Political and economic implications of Brexit: Storm in a Soup Bowl

Brexit is a major political development for at least the OECD countries. There is no doubt about it. Even if no other country leaves the EU, the political relationships between European countries may change. In the US, the 2016 elections may feel some impact.

However, Brexit has few direct major political implications for most other countries. For example, China and India do not expect that they will be politically affected this change. Further, it is hard to imagine that Brexit has any direct implications for most countries in Africa.

Thus, Brexit is likely a world-changing event in the same manner as World War I — which was essentially a war in Europe, with no direct major implications for the rest of the world.

Similarly, most countries outside OECD are not worried about any direct economic implications. For example, India’s Chief Economic Adviser said,

Brexit was a sad development but India would not be affected by it.

Still, the chaos and uncertainty created by Brexit is likely to have significant negative impacts on the economies of the UK and EU countries. This may last 1–3 years, depending upon how quickly the UK and EU are able to finalize the terms of the exit, including the new relationships after the exit.

Once the new political order emerges, the economic fundamentals will again become dominant. These have not been changed by Brexit in either the UK or the EU — or in any other country.

Brexit does represent lost opportunities. More precisely, what has been lost is the best way of taking advantage of the economic opportunities arising from efficient allocation of resources — labor and capital — across the EU and the UK. However, in many cases, second-best ways will still remain open. Hence, the loss will be mitigated, and may not be noticeable.

For example, UK firms will still continue to export their products to the EU. In doing so, they will still continue to meet EU standards and rules because that’s what the EU rules require. Even countries that are not members of the EU follow those rules. This is nothing unusual. Countries that export food to the US have to meet US rules and standards even though they are not linked to the US in the way that EU and UK were linked.

The UK will lose the influx of workers from the EU who come to work in the UK. This will be a loss for the UK overall, though some UK residents will gain higher wages as a result. There will also be a loss to the UK because its residents will no longer be able to move freely to work in EU countries. But, there will be a corresponding gain for the residents of the EU countries.

In short, there will be overall economic losses in the UK and the EU, with some gains for selected groups. It’s more like a storm in a soup bowl than a world-changing economic thunderstorm.