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How Brexit Will
Affect Global
Economy, Now & Later

How Brexit Will <br/>Affect Global <br/>Economy, Now & Later

New York
Things fall apart. And now,"things" includes the European Union.
British voters delivered a well-aimed kick at the global elites who prefer a Britain that is deeply intertwined, economically and diplomatically, with Europe.
So now that they did it, what does it mean for the British economy and the rest of the world?
With the caveat that nothing is really clear in the immediate aftermath of a seismic event like the one that happened Thursday, here's how to think about the economic forces that have been unleashed and how we can expect them to play out in the weeks and months and years ahead.

In the short run ...
If you run a British company that exports a lot to Europe, or manage a European bank with thousands of employees in London, nothing much changed with the results Thursday.
Britain is a member of the European Union today, and will be one tomorrow. Your products can still be shipped to Duesseldorf without any hint of a tariff. Your employees can work legally whether their passport is from Sweden or Spain.
The immediate effects of"Brexit" will flow almost entirely through financial markets. Markets may be flawed, but they really do amount to a real-time verdict by millions of people with vast sums of money at stake on what something will be worth over the indefinite future. Economic shifts happen slowly; financial shifts happen overnight (literally, in this case).
The truth is that the stock market declines that took place worldwide Friday are nothing to be too concerned about. The British stock market, as measured by the FTSE 100 index, was down 3.2 percent Friday in Britain, above its levels of mid-June. That suggests that investors do not envision the Brexit hit to hammer corporate profits in the near future.
But what is happening in the bond and currency markets suggests bigger problems. The 7.6 percent drop in the British pound against the dollar is indeed a seismic move ” major currency pairs just don't do that. Since 2012, the average daily move in the pound-dollar exchange rate is 0.35 percent. This move is 21 times that.
Combined with a rally in British government bonds (and consequently lower interest rates), the currency shift will mean a burst of inflation for British consumers as imported goods become sharply more expensive. It will also make the nation's export industries more competitive (for now, at least).

In the medium run ...
As the months pass, the economic consequences of Brexit become less about financial market disruptions and more about real economic activity. Within Britain, a pall of uncertainty is likely to be cast over every business's decisions on whether to hire people or make capital investments ” and that's true of both British-owned businesses and the many affiliates of global companies in Britain.
If you're a US company that has its European headquarters in London, do you keep calm and carry on? Or do you start checking out real estate in Frankfurt or Dublin or some other place where the relationship with the EU is more settled? If you run a British company thinking of building a new factory, do you start to entertain the same question?
Even if the ultimate answer for these companies is"remain," it is easy to see how the desire to wait for clarity could hold back economic activity for many months to come ” and perhaps beyond British borders.
And the decision comes at an uncomfortable time. The world's central banks, normally the first responders in times of economic distress, are poorly positioned to help. Those banks have signaled that they are ready to act. Statements were promptly dispatched Friday morning from the Bank of England, the European Central Bank and the Federal Reserve.
Futures markets priced in a 50 percent chance of a Fed interest rate increase on Thursday, but that fell to 14 percent Friday, along with a 12 percent chance of an interest-rate cut this year.
But both the Fed and the ECB are already tilted toward cheap money ” indeed, the ECB already has negative interest rates. And the Bank of England faces an extraordinarily knotty situation. It simultaneously must plan for a possible recession caused by Brexit uncertainty and for higher inflation because of the drop in the currency and outflow of capital. It can fight one problem, but not both at once.
So a decline in business confidence and a rise in uncertainty, paired with limited responses by central banks, makes a recession a major risk in Britain and something of a risk in the rest of Europe and the United States.

In the long run ...
Things like business confidence, market swings and central bank responses shape the economy in the short and medium run, but over time, bigger forces prevail.
And this is where there is the most uncertainty of all. What will a post-EU Britain look like?
The exact process by which the nation will remove itself from the union is murky; it will presumably invoke Article 50 of the Lisbon Treaty, which is a mere 261 words. It isn't exactly a detailed road map for extricating a country from a complex set of interconnections affecting every facet of economic life. It will take years of arduous negotiations.
One possibility ” the benign option, if you want Britain to remain well integrated with Europe ” is to model itself on Norway or perhaps Switzerland, two countries that are not part of the EU but maintain free trade within the bloc.
The only problem with that: The price of maintaining free access to the rest of the European marketplace for those countries is allowing free migration from EU member states and accepting EU regulations on businesses. To the degree that pro-Brexit sentiment was driven by British opposition to immigration and regulation, this solution wouldn't really solve anything.
Britain will get through the immediate financial turbulence and a possible recession just fine. The question for its future is which of two options British leaders now choose. They can maintain the status quo and remain a major international business centre (while ignoring the impulse that led voters to choose"leave" in the first place). Or they can become a smaller, more isolated island that is a less important cog in the global economy ” but at least one that honours its voters' wishes.