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What is the economic impact of Brexit — what happens now that Britain has voted to leave the European Union (EU)?

This economics post discusses how economic growth, trade, immigration, international politics, and more would be affected by a split with the EU - today's historical Brexit

The immediate economic impact of today’s historical event was that Britain’s exit from the European Union shocked global economic assets and financial markets and unleashed massive economic uncertainty.

First, the pound plunged to its lowest level since 1985.

Second, investors fled risky economic assets and turned to the dollar and the yen, sending them soaring.

Third, the Bank of England earmarked £250 billion, about US$344 billion, for potential stability measures, which definitely means that the economic experts expect some turmoil in the near future.

Of most immediate economic consequence, Britain’s vote to leave Europe sent global markets on a wild descent. 

Investors gasped at this major damage to the global economic landscape and decided it looked dangerous and uncertain, and that they preferred to pull their money out of riskier places, and place their money in safe havens, for example Japan which saw the soaring of the yen today (24 Jun, Singapore time).

However, it has to be said that few economists expect that Britain’s departure from Europe will set off a full global financial crisis like the particular economic disaster seen soon after the collapse of the investment banking giant Lehman Brothers in 2008. 

Yet, it should also be said that at the time, that situation was not seen as a major economic blow to the world, and it turned out that the economic situation worsened rather terribly later leading to the global financial crisis.

Economic growth or lack thereof?

Nonetheless, most economists think that leaving the bloc would slow the UK’s economic growth. In a detailed assessment, professor Nick Crafts estimated that the EU directly raised UK’s economic prosperity by about 10 per cent, mainly due to increased economic competition and better access to the single European economic market. 

Many economic questions now linger: what would a new Ministry of trade have to do after the UK broke off with the EU to replace current trade networks and economic relationships? Sign a trade deal with the remaining 27 members of the EU each? 

Should the UK now come to an arrangement with about 50 additional countries with which the EU has preferential deals, or all the remaining 161 members of the World Trade Organisation (WTO)?

Apparently, the Leave campaigners started their campaign suggesting that the UK could maintain access to the European single market, they now think the UK could still trade with the EU under WTO rules and eventually strike a bilateral deal with the trade bloc, and yet not be a part of the EU’s custom union. Such an accord is likely to take years to negotiate, say experienced economic negotiators.

Economic impact of migration? Immigration as an issue?

Britain’s net migration stood at 333,000 in 2015, the second highest figure on record and more than PM David Cameron’s pledge to bring the figure down to the tens of thousands.

It has to be said that net immigration from EU countries, particularly central and eastern European member states, rose rapidly after their accession to the EU and recently when citizens of Bulgaria and Romania also acquired the economic right to work and settle in the UK.

Only by leaving the EU can the government reduce the numbers of EU migrants. That would be fair to say. 

However, the issue is that even if EU net migration was cut to zero, Britain would have far more migrants from non-EU countries than the prime minister’s tens of thousands pledge. Globalisation is by far the bigger issue. 

As long as Britain’s economy is doing well internationally, it attracts immigrants. But now that Britain has left, its economic growth may slow or even fall, thus leading to a decrease in migration - in that particular sense!

What does the future bring? No one knows?

Brexit hurts economically speaking.

The main groups of economists who have published economic studies in the campaign use different economic models and different datasets but speak with unanimity on this subject.

There are many negative economic results: the UK erecting trade barriers with the EU would hit economic prosperity very badly, which is not easily replaced by greater economic free trade elsewhere in the world. Leaving the economic bloc would afford the UK little additional regulatory freedom and there could be negative long-term economic consequences from the short-term upheaval of Brexit. 

On balance, experts and economists overwhelmingly think leaving the EU is bad for the UK economy.

One final point – on that 350 million pounds claim…

However, in the final analysis, no one really knows what happens now. The collective imagination leads to dark places.

In particular, as a final note on this sad day, one major piece of news that is making the rounds is the fact that some of the Leave camp's economic claims turned out to be not true. One major example is:

“The EU now costs the UK over £350 million every week – nearly £20 billion a year”
- by the Vote Leave campaigners

Well, yes it turns out that EU membership does come at a cost. Sure it does! 

Nothing is free in the world; there is no free lunch. 

Yes, the UK pays more into the EU budget than it gets back, but it turns out that the UK does not pay £350 million a week. In fact, the UK’s discount, or rebate, reduces what the UK should pay. Some of the so-called given away money came back in EU payments funnelled through the government, so the government’s ‘net contribution’ was around £8.5 billion, or £160 million a week. The EU also spends money directly in the UK (many economic articles show where EU grants go, especially to some poorer cities in the UK) – well, since this is an academic article, especially in grants to British researchers, for instance.

Therefore, it turns out that one of the major claims by the Leave camp was fradulent, fake, false, inaccurate. 

Maybe Brexit is a mistake. Only time will tell.

JC Economics Essays – Today’s post is a special news report on a historical economic issue. It is a huge and momentous event in the world’s economic history. 

Special thanks to FT, ST, HP, and SS for synthesising this news report on Brexit and its economic impact. 

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