Brexit: the potential of a financial catastrophe and long-term consequences for the UK financial sector

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Question 1: Do you agree that there would be substantial negative long-term consequences for the UK financial sector if the UK were to leave the EU?

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Question 2: What is the probability that the UK experiences such a significant disruption to financial markets and asset prices following a vote for Brexit on 23 June?

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Question 3: What do you think will be the overall economic consequences of Brexit for the UK?

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Summary

The June 2016 Centre for Macroeconomics survey of experts asked for views on the impact of the UK’s referendum on membership of the European Union for the country’s financial sector. Almost all panel members thought that a vote for Brexit would lead to a significant disruption to financial markets and asset prices for several months, which would put the Bank of England on high alert.

On top of the risk of a financial crisis in the near future, an unusually strong majority agree that there would be substantial negative long-term consequences. No panel member expects the overall consequences of a Brexit outcome to be beneficial for the UK economy – the first time since this survey began that one side of the argument is supported by none of the respondents.

Background

On 23 June 2016, there will be a referendum to decide whether the UK should remain or leave the European Union (EU). Proponents on both sides of the ‘Brexit’ debate argue that the outcome will have important and long-lasting consequences. In this survey, we focus on the consequences for the stability of the UK financial sector.[i]

Long-term financial sector implications

Brexit is likely to have important consequences for the UK’s financial sector. Armstrong (2016) highlights several. If the UK were to leave the EU, then it may not have the same access to the Eurozone’s financial infrastructure, because the European Central Bank (ECB) may restrict euro-related activities of London-based banks.[ii]

Proponents of Brexit argue that stability of the Eurozone will require greater integration and increased regulation. But changes that are desirable for the financial stability of the Eurozone are not necessarily beneficial for the UK financial sector. One could counter that the UK financial sector is unlikely to avoid being affected by Eurozone financial regulation if it continues to play such a dominant role in Eurozone finance. An objection against this last argument is that given the increasingly global nature of finance, future regulation will be heavily influenced by the G20 and the Financial Stability Board, and the UK has an influential role in these bodies.

Another issue is the right of UK-based financial institutions to conduct business anywhere in the EU. These ‘passporting rights’ would disappear in the event of Brexit, which would mean that financial institutions currently in the UK (whether UK- or foreign-owned) would need to establish EU-based operations.[iii] Those in favour of remaining in the EU argue that this would reduce the competitiveness of the City. Those in favour of leaving the EU counter that these extra costs are small and that the benefits of being in a large financial centre such as London (so-called ‘agglomeration effects’, such as an abundance of experienced financial sector workers and support businesses) easily outweigh them.[iv]

Finally, it has been argued that the EU-imposed cap on bonuses is not effective at improving financial stability, and that it reduces the competitiveness of UK financial services vis-à-vis non-EU financial service centres. Leaving the EU would allow the UK to revoke this cap.

Question 1. Do you agree that there would be substantial negative long-term consequences for the UK financial sector if the UK were to leave the EU?

Thirty-eight of the panel answered this question, and a strong majority agree with the statement: 18% strongly agree, 55% agree, 13% neither agree nor disagree, and 11% disagree. When weighted with self-assessed confidence, 82% either strongly agree or agree and only 8% disagree. It is very unusual that the panel members are so united in their views.

The two main arguments given by those who agree with the view that Brexit would have negative long-term consequences for the UK financial sector are the following.

First, losing privileged access to the Eurozone financial infrastructure is likely to reduce business opportunities for UK-based financial institutions. In particular, several panel members argue that the likely loss of passporting rights will hurt the UK financial sector. Indeed, several participants agree with Morten Ravn (University College London) that the loss of passporting rights will ‘set in motion a process of relocation’ of some (large) banks to the Eurozone.

In addition, Jagjit Chadha (National Institute of Economic and Social Research, NIESR) and Ray Barrell (Brunel) point out that this privileged access enabled UK banks to benefit from ECB’s liquidity operations during the financial crisis and Brexit would make such benefits less likely in the future.

The second main argument given to support the view that Brexit will be damaging to the UK financial sector is related to regulation. As Angus Armstrong (NIESR) points out, ’it is clear that the EU will be responsible for financial regulation within the EU (within the context of G20, FSB, etc). The UK would have to comply with regulations which it would have only a consultative role in shaping.’

