Brexit: the Immediate Risks
By Olivier Vardakoulias / neweconomics.org

We all have our view on the long-term prospects associated with an exit from the EU. 

But as foretold by virtually all economists, the dramatic, immediate consequences of a vote to leave the EU are already being felt. The value of the British Pound is currently plummeting, stock markets are in freefall and no doubt a sizeable outflow of capital is underway. This isn’t “black Wednesday” (when the UK exited the European Exchange Rate Mechanism in 1992): it’s much uglier – and this was predicted and predictable.

What we’re currently seeing is only the beginning of a period of instability – so what does this mean for our economy, which has barely recovered from the financial shock on 2008, in the short-term? Here are some of the impacts:

How will UK households be affected?

First the important depreciation of the British Pound, which is currently underway, means that UK households will suffer – particularly the poorest ones.

A strong currency depreciation renders imported goods more expensive – relative to domestic goods and domestic wages. In theory people can switch their consumption away from imported goods (e.g. imported foodstuff) towards domestically produced ones. But this assumes that an economy is able to substitute imported goods with domestic production quickly and easily.

This is currently not the case for the British economy, which has a record-high trade deficit (particularly in manufacturing trade) and is running to the limits of its potential production. The consequence is simple: there will be inflation and people will have to spend more on the items they consume – losing purchasing power and cutting down on their expenditures in the process.

The Brexiteers’ idea that the economy will magically adjust overnight, and start producing the products that it hasn’t been for decades was always a mirage. 

Altogether, this will contract economic activity and increase unemployment. 

What does Brexit mean for the financial system?

While the big medium-term risk is a drive towards further financial deregulation, there are sizeable short-term risks too.

The UK’s financial system is extremely exposed to the rest of the world, having a massive external debt. It is also heavily reliant on the inflow of capital from abroad. A heavy depreciation of the British Pound isn’t just likely to shrink the turnover of the City: it may also lead to a new financial crisis in the UK and elsewhere.

Although scarce public information is available, there is a suspicion that massive maturity and currency mismatches exist between the assets and liabilities of UK financial institutions. While the former are easier to deal with through injections of cash by the Bank of England, the latter are not.

In a scenario where currency mismatches are large, the Bank of England is likely to find itself in a cul-de-sac.

If the British Pound continues falling along with ongoing capital outflows, and the Bank of England doesn’t act to stop that – for example by increasing interest rates – then inflation through the increase of imported goods prices will hit household pockets disproportionally. As a result consumption will decline, leading to a recession, which would in turn, potentially increase non-performing loans and mortgages – eventually making the banking sector even more vulnerable.

But if the Bank of England does eventually increase interest rates – after a foretold easing of monetary policy – to stabilise the value of the British pound, it will also risk a recession while increasing household defaults on loans and mortgages. And this will eventually put the health of the banking sector at risk through another route.

In either case, as in 2008, all of us will pay the price for the UK’s disproportionate reliance on an oversized financial sector. And European banks, heavily exposed to the UK market and sterling, will be hit too.

How will the rest of the EU be affected?

There will also be consequences for the rest of the EU – whose post-crisis economies, for many, are in a deplorable condition. Virtually all European stock markets are currently in freefall.

The UK has been running a massive trade deficit, and is in effect, along with the US, the global "consumer of last resort" – including for the EU.

Most Eurozone countries are trying to export their way out of the crisis following the crushing of internal demand (consumption). So, a strong depreciation of the British Pound – which will reduce UK’s consumption – is very bad news. Britain is indeed the third destination for Germany’s exports and represents 10% of the Eurozone’s total exports.

And in a global context characterized by mercantilism and recessions in emerging markets, the idea that the Eurozone can simply replace the lost exports to the UK with exports to the rest of the world is nonsensical.

Many European economies are likely to suffer considerably – with the possibility of unemployment increasing in countries which can barely afford this additional hit already, including Spain, Italy and France.  

Stopping the doom loop and planning for the future

There are immediate things we can do.

  1. Get to the negotiation table with the EU as soon as possible – without waiting for Conservative party to elect its new leader. For many households, the cost of uncertainty is simply too high: it will translate into a loss of income and higher unemployment. And the doom loop may not stop unless there is a sense of what a future agreement with the EU looks like.
  2. We need to take immediate action to protect households from the shock of Brexit. Now is the time for the State to fulfil its role by increasing redistribution towards vulnerable households, and draw a line on austerity: at difficult time, the State is ultimately responsible for kick-starting investment, securing full employment, and providing essential public services, like health.

Along with short-term measures we also need to actively plan for a new economic model. At the very minimum, this new model should involve an active industrial policy targeted towards new technologies and clean energy; more financial regulation; and a drastic reduction of inequalities by enhancing labour rights, increasing real wages and more income redistribution. 

