Brexit – what will be the economic and financial consequences?

Brexit – what will be the economic and financial consequences?

The day when Brits will decide whether they want to remain members of the European Union is approaching rapidly. If they choose the so-called Brexit on 23th June, several months of negotiations with Brussels will begin, which would make Great Britain independent sometime in 2017. What would the departure mean to Britain and how would it affect EU itself?

Europe is not just the Union

The truth is that Brexit might be a precedent for other countries which already seek a more liberal interconnection with the EU. For example, the Czech Republic is officially not such country, as the government stands for the opinion that Czexit would bring no advantages to us. Some economists even say that it would be an “economic suicide and plunging into the arms of Russia”.

Firstly, it is proper to say that non-membership in the EU does not necessarily mean non-membership in Schengen and the European Economic Area. There are already four EU non-members in the Schengen area. Furthermore, European customs duties are relatively low, so they wouldn’t stop Czech import and export but merely swing it off its balance – at best. Their influence on a giant such as Great Britain would obviously be even smaller.

A possible outcome of this unbalance might be instability of some European currencies, especially pound sterling. Both Great Britain and the Czech Republic have, however, an advantage in using their own currency. It is necessary to admit that the Euro is not a miraculous currency able to boost a state’s economy into the outer space. If it were so, Greece wouldn’t be convulsing in an agony of bankruptcy and the Eurozone would be a money factory. But it isn’t.

Keep calm and carry on

Let’s take a closer look in how states generate their wealth. According to Société Génerale, the European economy overall would slow down by almost 0.25% while the British GDP would fall by at least half a percent, maybe even one whole percent. Other analysts, on the other hand, found out that Britain would rise by more than one percent. The most likely scenario says that the movement of GDP will be somewhere between these numbers – from a financial point of view, nothing at all will happen.

Approximately the same result is expected from banks’ seemingly catastrophic rush away from London. The City is currently home to most European banks but should Britain leave the EU, Frankfurt or Luxembourg City looks like a much safer refuge. Even though Britain would lose money on banks’ departure per se, lower costs for banks on the continent would mean better conditions for their clients on the Isles and a market revival thanks to cheaper mortgages, respectively.

Who loses out on Brexit in the end?

Even though the European Union allows its member states to receive billion-euro grants, we have to keep in mind where all this cash transfers. They are being poured from one place to another, in case of Great Britain, a membership fee is approx. £11 billion. According to Tim Congdon, a UKIP analyst, it is merely a feeble snatch of £150 billion, which Britain pays each year for EU-related bureaucracy management.

The real risk, although not for Britain but for other member states, lies in the crushing impact of Brussels’ bureaucracy. In case of Brexit, EU would have to fill in the hole left after British money. A reasonable solution would be to reduce that bureaucracy and give the EU a good airing. With Britain gone, the northwest fraction would, however, lose precious council votes and the Eurozone would go a bit more centralized way. The most likely way is therefore not a diet but even higher membership fees from the remaining member states.

In conclusion, it is more than difficult to guess what the result of a British exit from the EU would be. It can, however, be assumed that it would lead to higher volatility in the Eurozone. If Brussels want to keep the Union intact, they have to come up with far more advantageous conditions for all members, not only Great Britain, just because it threatens with departure.