Economics

Breaking Up is Hard to Do

On June 23, 2016, the United Kingdom (UK) voted to leave the European Union (EU) in an event many called “Brexit”. What happens next to the UK economy will depend on whether or not UK leaders accept to leave the EU with a deal in place.

Robert Spendlove and Drew Maggelet Aug 27, 2019

The Story

On June 23, 2016, the United Kingdom (UK) voted to leave the European Union (EU) in an event many called “Brexit”. The vote meant that a decades old relationship that included a unified market with no economic barriers, free movement of people, and common regulations, now had to end. The resulting uncertainty has hurt both the UK and EU economies as the two entities try to determine what their new relationship will look like after October 31, 2019, the date the UK economy is scheduled to leave the EU.

The Aftermath

Since the vote to leave the EU, the UK economy has suffered from political chaos. Multinational corporations have begun to move operations out of London and into other major cities in Europe, the pound has lost 18 percent of its value, and in the most recent quarter, the UK economy contracted for the first time in almost 7 years. Although negotiations have resulted in a roadmap or “deal” to reform economic, trade, and immigration ties with the EU, UK politicians have consistently rejected the plan and are now left with the possibility of cutting ties altogether.

Value of Pound Compared to Dollar Has Dropped 18 Percent Since Brexit Vote

Source: Federal Reserve Bank of St. Louis

Uncertainty Surrounding Brexit Leads Quarterly GDP to Contract for the First Time Since 2012

Source: U.K Office for National Statistics

Deal or No Deal

What happens next to the UK economy will depend on whether or not UK leaders accept to leave the EU with a deal in place. If the UK comes to new terms with the EU, the two powers will likely untangle themselves in an orderly fashion over a period of 2 years. While the UK would suffer some economic speedbumps from accepting the renegotiated ties, the setbacks would be minimal compared to a “no deal” scenario.

Should the UK leave the EU on October 31, 2019 without a new agreement, the economic consequences could be dire for both parties. Trade would be significantly curtailed as the UK raises new import barriers on EU products, which could result in higher prices for UK consumers and a reduction in exports coming from the EU. The trade and financial impact of exiting the EU with no plan could shrink the UK economy by up to 17 percent. Exports from many major countries outside the EU may benefit as the UK and the EU turn to other countries to fulfill their import needs. It is uncertain what path the UK will choose, but either way, the UK’s economy will be fundamentally changed.

Exports from the EU Would be Hurt While Many Countries See Export Gains From a No-Deal Brexit

Source: United Nations Conference on Trade and Development

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