The British vote to leave the European Union has shaken world financial markets. The immediate and medium-term prospects for economic growth in the United Kingdom are severely diminished, and the impact on the rest of Europe will be negative.
Some of the obvious political winners from Brexit are people who do not like Western Europe and what it stands for. Ironically, the United States — Europe’s greatest ally and the EU’s largest trading partner — may also end up as a beneficiary, though not if Donald Trump, the presumptive Republican nominee, wins the presidential election in November.
Britain has a population of just over 65 million people and what was, at least until Thursday, the world’s fifth-largest national economy, with annual GDP totaling nearly $3 trillion. In the context of a $75 trillion global economy, Britain’s is a relatively small, open one that relies heavily on foreign trade — annual exports are typically in the range of 28%-30% of economic activity.
That is now likely to change. The EU accounts for about half of Britain’s exports, and the prospects for continued full market access are dim. Trade in goods may be affected, but the impact on exports of services — including financial services — will be more severe. In principle, Britain could now negotiate a great deal of market access, but this would almost certainly require accepting rules made in Brussels – which is just what the British voted against. Growth in the U.K. will consequently be lower and for a long period of time.
The direct impact on the world economy is likely to be limited by the fact that other countries will to some extent gain from Britain’s loss. For example, the U.K. was until recently one of the top destinations for foreign direct investment, precisely because companies saw it as a good base from which to sell into the rest of Western Europe. The UK’s attractiveness — and the creation of good jobs that resulted from it — will now decline.
Read the full post at MarketWatch.
Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management, where he is also head of the Global Economics and Management group, a member of the Executive Personnel Committee, and chair of the Sloan Fellows MBA Program Committee.