Brexit: What It Means for the Global Economy

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British voters have recently voted Britain out of the European Union. The debate is now going on regarding the impact of Brexit on the British economy and the rest of the world. The effect of Brexit can be seen in three stages.

Short term consequence

If you have a British company exporting good from Europe, then there won’t be any effect of Brexit on your business. You will still be able to ship products without any tariff. If you are the owner of a European bank whose majority employees are from London, then also it is 100% for the British employees to work in the European bank. There has been a slight decline in the stock market right after the announcement of the Brexit. This shows that investors are not worried about the future profits even after Britain is pulled out of the European Union. But there has been a 7.6% drop in the British pound against the dollar. This is a huge drop compared to the 0.36% regular fluctuations. This may lead to inflation for British consumers as the imported goods will become expensive. The export industries will also become very competitive.

Mid-term consequence

After some months the impact of Brexit is more about real economic activity, rather than about financial market. There is uncertainty in the decision of whether to make capital investments or hire people. Imagine you are an American company having headquarters in London. Now would you consider staying in London or moving to Frankfurt? Even if the companies decide to stay where they are, the ‘wait’ to see what happens can disrupt economic activity for several months. The central bank is not in a good state to help. There may be an increase in the interest rate. So, there are many uncertainties. The business confidence has declined, and there is limited support from the central bank. Britain is at risk of recession.

Long term consequence

People are worried how a post-EU Britain will look like. One possibility is that Britain can become like Switzerland and Norway.These countries are not part of EU but maintain free trade with them. But this will allow free migration for the rest of the EU member states. It will also mean accepting EU regulations for businesses.

The financial and recession problems will eventually go away. The primary concern is whether Britain will choose to be a major international trade center like now by ignoring the fact that they wanted to vote out of EU, or become a small and isolated island.