Somalia, South Africa, Sri Lanka, United States and Zimbabwe.

        That is as close a definition as I’ve found. Thanks for asking!

    2. dw

      thinking that globalization had more to do with the exit than almost any thing else,. if i wee to guess, voters felt that they had lost control over their country economically (their incomes no longer even tried to keep up with inflation) and other felt like their country was no longer theirs because they didnt recognize it. and their ‘leaders’ didnt listen to their complaints, and actually do any thing about to resolve them. while we in the US may have more elections, and in some cases you wonder how we would ever be put back together (which seems top get worse as the parties dont care about any thing but keeping power. so they end up with political PR, naming bills as being job creators, when they do no such thing). will the UK survive the exit? not as it was. and certainly not the way those who pushed for it hoped it would, and it might not be as bad as the worse case was supposed to be, but it will be a few years before we know.

  7. Jean-Jacques Rosa

    The Britons who “questioned whether free trade should mean being forbidden to buy items such as incandescent light bulbs or powerful vacuum cleaners” are right indeed. You are far too generous in your interpretation of centralized european regulations. One could argue that they are a means for big firms to collude and reduce competition in the single market. While market access in 27 countries used to require 27 separate lobbying budgets for large firms wanting to sell there (think pharmaceuticals), with centralized panEuropean regulation that total lobbying budget can be spend on influencing a single regulator in Brussels. This gives large (old) firms and the regulators themselves much more power. How and for what purpose will it be used? Would Adam Smith believe that it would best serve the consumers’ interest and open competition? And the same can be said of the single currency. Where is the theory supposed to prove that a single market and free trade requires a single currency?

  8. Tom Warner

    Short-term it’s a clear negative, even if as I still consider likely some way is found to not do it (eg deferring to parliament, or to the Scottish parliament). For the UK economy the lack of certainty is the big issue. I take seriously the anecdotal reports and surveys pointing to a substantial outward relocation of business. As Jim suggests this will add to doubts about the whole south not just Greece, partly just for the very simple and direct hit this means to the EU budget. It also increases doubts for central-eastern Europe and somewhat pushes the nationalist/isolationist trend there. And it’s a victory for Putin’s deeply cynical policy of weakening European unity by cluster-bombing Syrian civilians while promoting fears of immigration among Europeans. He’ll be encouraged to push similar tactics further.

    Longer-run I’m fairly neutral. If Britain had it all to do over again, I don’t think it would have been any worse off if it had gone a Norway or Switzerland or Iceland-style route. The mess of extricating itself from the EU should eventually pass. There’s no sign of dropping confidence in the UK in gilt markets: 10-years just fell below 1%. Overall markets are signaling short-term likely recession but long-term fairly confident.

  9. RN

    No country in their right mind would leave after seeing the train wreck Brexit has caused.

  10. Genauer

    The UK has now lost its last AAA rating, by two notches, S&P , outlook negative

    Perfect Grades of 100 are now just the German Block (Denmark, Germany, Liechtenstein, Luxembourg, Netherlands, Switzerland)

    S&P cut the growth perspective for the UK by 1% per year.

    This is in line with assesments of the UK profiting from joining the EU in 1973

    The UK has problems with their twin deficits (Current account and government) and foreign reserves just enough for 2.5 months of imports (IMF recommended minimum 3 months).

    When buying an overpriced house in London plus an English passport no longer gives access to mainland Europe, some oligarchs might have second thoughts.

    Being out of the EU jurisdiction eliminates the right of London to Euro related financial services.

    While the Brussels folks want England out as fast as possible, the calm German chancellor Angela Merkel says there is no need to rush, or to be “particularly” nasty.

    But there will be no negogiations without notification by Art. 50 TFEU

    I would by now bet 2 / 1 that by Christmas 2016, the English will find that this Brexit might not be such a good idea, and ….. kinda, …. sort of , …. postpone the thing : – )

    after 75 % of the political personnel from both Tory and Labour has been sorted out

    1. baffling

      “I would by now bet 2 / 1 that by Christmas 2016, the English will find that this Brexit might not be such a good idea, and ….. kinda, …. sort of , …. postpone the thing”

      we actually agree on something. since the vote was nonbinding, they do not actually need to file article 50 and leave the EU. i am not sure if they will go through with it. but if that occurs, it will create a very interesting dynamic in the EU. especially those who immediately called for great britain to leave. can other members of the EU force out another member because they do not like the rhetoric, vote, etc that occurred in the member country? it will have implications on greece, spain, portugal, italy, etc. the EU better have solid and fair leadership, or there will be trouble.

      1. Ulenspiegel

        “can other members of the EU force out another member because they do not like the rhetoric, vote, etc that occurred in the member country?”

        Sorry, here I do not get you. It was the British government that launched the referendum which affects the other 27 members of the EU too, as we can observe.

        Now to use kindergarten tactics on side of the Brits, because the referendum gave a result that was not expected and one is not prepared for – they had only three years for preparation and only whopping two possible results – is rich. Now the government of the second/third largest economy in the EU, with a long tradition fro diplomacy behaves like somebody for whom this is only a game.

        There is the Article 7, but it is indeed hard stuff to use it, I hope this does not happen. OTOH there should a plan be made for the case that in October we still see the delaying tactics.

        As democrat I do not support suggestion s like a second referendum or British MP ignoring the referendum. The clean solution is an Brexit and – after a clear vote- the reapplication for full EU membership, a possiblilty that is outlined in Article 50, everything else does more damage than good IMHO.

