Macro Weekly – Brexit: what now?

by: Han de Jong

In this publication: A lot of commentary has been produced on the UK electorate’s shock decision to leave the EU. Volatility on financial markets has jumped and it will probably take a while before the dust settles. Uncertainty prevails.

Macro-Weekly-24-June-2016-2.pdf (118 KB)

What do we know?

• The UK will leave the EU
• David Cameron has resigned, but he will stay on for another couple of months
• David Cameron will not invoke article 50 of the Lisbon Treaty, which would set the ball rolling for formal negotiations between the UK and the EU. Instead, he is leaving that up to his successor. This will create several months of breathing space.

What do we not know?

• How long the negotiations between the UK and the EU about their new relationship will last
• What the tone of these negotiations will be
• What the outcome of these negotiations will be
• To what extent anti-EU groups in other countries will enjoy more support following the Brexit referendum
• What the impact on the respective economies will be
• Where financial markets find new ‘equilibrium’ levels

So I would say there is a lot more that we do not know than what we do know, but the fact that the UK will not invoke article 50 straight away provides a very welcome breathing space. Most of the commentary produced today focuses on the short term impact. Perhaps it is good to take a step back and focus a little on the longer term.

Most negative

I have asked myself what is the most negative consequence of this decision. And it seems to me that it’s impact on globalisation is the most negative and possibly what it might do to the US dollar.

For many decades, world trade growth has tended to grow faster than the world economy (except for brief periods of recession), implying that the world economy continued to integrate. As export sectors are usually the most dynamic in any economy, the relatively fast growth of world trade has long been a driver of overall global growth.

Since the financial crisis, this pattern has changed. World trade growth has lagged overall global growth, not only during the recession, but also during the recovery. I believe this has been a major factor holding back overall growth and limiting productivity growth. Opinions vary as to why world trade growth has been so weak in recent years. In any event, the UK leaving the largest trading block in the world cannot be positive, regardless of the new relationship between the UK and the EU. Therefore I think the decision to leave the EU is negative for economic growth. The degree to which it will be negative will depend on the new relationship between the UK and the EU.

If there is one lesson that can be learned from the experience of financial markets in recent years it must be that sustained strengthening of the US dollar exchange rate causes problems. An appreciation of the dollar tightens financial conditions around the globe and is bad for emerging economies, commodity markets etc. If the UK’s decision to leave the EU leads to sustained weakening of the euro and strengthening of the US dollar, that would also be negative.


One can perhaps also raise the question what the most positive effect of the Brexit decision might be. My answer is obviously biased as I am a firm believer in European integration and I think that a federal Europe is, ultimately, the way to go.

Nevertheless, one must say that the electorate, virtually everywhere, has felt increasingly detached from the political elite. The EU’s answers to challenges have tended to be more regulation, enlargement etc. The answer has always been ‘more Europe’. And the attitude of the political elite towards the electorate has not always been particularly inspiring. Even for a supporter of European integration as I am, the way the EU has evolved has not always been the most appealing. So perhaps, just perhaps, the UK Brexit vote is a wake-up call for the political elite to demonstrate more understanding for what the electorate actually wants. And if the electorate wants things that are unwise, perhaps the political elite can make that sufficiently and respectfully clear. So perhaps, just perhaps, the Brexit vote may ultimately lead to a better functioning of the EU.

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