Moreover, UK-based financial may face tougher regulation for euro-related activities. For example, Ray Barrell (Brunel) writes the current EU financial regulation environment has a single market in financial services that does not coincide with the regulatory area under the control of the ECB. Although this is unwise, it is of benefit to the UK. Once the UK has left the EU, the ECB will tidy this up, and the UK financial system will find itself with the same access as the US, and hence firms will move.’

Among those who do not believe that Brexit will seriously hurt the UK financial sector, two kinds of arguments are given. First, some believe that current arrangements will not be affected very much. Gianluca Benigno (London School of Economics, LSE) writes 'if the UK were to seek to join the EEA [European Economic Area] adopting a model like Norway, the UK could continue to take advantage of the passport system and would maintain existing regulation.’

The second argument given by several panel members is that there is no credible alternative for the skills and experience of the UK financial sector. Even though Sir Charles Bean (LSE) thinks that Brexit will have some negative consequences, he writes ‘London will still retain the attractions of deep markets and a skilled workforce.’

Short-term financial instability

The first question focuses only on long-run consequences for the financial sector. This question focuses on the short-run financial instability that a vote for Brexit would be likely to generate.

A vote in favour of Brexit on 23 June would not result in the immediate withdrawal of the UK from the EU. Instead, the UK government would invoke Article 50 of the Lisbon Treaty and have up to two years to withdraw.

At the moment of the referendum result, there would be uncertainty about future arrangements with the EU. For example, we would not know about the UK’s future trade relationships with the EU and other countries and they would become subject to negotiation. Similarly, product, labour and financial market regulations would all be subject to some uncertainty. Such economic uncertainty can have a big impact on the investment and hiring decisions of firms (as in Bloom, 2009).

Here we focus on the effects of Brexit on financial markets that would be likely to be affected by both the implications of Brexit for UK economic prosperity, as well as by the uncertainty itself.

With this question, we want to get an assessment of the likelihood of a severe financial disruption. This question is not about some increased volatility during the weeks immediately following the vote. The type of disruption that we are thinking of is the kind that will make headlines in newspapers for at least several months, will put the Bank of England on high alert, and will be most likely to require some non-trivial intervention by policy-makers.

For example, on May 16 2016, in its 2016 Article IV Consultation Concluding Statement, the IMF stated:[v]

‘Another risk is that markets may anticipate such adverse economic effects, provoking an abrupt reaction to an exit vote that effectively brings these costs forward. This could entail sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows into key sectors such as commercial real estate and finance. The UK’s record-high current account deficit and attendant reliance on external financing exacerbates these risks. Such market reactions could sharply contract economic activity, further depressing asset prices in a self-reinforcing cycle.’

One could counter this alarming prediction with the observation that the UK economy including its financial sector are doing well and that the financial markets may see some advantages in an upcoming Brexit.

Question 2. What is the probability that the UK experiences such a significant disruption to financial markets and asset prices following a vote for Brexit on 23 June?

  • > 70%.
  • 31-70%
  • 11-30%
  • non-trivial but 10%
  •  0%

Thirty-eight panel members answered this question. The results are shocking. The panel members are extremely worried about the consequences of a Brexit outcome for financial markets.

The question asked about the likelihood of a ‘significant disruption’ and the background information pointed out that the question is about a ‘severe financial disruption’ that would ‘put the Bank of England on high alert and will be most likely to require some non-trivial intervention by policy-makers.’ Nonetheless, there is only one panel member, Michael Wickens (Cardiff and York), who thinks that the chances of such serious disruptions are basically zero. He writes ‘Like most of the predicted economic gloom this too is an exaggeration. More significantly, the point of Brexit is long-term, largely non-economic benefits, not short-term costs.’

All of the other panel members think that there is at least a non-trivial chance of a serious financial breakdown: 26% think that the chance is higher than 70%, 29% think this probability is between 31% and 70%, 24% think it is between 11% and 30%, and 18% think that it is less than 10%, but still non-trivial. The picture becomes gloomier when answers are weighted with (self-assessed) confidence. Then 37% of the respondents think that the probability is above 70%. One important qualifier is that several panel members point out that it is very difficult to predict how financial markets will react.

Ricardo Reis (LSE) points out that financial markets themselves are predicting quite a bit of turbulence if the Brexit campaign were to win the referendum. He writes ‘implied volatility in sterling/dollar three-month option contracts is very high (around 14%, which is 1.5 times higher than in January) while the betting markets for Brexit seem to put its odds at around 20%. Combining these two numbers, it seems that financial markets think the unlikely event of Brexit would lead to significant disruption in the value of sterling.’

