Brexit: The uncertainty shock of leaving the EU – Goldman Sachs

Research Team at Goldman Sachs, suggests that in the event that the UK votes to leave the EU on June 23, the long-run economic consequences of Brexit for the UK and the EU are likely to be negative.

Key Quotes

“However, given the substantial unpredictability regarding the UK’s post-Brexit trading and regulatory arrangements, quite how damaging Brexit would be in the long term is subject to a great deal of uncertainty. Arguably of more immediate concern is the effect that the uncertainty itself would have on UK growth.

The EU Treaty sets out a two-year timeframe for departure. During this period, the UK government would have to negotiate the terms upon which it could continue to trade with EU countries and, because each of the UK’s existing trade relationships with non-EU countries is currently conducted via the EU, it would also have to negotiate the terms on which it can continue to trade with the rest of the world. Domestically, the UK government would have to decide upon which of the existing EU regulations and laws – governing everything from product quality to competition rules – it would want to adopt into UK law.

Some of these trade negotiations and many of the regulatory/legal decisions would be relatively straightforward. But many would not. Moreover, given the sheer quantity of deals and rules involved, the process of constructing a new trading, regulatory and legal architecture is likely to take a number of years.

During this period, UK-based businesses would face considerable uncertainty: exporting companies would not know the terms on which they would be able to supply export markets abroad once Brexit is complete; importing companies would not know the terms on which they would be able to import; and all companies would be confronted with increased regulatory/legal uncertainty.

Faced with such uncertainty, the option value for businesses of delaying investment would be high, at least until some clarity is reached. Business investment accounts for around 10% of UK GDP. A collective decision to pause a significant share of this spending would be materially negative for UK output.”

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