olitical risk in several ways. It could also boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies that would have long-term economic benefits.
Brexit is likely to cause volatility in the EU. According to Fitch, the most exposed countries are Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to the UK are at least 8% of GDP. Brexit could trigger a weakened European economy.
Implications for the world
Investors all over the world hate uncertainty and the result of the referendum gives rise to a surfeit of it. Brexit will surely hurt the global economy several ways. A big concern is the extent to which a retreat from financial risk will disturb the existing fault lines in the world economy, notably in China and southern Europe. Italy has a referendum of its own (on constitutional change) in October, this might influence it. If Brexit leads to a weaker European economy, it will certainly hurt Chinese exports. Perhaps a bigger risk is a renewed bout of dollar strength, as Europe’s currencies weaken, which might in turn put renewed downward pressure on the yuan.
Moreso, there are concerns over perception. If Britain, long a champion of free trade, can vote to revoke a regional trade deal, how much faith can businesses worldwide put in other international economic agreements? An EU shorn of Britain’s deregulating influence is a troubling portent for the liberal world order. Nationalist, populist and protectionist forces in other countries will be greatly encouraged by Brexit. The United States of America, long seen as Britain’s major ally in Europe, will mourn the loss of a key partner in Brussels. Some see Brexit as a sign of waning US influence over the Britons. Moreso, there are concerns that this could ignite a new wave of nationalism and xenophobia across the world.
Are there options for Britain?
Under Article 50, the terms of Britain’s departure would be agreed by the other 26 EU countries, without a British vote. So Brexiteers would prefer to negotiate informally, without invoking Article 50. The other 26 countries are unlikely to go for this.
The kind of deal offered is a longer-term question, with neither main option very palatable. The first is to become like Norway, which is a member of the European Economic Area (EEA), in return for which it is required to contribute to the EU’s budget and allow the free movement of people. The second is to opt out entirely, trading with the EU under the rules of the World Trade Organisation such as America, China or any other country. Most economists agree that this would do more damage to the British economy. Whichever way, Britons seem to have found themselves between the rock and a very hard place.