Several of our experts emphasise the uncertainty associated with a Brexit outcome. Panicos Demetriades (Leicester) writes ‘This event will unleash the kind of uncertainty that Keynes had in mind when he said “we simply do not know” when referring to the likely effect of war. Such uncertainty can only be disruptive for financial markets. We will enter a new era of volatility that is likely to last until these difficult negotiations are completed.’

The panel members see this uncertainty as not just related to new arrangements with the EU. Costas Milas (Liverpool) writes ‘Bearing in mind that Tory Eurosceptics have made substantial noise during the Brexit campaign, it is more likely than not that we will witness political instability.’ But some panel members think that the policy response will be adequate. Jonathan Portes (NIESR) writes ‘I am reasonably confident that the authorities have contingency plans in place, and the appropriate tools, to deal with the most adverse possible impacts.’

Richard Portes (London Business School, LBS) highlights the current unfavourable external position of the UK: We are running a current account deficit of 6-7% of GDP, financed by portfolio capital inflows and FDI [foreign direct investment]. It is highly likely that there would be a “sudden stop” to these capital flows, a sharp depreciation of sterling, and a sharp fall in asset prices. We would no longer be the “safe haven” that we have been in “risk off” episodes of recent years.’

Panel members who think that the chance of another financial crisis is non-trivial but not very high point out that there are some mitigating factors. Sir Charles Bean (LSE) writes ‘While a period of asset price volatility is very likely after a vote for Brexit, including a further substantial fall in sterling, I do not expect to see a major cut-off in funding to UK financial institutions. Banks and other financial institutions already cope with the risk of substantial movements in exchange rates, so I do not expect disruption on that score. Also a vote to leave should not be associated with a sharp deterioration in the quality of banks' assets.’

Overall Brexit consequences

The first two questions focused exclusively on the financial sector. We added a third question to the survey, because some panel members’ opinions may be different when the overall economic consequences of a Brexit outcome are considered and they may want to make that known.

Question 3. What do you think will be the overall economic consequences of Brexit for the UK?

  • Significantly negative
  • Mildly negative
  • Neutral
  • Mildly positive
  • Significantly positive

Twenty-three panel members answered this question and nobody answered that the overall consequences of a Brexit outcome would be beneficial for the UK economy. It is noteworthy that – for the first time since the start of this survey – one side of the argument is supported by none of the panel members.

There is, however, disagreement on how large these negative effects will be. In particular, there is disagreement on the impact on trade. Several panel members think that the new arrangements between the EU and the UK will be such that trade will not be affected very much. After all, as Jonathan Portes (NIESR) points out, ‘Economists agree that trade, migration and access to large markets are good for economies.’

But some economists are more pessimistic about the types of arrangements that the UK can expect. For example, Panicos Demetriades (Leicester) writes ‘The UK will eventually negotiate a deal that is bound to be much less favourable for UK industry and financial services than EU membership, partly to make sure that the precedent that is set deters other countries from leaving.’

Moreover, there is disagreement on whether the negative effects are long-term effects. As Paolo Surico (LBS) points out, In the long run, it would seem difficult to build a definite compelling argument for either front. But in the short run, there seems to be mounting evidence that the economic consequences of Brexit would be significantly negative with the concrete possibility of significant capital flows and sharp drop in asset prices, including houses and the exchange rate.’

 

[i] The May 2016 issue of the National Institute Economic Review, published by the National Institute of Economic and Social Research, provides a lot of useful background information. It also has been helpful for the background information given in this survey: http://www.niesr.ac.uk/publications/eu-membership-financial-services-and...

[ii] One example is the regulation and oversight of central counterparties (CCPs), which have become a very important part of the financial infrastructure following the global financial crisis. The current arrangement is that the Bank of England and the ECB have joint oversight of CCPs and there are reciprocal currency swaps to facilitate multi-currency liquidity support. This arrangement was the outcome of a long process as the ECB was not initially supportive since the arrangement facilitates a high proportion of euro-denominated financial activities taking place abroad. If the UK were to leave the EU, then the arrangement may not continue, which is likely to have a negative effect on the importance of the UK financial sector for euro-related financial transactions.

[iii] Passporting rights guarantee the right to sell into the rest of the EU without having a branch there.

