Economic Implications of a United Kingdom Exit from the European Union

Summary

This report provides an analysis of the possible economic implications for the United States and the global economy of an exit from the European Union (EU) by the United Kingdom (UK), commonly referred to as Brexit. It offers background information on possible implications of the vote to leave the EU, an overview of U.S.-UK trade and investment relations, and various estimates of Brexit’s financial implications for the U.S. and global economies. For Members of Congress, economic fallout from Brexit could increase the risks of a slower rate of economic growth and potentially complicate economic policymaking. Brexit also could have implications for congressional oversight of U.S. trade policy, including ongoing U.S.-EU negotiations on a Transatlantic Trade and Investment Partnership (T-TIP) free trade agreement (FTA). Since the Brexit vote, resolutions have been introduced in the House and Senate supporting the negotiation of a U.S.-UK FTA. (See S. 3123 (Lee), S.Res. 520 (Rubio), H.Res. 817 (Dent), and concurrent resolutions H.Con.Res. 146 (Brady) and S.Con.Res. 47 (Hatch).)

Factors that could shape the possible impact of a UK exit from the EU include the following.

There is no precedent for a country withdrawing from the EU, so there is a high degree of uncertainty about how a separation might work.

The vote does not force the UK out of the EU immediately. Negotiating the UK’s withdrawal and future relationship with the EU could take years to complete.

NATO remains the preeminent transatlantic security institution, and the UK will remain a leading member of NATO, but Brexit may affect Euro-Atlantic cooperation and unity on a range of security issues.

Various studies project that Brexit would lower UK GDP between -1.3% and -5.5% per year in the short run (2020) and between -1.2% and -7.5% per year over the long run (2030). Estimates of the yearly income loss per UK household are at between -£600 (about $900) and -£5,200 (about $7,500).

Immediately following the Brexit vote, global financial markets reacted sharply: the pound depreciated by more than 10% at one point, reaching its lowest level in more than 30 years; the dollar appreciated against major currencies; and the yen and Swiss franc appreciated. Other currencies were mixed as some emerging market currencies depreciated; most major stock indexes and government bond yields were lower. Global financial markets recovered substantially by the end of June, although the pound and stocks of British firms remained lower.

According to some analysts, uncertainties created by Brexit may have a long-term negative impact on global markets, given the tepid pace of the current global economic recovery. A protracted political leadership struggle in the UK also could add to uncertainties over the UK’s ability to implement the economic measures that may be necessary to restore stability. To date, various central banks have taken steps to calm financial markets. The depreciation in the pound and simultaneous appreciation in the value of the dollar and other currencies considered to be safe havens could add to the challenges facing some central banks in formulating monetary policy over the near term. Capital flight from emerging economies to safe-haven assets could further add to the economic challenges facing developed and emerging economies and potentially harm global growth prospects.