The fallout of political uncertainty can be devastating on an economy. In a rare example of political uncertainty in an established democracy, notably in the United Kingdom (UK), the consequences of political uncertainty on the economy were not only swift but dramatic; however once the Conservative party elected its new leader well before the three months originally envisaged at the time David Cameron announced his resignation the economy began to show signs of some resilience.
The immediate economic fallout of Brexit, 23 June, was devastating not only for Britain but also the world attributed to globalization. In the UK the Financial Times Stock Exchange (FTSE) 100 index fell by more than 8 percent which effectively wiped out 100 billion pounds off the biggest bluechips including banks (Lloyds, Barclays and RBS plunging as much as 30 percent at one point), house builders and property companies and the pound lost more than 13 percent of its value to reach a 31 year low.
London's market, however, bounced back by the first week of July and the factors responsible for this rebound were, as per British media, robust corporate earnings and the entry of bargain hunters. Those companies that were exposed to the domestic British market, particularly the house builders, continued to witness losses while those with global market access stabilized. The International Monetary Fund described the Brexit as a major threat to world growth and Standard & Poor's cut the country's credit rating to AA, its third highest level.
The Bank of England Governor Carney, a supporter of Remain campaign, in his post-Brexit statement to members of parliament refused to intervene to strengthen the pound, "(you) would not expect the Bank to stand in the way of necessary adjustment in the exchange rate...It would be inconsistent as well to use the exchange rate for competitive purposes or other reasons that would be inconsistent with our G7 commitments." However Carney indicated that the nine-member monetary policy committee (MPC) which sets interest rates, with implications on the pound value, would consider lower borrowing costs. In a speech to bankers and businessmen Carney stated "in my view, and I am not prejudging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer. The committee will make an initial assessment on 14 July and a full assessment complete with a new forecast will follow in the August inflation report. In August, we will also discuss further the range of instruments at our disposal." The rate cut, already at a low of 0.5 percent for almost seven years, would as per Carney be "a tradeoff between stabilising inflation on the one hand, and avoiding undue volatility in output and employment on the other." Katie Allen of The Guardian wrote on 30th June that "adventures into the murky world of negative interest rates could be dangerous - they might "perversely reduce credit availability or even increase its overall price" - and quantitative easing looks increasingly pointless if 10-year gilt yields are below 1%". It's up to the politicians to get their act together." Her valid concerns no doubt account for the Bank of England's decision not to lower rates, a fact which weakened the pound in recent days.
Carney stated post-Brexit that he would not leave his job as, "it would be irresponsible of me, or any of my other colleagues, to walk away from those obligations. The question is not whether the UK will adjust, but rather how quickly and how well." And took a dig at politicians particularly Cameron for not having a Plan B in the event that the public voted in favour of Brexit. In spite of the much sooner than expected end to the leadership contest, which strengthened the pound initially, one cannot but empathize with Carney's sarcasm: "(A) plan beats no plan."
So how much did the UK contribute to the EU budget? In 2013 the following contributions were cited.
In terms of trade around 45 percent of UK trade is with the EU, 18% with the USA and 7.3% with the BRICS countries (Brazil, Russia, India, China, and South Africa). However around 33 percent of all trade is in services and the UK registered an 83 billion pound surplus trade in services in 2014; and it is feared that this may be most effected post-Brexit as the EU's existing preferential trade agreements do not include services, or do so only partially. In addition, EU officials have warned the UK that UK-based banks and financial firms would lose access to sell services to EU countries if the UK desists from applying EU rules with respect to free movement of people, capital, services and goods. The loss of the services market, pro-Remainers argue, implies that the cost to the economy of leaving EU would be higher than the net contributions of 10.76 billion euros.
That may be however it is not yet possible to quantify the actual cost to the economy which would be determined by which of the three trade regimes/models are put in place as per the UK Treasury's medium term assessment:
(i) 'Norway' model. The UK remains in the single market, follows its rules without having any say in the rules, pays budget contributions and accepts free movement of people; however Theresa May's cabinet is expected to support free movement of goods and services but not free movement of people - a condition believed to be the major source of concern for those who voted in favour of Brexit. The UK cabinet is however expected to agree to guarantee rights of Europeans living in the UK but only if Europeans guarantee rights of British nationals resident in EU countries;
(ii) 'Canada' model (a bilateral agreement with the EU) which would be the preferred option only if negotiations with the EU on free movement of goods and services though not of people stall - and given that the bulk of UK trade with the EU is with three to four countries bilateral treaties would be proactively negotiated with these countries; or
(iii) Based on World Trade Organization (WTO) rules without any specific agreement with the EU. This is unlikely to be the way forward for both the UK and the EU.
The long term effect of post Brexit would as per the National Institute of Economic and Social Research "reduce GDP by anything between 1.5% and 3.7% by 2030 depending on the subsequent relationship between the UK and the EU, as well as the rest of the world... But in all possible scenarios, our simulation exercises show a substantial loss of export trade...Under the worst outcome, the fall in demand for UK goods and services leads to an almost 10% decline in wages by 2030 relative to remaining in the EU... Inflation would jump dramatically as sterling depreciates, investment would plummet and consumer spending would be hit by lower real incomes....The loss to average UK households could be as much as £2,000 over the longer term in the institute's worst-case scenario, which involves a loss of preferential trade links with the EU and a fall in productivity linked to declines in business investment".
London School of Economics Commission on the Future of Britain in Europe, a result of a six-month series of 11 hearings involving a cross section of British and European politicians, business people, academics, economists, public officials, journalists, trade unions and social organizations maintains in its report that: "Brexit is largely a leap into the unknown and there are no 'off the shelf' solutions offering Britain tangible advantages...In the long term there may be benefits from leaving the EU but in the short to medium term there is a risk of instability and economic losses.....That said, the impacts of Brexit are likely to differ across the UK by geography, economic sector and social group.....The task of extricating the UK from the EU would be complex, time-consuming and costly in political and economic terms....(the choice being) between significant costs in lost jobs and growth, the risk of lesser protection of rights, and a weaker international voice, against perceptions and sensibilities over accountability, sovereignty and identity".
To conclude, there is an agreement amongst economists that there will be a short to medium term price to pay for Brexit but the long term price may be a lot less than what is being envisaged; however its actual impact would depend entirely on the negotiating skills of Theresa May's newly established dedicated department as well as on the EU negotiators.
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(Billion Euros)
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Contribution Received Net
contribution
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Germany 29.376 13.05 16.32
UK 17.06 6.308 10.76
France 17.16 14.23 9.05
Italy 17.16 12.55 4.61
Netherlands 6.55 2.226 4.29
Poland 4.21 16.179 (-) 11.9
Hungary 1.01 5.909 (-) 4.89
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