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References

Armstrong, A. (2016) ‘EU Membership, Financial Services and Stability’, National Institute Economic Review, May: 31-38.

Bloom, N. (2009) ‘The Impact of Uncertainty Shocks’, Econometrica 77: 623-85.

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How the experts responded

Long-term financial sector implications

Participant Answer Confidence level Comment
Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
The UK financial sector has benefitted from being part of the EU but simultaneously from the opt-out from EMU. The UK financial sector has benefitted from liquidity operations made by the ECB, from acting as an entrepot for financial services to the rest of Europe and it has been able to play a leading role in developing the new set of financial regulations. All three of these benefits may be lost under Exit.
Gianluca Benigno London School of Economics Neither agree nor disagree Confident
It seems to me that all depends on which model would be adopted in the post-Brexit scenario. For example if the UK were to seek to join the EEA adopting a model like Norway, the UK could continue to advantage of the passport system and would maintain existing regulation. Alternatively under a UK EU free trade agreement models the UK could regulate its own financial service sector.
Andrew Scott London Business School Neither agree nor disagree Not confident
This seems key existential question for the City. Is its role in the EU as NYC to the USA or HK to China?
Richard Dennis University of Glasgow Disagree Not confident
Ethan Ilzetzki London School of Economics Neither agree nor disagree Not confident
I think the overall net impact would be negative, but I dont' think the damage would be "substantial". London is a global, not only a European, central of finance and neither Frankfurt nor Milan could usurp its role due to Brexit. On the margin, though, many banks are already considering moving parts of their operations to Ireland and elsewhere in the EU, and Brexit may certainly accelerate this process.
Wouter Den Haan London School of Economics Agree Confident
Being isolated is not good for a financial centre. It seems evident that the UK financial sector will loose some Euro related business. There may be some offsetting positive effects (for example, if the continent imposes overly restrictive regulation), but I cannot see that these outweighs the cost.
Nicholas Oulton London School of Economics Agree Confident
The eurozone would almost certainly use Brexit as an opportunity to impose new regulations which discriminate against London in euro-related transactions.
Paul De Grauwe London School of Economics Agree Confident
Mike Elsby University of Edinburgh Agree Not confident
Alan Sutherland University of St. Andrews Agree Confident
Fabien Postel-Vinay University College London No opinion Not confident at all
Silvana Tenreyro London School of Economics Agree Confident
Sir Christopher... London School of Economics Strongly agree Extremely confident
In the event of Brexit the UK will have to renegotiate its access to EU financial markets and EU nations are not likely to be as generous with EU-based banks if the alternative is to develop their own and reap some of the rewards themselves
Sir Charles Bean London School of Economics Agree Confident
A vote to leave the EU is almost certain to lead to the migration of some EU-focussed activities, such as euro-denominated clearing. However, London will still retain the attractions of deep markets and a skilled workforce, so I expect the damage to remain relatively limited.
David Smith Sunday Times Strongly agree Very confident
Joseph Pearlman City University London Agree Confident
While I agree with notion of 'passporting rights', I am only reasonably confident that this argument is important. Both sides of the argument have been over-hyped, and I do not find myself completely convinced of the weakness of the Brexit case.
Ray Barrell Brunel University London Strongly agree Extremely confident
The UK financial sector is likely to suffer significantly if we leave the EU. Passporting rights do matter, and access to the ECB infrastructure was important during the 2008-9 crisis. The loss of both will reduce efficiency and cost market share. More importantly, the current EU financial regulation environment has a single market in financial services that does not coincide with the regulatory area under the control of the ECB. Although this is unwise, it is of benefit to the UK. Once the UK has left the EU the ECB will tidy this up, and the UK financial system will find itself with the same access as the US, and hence firms will move. The long run impact on London will be significant and negative, but at least that means we will not need a third runway at Heathrow.
Simon Wren-Lewis University of Oxford Strongly agree Very confident
Jim Malley University of Glasgow Agree Very confident
David Cobham Heriot Watt University Agree Confident
Wendy Carlin University College London Agree Confident
Martin Ellison University of Oxford Agree Confident
Paolo Surico London Business School Neither agree nor disagree Confident
Ricardo Reis London School of Economics and Columbia University Agree Confident