0.0 ·
0
What's Next
Trending Today
90 Inspiring and Visionary Films That Will Change How You See the World in Profound Ways
Tim Hjersted · 4,853 views today · The world today is in crisis. Everybody knows that. But what is driving this crisis? It's a story, a story that is destroying the world. It's a story about our relationship to...
Why Are Media Outlets Still Citing Discredited 'Fake News' Blacklist?
Adam Johnson · 4,659 views today · The Washington Post (11/24/16) last week published a front-page blockbuster that quickly went viral: Russia-promoted “fake news” had infiltrated the newsfeeds of 213 million...
93 Documentaries to Expand Your Consciousness
Films For Action · 4,231 views today · There are over 800 documentaries now cataloged in our library of social change films. That's probably way too many for any mortal to ever watch in a lifetime, let alone a few...
The Orwellian War on Skepticism
Robert Parry · 2,394 views today · Official Washington’s rush into an Orwellian future is well underway as political and media bigwigs move to silence Internet voices of independence and dissent, reports Robert...
Projext X: Using Leaked Documents to Reveal the NSA's New York Spy Hub, Hidden in Plain Sight
10 min · 2,272 views today · A top-secret handbook takes viewers on an undercover journey to Titanpointe, the site of a hidden partnership. Narrated by Rami Malek and Michelle Williams, and based on...
Where Do You Draw the Line? (2016)
60 min · 1,899 views today · Why is the Ecuadorian government proposing to extract oil in an area frequently classified by ecologists as one of the most bio-diverse rainforest regions left intact on earth?...
Today I Rise: This Beautiful Short Film Is Like a Love Poem For Your Heart and Soul
4 min · 1,788 views today · "The world is missing what I am ready to give: My Wisdom, My Sweetness, My Love and My hunger for Peace." "Where are you? Where are you, little girl with broken wings but full...
Twelve Things To Remember After The US Election, From Front Line Organizers
Bill Quigley · 1,783 views today · When you find yourself in a suddenly darkened room, what do you do?   Some rush blindly to where they think the door might be.  Others stand still, let their eyes get...
Law Professor's Epic Response to Black Lives Matter Shirt Complaint
Social Design Notes · 1,068 views today · A first year law school student wrote a complaint about her professor having worn a Black Lives Matter T-shirt during class. The professor’s response is priceless. Scans of...
John Lennon's "Imagine," Made Into a Comic Strip
John Lennon. Art by Pablo Stanley · 993 views today · This is easily the best comic strip ever made.  Pabl
Social Media Echo Chambers: Here's How Most of Us are Living in One
2 min · 840 views today · Americans are blocking out the friends and news sites that won't confirm their views.
The Fight for Clean Water (#NoDAPL)
2 min · 782 views today · Clean water or Corporate profits? What’s more important? #NoDAPL Energy Transfer Partners: (214) 981-0700 U.S. Army Corps Of Engineers: (202) 761-0010; (202)...
Dakota Access Pipeline Permit Denied
Nika Knight · 725 views today · 'For the first time in Native American history, they heard our voices.'
How Mindfulness Empowers Us
2 min · 694 views today · Many traditions speak of the opposing forces within us, vying for our attention. Native American stories speak of two wolves, the angry wolf and the loving wolf, who both live...
What Makes Call-Out Culture So Toxic
Asam Ahmad · 617 views today · Call-out culture refers to the tendency among progressives, radicals, activists, and community organizers to publicly name instances or patterns of oppressive behaviour and...
This Short Film Plays Out Like an Epic Movie That Will Shake Your Soul - But the Movie Is Real, and We are The Actors
6 min · 544 views today · For next year, we need a resolution capable of confronting the crisis we face, and making a future worth fighting for. This short film looks back on the crisis and confusion...
Dreaming Beyond Capitalism: a Culture Without Fear
Martin Winiecki · 416 views today · In the 1990s an unusual encounter took place in the Ecuadorian Amazon. In plant rituals, shamans of the Achuar, a tribe living in pristine forest that had never been in touch...
The White Man in That Photo
Riccardo Gazzaniga · 384 views today · Sometimes photographs deceive. Take this one, for example. It represents John Carlos and Tommie Smith’s rebellious gesture the day they won medals for the 200 meters at the...
How a Land High in the Western Himalayas Can Help Us Understand The Crisis of The Modern World
9 min · 361 views today · This is a clip from The Economics of Happiness. Watch it here. It's a brilliant film that was easy to put at the top of our list of the top 100 documentaries we can use to...
The 6 Grand Illusions That Keep Us Enslaved
Sigmund Fraud · 341 views today · For a magician to fool his audience his deceit must go unseen, and to this end he crafts an illusion to avert attention from reality. While the audience is entranced, the...
Load More
Like us on Facebook?
Brexit: the Immediate Risks