Brexit: the financial implications BLOG

March 3, 2016 11:35 am

Brexit: the financial implications – highlighting the uncertainty around the EU Referendum

The outcome of the In/Out EU referendum on 23 June is far from certain. The bookmakers still suggest that the ‘In’ campaign should prove successful, but, with months of political posturing ahead, we have been considering what the financial implications of a Brexit could be.

There have been a range of previous studies published on the subject with a wide range of potential outcomes forecast. Capital Economics were commissioned by Woodford Investment Management to examine the United Kingdom’s relationship with Europe and the impact of ‘Brexit’ on the British economy, and their report draws a measured and neutral conclusion. The report considers several of the most important elements of the Brexit debate including immigration, trade, financial services, regulation and the public sector.

Benefits for certain industries

Annual net migration from Europe has more than doubled since 2012, reaching 183,000 in March 2015, boosting the workforce by around 0.5%. Currently, labour movement within the EU is free, whereas leaving the EU could allow immigration policy to be restricted and focussed on certain skill bases, which could benefit certain industries. Restriction of low-skilled worker immigration could however be detrimental to low-wage sectors such as agriculture, and could increase wage-growth and inflation.

Free trade with EU countries would be impacted. Under the Lisbon Treaty, a country leaving the EU has two years to negotiate a withdrawal agreement, and it is very likely that a favourable trade agreement would be reached in a Brexit scenario, albeit with some potential additional costs to exporters. Indeed, the ability to negotiate our own trade agreements with other non-EU countries may be favourable to going via the bureaucratic processes of the EU, and this could potentially offset some of the additional cost of dealing with EU members.

Saving on red tape

The City’s position as a global financial hub is certainly helped by being part of the EU, allowing unfettered access to European markets to London-based firms. The City currently exports £19.4bn of financial services to the EU, and this would be significantly disrupted in the short term. Over the long term, the UK could broker deals with emerging markets to help allay this impact.

Saving on the red tape and regulation emanating out of Brussels is often cited as a potential positive of Brexit. This might however prove be a smaller boost to productivity, as exporters will still need to comply to easily access the EU, and the UK may therefore decide to retain many EU rules.

Similarly, the UK’s significant £10bn contribution could be saved through Brexit, but in reality this saving may not be fully felt. The economic impact in other areas may offset some of this, and indeed the Government may have additional costs in compensating certain sectors and regions that current receive EU subsidies.

Uncertainty will dominate

In summary, the effect on the UK economy of a Brexit may not prove to be too significant in the long term. However, much will depend on how an unprecedented exit is handled and how the UK can then independently negotiate with other parts of the world.

As the vote draws ever closer, it will be interesting to see whether economic impacts draw more headlines than the current focus on political issues. However, it is hard to currently see how the debate will be dragged too far away from the emotive issue of immigration.

Until such time as the outcome is clear, uncertainty will dominate – something which will not be beneficial for financial markets. In the event of an ‘Out’ vote, the uncertainty will continue for some time, whereas a vote to remain in will provide some quicker clarity. This suggests that financial markets may continue to demonstrate volatility in the months ahead.


All figures sourced from Capital Economics report, published February 2016  –