Q and A on 'Brexit'

Associate Professor of Finance Cathy Bonser-Neal discusses potential financial impact as the United Kingdom votes on whether or not the UK should leave the European Union

“While the vote itself is uncertain, we are seeing financial markets currently pricing in the expectation that Britain will ultimately vote today to remain in the European Union. A vote to remain in the EU is generally believed to be positive for UK economic growth, while a vote to leave is expected to be a negative for UK growth. As a result, the fact that major stock markets and the value of the British pound are up reflects this expectation of a smaller likelihood that growth in the UK will be disrupted by the Brexit vote.”

“My take is that markets would view that as somewhat of a surprise [If they chose to leave], and in the near-term we would see an increased demand to hold safe assets, such as U.S. Treasury bonds and the U.S. dollar. As a result, we would expect to see U.S. dollar appreciate strongly. The rise we have seen in U.K. and European stock markets the past couple of days would also likely be reversed, as markets price in greater uncertainty about the U.K. and European Union’s economic outlook. Investors would need to be prepared for increased financial market volatility. ”

“In the longer term, if they do vote to leave, then I expect lower economic growth in the U.K.. This lower growth would result if there is a removal of the UK’s preferential trade status with the EU and tariffs rise on goods & services traded between the UK and the EU. Growth would also likely be lower as the uncertainty about the implications of an EU exit would hinder investment spending in the UK, and it could cause foreign firms, including U.S. firms, to reassess their choice of the UK as a location for their operations. Since the UK is an important trading and investment partner of Europe and of the US , what happens in the UK has wider implications for growth of its trading partners. ”

“If they vote to stay, I think the market reaction will be positive. The potential exit of the UK from the EU has been weighing on the markets, and so with the uncertainty about a Brexit resolved, investors will be more comfortable making investments and in taking on additional risk. The risk of a Brexit to UK and European economic growth will also be removed.”

“That said, I don’t believe a ‘Remain’ vote will stop the discussions about EU policies which have been the source of some discontent in the U.K. Unhappiness with some of the EU’s policies and procedures are felt in other parts of the EU as well, and so this referendum may be a ’wake-up call’ for the EU. In the end, if the pressures created by the UK’s referendum lead to a reexamination and reformulation of some EU policies, then this Brexit vote ultimately could lead to a strengthening of the European Union and its economy.”