EU and Brexit: the economic implications

William De Vijlder, Research Analyst at BNP Paribas, expects the UK’s decision to leave the EU to shave about 0.5% off the Eurozone’s GDP in 2016−17 by fuelling uncertainty, hurting trade and tightening monetary and financial conditions.

Key Quotes

“The ECB is likely to respond by providing additional liquidity and potentially front-loading asset purchases. A 10 bp cut in the repo rate is also possible. These measures are likely to come on top of the six-month extension of the asset purchase programme that we still expect the ECB to announce in September.

The long-term economic impact of ‘Brexit’ is unclear. It will depend on what form the new EU–UK relationship takes, including decisions on trade, regulation and competition. The UK’s departure may temper its dominance of EU financial services, potentially to the advantage of other financial centres.

The EU without the UK could see a shift towards less liberal policy and a decline in its international influence. But decision-making in the EU could also become more fluid.

The key risk for the EU is that the UK’s departure could have a contagion effect and that support for EU-sceptic or protest parties would increase. If so, the impact could be bigger in non-Eurozone countries than in the euro area, which has successfully managed periods of market tension in the past.

All eyes are now turned towards the European political leaders and how they will react. Reuters has reported over the weekend that the foreign ministers of France and Germany have already drafted a paper with proposals of a common European policy to address security, migration and strengthening convergence. The summit of Berlin between Angela Merkel, François Hollande, Matteo Renzi and Donald Tusk of Monday 27 June will be particularly important in providing a perspective on how the consequences and implications of the UK referendum will be addressed by the EU.”

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