How the economies of each of the European Union’s remaining 27 member countries will be affected by Brexit largely depends on the intensity of their respective economic ties with the UK. The repercussions of Brexit for European exporters and investors with UK exposure could range from minimal to immense, depending on the follow-on agreements between the EU and the UK.
Irrespective of the final legal framework, D&B believes the long-term economic impact of the UK’s vote to leave the EU on June 23 will be significant and negative. Demand-and-supply shocks to the rest of the EU are likely to be milder. In the short- to medium term, the ripple effects of the Brexit will impact the EU via three main channels: politics, trade and currency, and confidence and expectations.
Brexit risks delivering a serious political blow to the EU and to the “EU project,” and could pave the way for similar membership referendums in other member states. However, June’s general election in Spain suggests that this is not necessarily the case.
Spain’s antiestablishment Podemos party lost more than 1 million votes to the mainstream PSOE party after December’s inconclusive elections. As such, the Spanish ballot has shown that in times of high uncertainty voters may turn to mainstream parties, which they perceive as safer.
Paradoxically, the Brexit vote may lead to a stabilization of the European political landscape rather than further fragmentation.
Trade and Currency
Brexit’s impact on trade and currency is limited and could be positive overall. Indeed, the EU only sends around 6% of its total merchandise exports to the UK.
As for the eurozone, we expect the British pound to depreciate against the euro less than it will depreciate against other major currencies (such as the US dollar and the Japanese yen), given that the euro is likely to be weaker as a result of the uncertainty stemming from the Brexit.
It follows that the drop in EU exports to the UK is likely to be more than offset by an increase in EU exports to the rest of the world due to a cheaper single currency.
Confidence and Expectations
Finally, a potential loss of confidence in the European economy is a significant and negative impact of the Brexit. Likewise, European integration has ceased to be perceived as irreversible and everlasting, and, in a worst-case scenario, the “project” of a united Europe could potentially unravel.
A prolonged period of uncertainty and market volatility is an inevitable by-product of higher political uncertainty and lower economic confidence. This instability is set to weigh on companies’ investment decisions, and thus on real GDP growth.
To reflect this, D&B has downgraded Germany’s growth forecasts for this year and the next, and placed several other EU-member countries on review for a downgrade.
The frequency of events tied to Brexit will be high in the short-term aftermath of the referendum. Hence, D&B recommends monitoring the news closely and frequently.
We also advise our customers to expect a further depreciation of the euro toward the US dollar, the Swiss franc, and the Japanese yen, and to factor in lower growth when planning investments for 2016-17.
From a supply-chain perspective, D&B customers should assume no major changes within the EU in the short term (within the next two years) and that the UK will continue to have access to the EU’s common market. Furthermore, a prolonged period of market volatility is to be expected, at least until the terms of the UK’s relationship with the EU are settled.
Daniele Fraietta has been a D&B economist for more than two years. He currently covers some Western European countries, notably Italy, Greece, Spain and Ireland. For D&B, Daniele has also developed the new econometric framework for commodity prices and exchange rates forecasting. He has an MSc in Economics from the University of Rome Tor Vergata, a Master in Business Administration from The Polytechnic University of Milan, and a Master in International Business from the Chapman College of Business.