The removal of passporting rights would likely mean that a few large banks would move out. Whether others would follow or not depends on the strength of agglomeration effects as opposed to other forces for path dependence in spatial development, so it is hard to assess whether the long-term result would be substantial or not. Still, the only way is down: London is currently the clear large financial center in Europe, and none of the arguments for why leaving the EU would improve its position seem plausibly significant.
Michael McMahon University of Oxford Agree Confident
I think that part of the attraction of the UK financial markets - especially the City of London - is that it is a major financial centre in the EU. While I don't expect that banks or other financial institutions will simply pack their bags on June 24 following a Brexit vote, I do feel that their marginal expansion and hiring decisions for some of their operations will be toward EU member states. Over time, this will erode the overall size and importance of the UK financial markets. This is the negative impact. Nonetheless, I believe that the UK would still have a relatively large and active financial system in the years following a Brexit.
Francesco Caselli London School of Economics Disagree Not confident
Very hard to tell but on balance I don't see US+EM+resource abundant business going to Frankfurt.
Jonathan Portes KIng's College, London Agree Not confident
There is considerable uncertainty: and, whichever way the referendum goes, specifying the counterfactual will be close to impossible. However, the arguments set out in Armstrong (2016) are convincing, in particular the loss of the UK's current privileged access to the financial infrastructure of the eurozone.
Charles Nolan University of Glasgow Agree Confident
Costas Milas University of Liverpool Agree Confident
Have you got permission from the "Leavers" before asking these types of questions? They will say that CFM is EU funded.
Richard Portes London Business School and CEPR Strongly agree Extremely confident
We would first lose all euro clearing business, because the ECB would require that it move to a euro-area country, and we would no longer have the protection of the ECJ (which stopped them from doing this before). In the likely case that we would stay out of the Single Market (because the 'Norwegian model' would be unacceptable to the Leave leaders), we would lose access for financial products and automatic 'passporting' rights, as well as any influence on EU financial regulation. Many activities and much financial sector employment would go to Frankfurt, Paris, and Dublin - Edinburgh as well, if Scotland were then to secede.
Michael Wickens Cardiff Business School & University of York Disagree Confident
The fears expressed in the question are greatly exaggerated. The UK's financial sector has a global financial reach. This would not be affected. It would maintain's the UK's access to finance and expertise that the EU could not surplant.
Sean Holly Cambridge University Neither agree nor disagree Confident
Jan Eeckhout University College London Disagree Very confident
Angus Armstrong National Institute of Economic and Social Research Agree Very confident
in the event of Brexit, I would expect both the EU and UK would work together to keep current arrangements in place. However, it is clear that the EU will be repsonsible for financial regulation within the EU (within the context of G20, FSB etc). The UK would have to comply with regulations which it would have only consultative role in shaping. This does not seem to be realistic with being a global financial centre or in terms of coherent governance arragements.
Morten Ravn University College London Strongly agree Very confident
The UK financial sector currently thrives due to agglomeration effects, vast supply of human capital, easy access to the European market, and an attractive regulatory framework. But as such, Frankfurt probably seems a more natural financial centre given the location of the ECB. Should the UK choose to leave the EU I think there is little doubt that passporting rights will worsen which will most likely set in motion a process of relocation of many firms in the UK financial to Frankfurt. This might happen slowly if passporting rights remain almost untouched but could also happen quickly.
Panicos Demetriades University of Leicester Agree Very confident
A vote to leave the EU will be followed by an extended period of uncertainty, which will is likely to put a hold all long term decisions. We do not know how that uncertainty will be resolved but it is likely that the EU will not want to create a precedent whereby a country that exists gets a favourable deal. Thus, the new equilibrium, which would be 2-3 years down the road, is likely to be worse than the current status quo in both trade and financial services. While London is unlikely to lose its status as a major international financial centre, it will nevertheless likely to lose business to Frankfurt and Paris and possibly other places in the EU. For example, the European Banking authority, which is currently located in London, it is unlikely to remain there if Britain votes to leave the EU.
John VanReenen London School of Economics Strongly agree Extremely confident
Akos Valentinyi University of Manchester Agree Very confident