        1. baffling

          ulen, the referendum was not binding. if you do not understand that statement, use a dictionary. they are not required to start article 50, legally, by their own constitution or the EU constitution. and if other eu members try to force the current or new prime minister to file article 50, you probably have a case of overreach. in a representative government, the prime minister and parliament are the only votes that count. if the current members refuse to file article 50, they can always be replaced in upcoming votes by members who will file. that is the democratic process in a representative government. but they may also be replaced by members who will not start the process. the rest of the EU must respect those decisions.

  11. JBH

    This post could not be more apropos. Though it could have more meat. People in Great Britain and (apparently many) other democratic Western European nations want the fullness of their sovereignty back. For years, their sovereignty was taken away bit by bit under economic pretenses. Economists and politicians did not tell them that. The people were lied to from the 50s on about the intent of the drive toward a single-state Europe. A critical mass has now at least dimly figured this out. Immigration was the immediate catalyst of this awakening. How about the 8-year long Depression in Greece? Horrific! My heart goes out to the poor Greeks. I pray each day that the Greeks will have the will and fortitude to escape their bondage. Were they to, or were Spain or Italy to, the ramifications of Brexit (which are already large and yet to play out) would pale alongside what would happen to the global financial system. It would be the mother of all credit events. The ECB would be insolvent! An exit from the eurozone would bring the euro project to an abrupt culmination. Fini! Economics is only one player in this, and a lessor one at that. Brexit was an event on the order of significance of the fall of the Berlin Wall, the (fabricated) 9/11 attack, and the 2008 Crisis. The market recognizes that Brexit was a watershed event, but few individuals comprehend it. For the first time in over 100 years, the drive toward a global supra-state that would strip sovereignty away from every nation has experienced a major setback. This is the significance of Brexit.

    1. Mike

      Yes, you get it. Brexit is a watershed event – like American colonies leaving the ‘protection’ of the British Empire when many nations were competing for the rest of the continental territory. Foolish according to Tories. Brilliant according to history. The US has thrived and Britain thrived. That spit-up had similar issues: local control, sovereignty, economic disagreements, democratic process vs. non-representative process. Despite the tone of most press articles, the major problems are and will be in the EU. You cite several of them, but many others exist, like ultra-risky banks, unbalanced and unsustainable funds flows among the EU countries, and inadequate defense capabilities. Though EU leaders have been critical of the UK, they recognize this is a watershed event in which they are poorly positioned. The EU has been driving on many fronts for integration. EU leaders said Saturday that EU policies need to adapt in several directions to meet different member needs. This is a 180 degree reversal, and a capitulation to prior direction. EU leaders remain angry, but they recognize they are on the long term losing end of this watershed event.

    2. 2slugbaits

      JBH Are you a closet member of the Lyndon LaRouche campaign? After reading your post I half expected to find references to fasces on the back of Woodrow Wilson dimes. Black helicopters from the Trilateral Commission descending onto your backyard.

      I don’t think you understand what “sovereignty” means. It does not mean nationalism or tribalism as you seem to suggest. Sovereignty simply means supreme power. What you are actually proposing has another term; viz., “Balkanization.” Nothing good ever came out of Balkanization. You mentioned the good old days going back 100 years. Well, something else happened about 100 years ago…the Great War. To a large extent that war grew out of tribalism in the Balkans and weak central government in Vienna and Istanbul. Memories and lessons learned from the Great War are what drove policies for a unified Europe. You seem to want to return to the Europe of pre-Bismarck. Not really a great idea. There is nothing sacred about political boundaries. They are accidents of history. Why not a sovereign Scotland? Or why stop there? Why not devolve sovereignty down to the county/shire or town level? There is nothing inherently bad about a new super political entity called Europe that would replace old nation states. Notice that those voting for Brexit were old timers, which points to the truth of Hannah Arendt’s point about mortality being critical to political advancement (see “The Human Condition”). Political society progresses funeral by funeral. Like it or not we live on a pretty small globe. We can’t afford the luxury of selfish nations and tribes ignoring the tragedy of the commons. Those days are long gone…and good riddance.

      I’m glad you are sympathetic to the Greeks, but your proposed remedy would make things worse, not better. What hurt the Greeks was a unified currency and a “sovereign” political and fiscal arrangement that allowed irresponsibility and corruption to run rampant.

      The crux of the problem is economic. Were it not for Cameron’s austerity policies and winner-take-all attitude about globalization, Britain probably wouldn’t be in this fix. Downscale voters felt alienated and ignored. Sometimes angry voters will cut off their noses to spite their faces. A more useful approach would have been to vote out the Tory government when they had the opportunity a few months ago.

      Question. Does it bother you that the positions you spelled out in your post are eerily similar to things that far right wing and near fascist political leaders are saying in other parts of Europe? Doesn’t that at least make you reconsider things? Don’t you worry about the company you keep?

    3. Ulenspiegel


      is it for you rally so hard to face reality?

      “The people were lied to from the 50s on about the intent of the drive toward a single-state Europe. ”

      BS, you onyl have to educate yourself little bit, little “Englander”. A single state was the goal, there is no doubt, only for people who do not read or get theri infaoramtion from the Murdoch press. 🙂

      ” Immigration was the immediate catalyst of this awakening.”

      Only partially. The non EU immgration was an UK issue and will not change by Brexit. The high number of people from the EU countries Poland , Bugaria and Romania was a result of a pet UK project, the eastward expansion of the EU (to screw France and Germany). You and many Brexiters are only living proof that ten years are sufficiently long enough to forget (own) history. The last weekend is karma. 🙂

      The second issue is that only sombody without intelligence and character uses an strategic issue that affects the next generation to silence backbencher in his party. But I bet you will find a reason why this dumbasses are the fault of the EU.

      “I pray each day that the Greeks will have the will and fortitude to escape their bondage.”

      Many Europeans like me too. Unfortunately they did vote to stay. As do the people of southern countries. What is wrong with your model/assumptions? 🙂

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