The bank for a changing world

United Kingdom, USA, Euro: 7 days of Economics

  • 01.07.2016

It has been a week since Europe woke up with the news the United Kingdom had decided to leave the European Union. Estimating the consequences, beyond the direct effects of developments on financial markets, is everything but simple.

The collapse of the pound will drive inflation up in the UK, to which the Bank of England will not respond in tightening, as pressures on prices will prove both temporary and recessionary; as investment and hiring plans freeze, the risks that the UK experiences a recession are non- negligible. In the eurozone, government bond yields went down, spreads did not widen while the euro depreciated against the dollar: monetary and financial conditions eased, which will help soften the likely brake on exports to the UK. The US dollar got more expensive but interest rates fell rather markedly; on the other hand, trade with the UK is too limited for the US to suffer from a British slowdown. In short, what matters is what we do not know: what will be the relation between the UK and the EU a few years from now? Negotiations will not start before a new Prime Minister is in charge, and the pro- Brexit camp does not look like having a plan. What is at stake is however quite clear: the UK will have to preserve its unity and its access to the single market. 

Alexandra Estiot

GBP down