Short-term financial instability

Participant Answer Confidence level Comment
Jagjit Chadha National Institute of Economic and Social Research 31-70% Very confident
There would be tightening of monetary and financial conditions reflecting an increased riskiness in Sterling-based assets. Policy and the exchange rate will only be able to offset this to a partial degree and so markets will take some calming down – particularly is the vote to leave is unexpected.
Gianluca Benigno London School of Economics nontrivial but ≤ 10% Not confident
Andrew Scott London Business School nontrivial but ≤ 10% Confident
Richard Dennis University of Glasgow nontrivial but ≤ 10% Not confident
Ethan Ilzetzki London School of Economics 11-30% Confident
Financial markets are nearly impossible to predict, but one should certainly price in some non-negligible probablility that the uncertainty surrounding Brexit will generate a panic. The ambiguity of the Brexit campaign's plans for the post Brexit world certainly adds to the likelyhood of a prolonged slum as investors "wait and see" what the implications of Brexit are.
Wouter Den Haan London School of Economics nontrivial but ≤ 10% Confident
Given the uncertainty associated with a Brexit, financial markets are likely to display increased volatility. Although we can expect the financial sector to suffer some losses, I don't think they are that big that they will push us into another financial crisis. But financial markets are inherently fragile, and especially so during uncertain times, so we cannot exclude this possibility.
Nicholas Oulton London School of Economics nontrivial but ≤ 10% Confident
The question was about disruption which is not the same as falls in a few asset prices. The latter occur all the time for a variety of reasons (and non-reasons).
Paul De Grauwe London School of Economics 31-70% Not confident
I think it is quite difficult to use probability measures for such unique events. We have no past observations to rely on. Avoid forcing us to do something that is quite impossible
Mike Elsby University of Edinburgh 11-30% Confident
Alan Sutherland University of St. Andrews > 70% Confident
Fabien Postel-Vinay University College London 11-30% Confident
Silvana Tenreyro London School of Economics 31-70% Confident
Sir Christopher... London School of Economics > 70% Extremely confident
Financial markets do not like uncertainty and this is reflected in asset prices. Whatever the final outcome of the negotiations in the event of Brexit there will be uncertainty in the short term
Sir Charles Bean London School of Economics nontrivial but ≤ 10% Not confident
While a period of asset price volatility is very likely after a vote for Brexit, including a further substantial fall in sterling, I do not expect to see a major cut-off in funding to UK financial institutions. Banks and other financial institutions already cope with the risk of substantial movements in exchange rates, so I do not expect disruption on that score. Also a vote to leave should not be associated with a sharp deterioration in the quality of banks' assets. That said, it is clearly prudent for the Bank of England to stand ready to provide additional liquidity support should it be needed.
David Smith Sunday Times > 70% Confident
Joseph Pearlman City University London 31-70% Very confident
A drop in house prices is likely to be a good thing in London. As regards commercial property, there was so little disruption since the financial crisis compared to what many in that market were expecting, that I would be completely amazed to see major disruption after Brexit.
Ray Barrell Brunel University London > 70% Very confident
Financial markets look forward, and exit, which remains unlikely, entails a different future and this will be brought forward. The impacts are difficult to assess in advance, but are likely to be large.
Simon Wren-Lewis University of Oxford nontrivial but ≤ 10% Confident
I think, as far as the short term is concerned, the emphasis on "financial disruption" is misplaced, and perhaps even a deliberate scare tactic. The exchange rate will fall on Brexit, but for good economic reasons. The economy may enter recession, but again for reasons unrelated to "financial disruption". As a result I doubt if interest rates will rise.
Jim Malley University of Glasgow 31-70% Confident
David Cobham Heriot Watt University 31-70% Confident
Wendy Carlin University College London 31-70% Confident
Martin Ellison University of Oxford 11-30% Confident
Paolo Surico London Business School > 70% Extremely confident
Ricardo Reis London School of Economics and Columbia University 31-70% Not confident
"Significant" is too vague to put a precise probability around. But, implied volatility in sterling/dollar 3-month option contracts is very high (around 14%, which is 1.5 times higher than in January) while the betting markets for Brexit seem to put its odds at around 20%. Combining these two numbers, it seems that the financial markets think the unlikely event of Brexit would lead to significant disruption in the value of sterling.
Michael McMahon University of Oxford 11-30% Confident
I think that Sterling would weaken but it already has somewhat so it is not clear there is a huge amount to go. The size of the effect on housing markets is very uncertain but also unlikely to occur quickly - Brexit would take up to 2 years to negotiate. Other markets, such as equities, will be affected in the run up but I hope that the resolution of the vote uncertainty may provide a potential offset to the diminished economic outlook following a Brexit vote. So I overall hope that there is not as significant a financial shock in the event of a Brexit vote.
Francesco Caselli London School of Economics 11-30% Not confident
Jonathan Portes KIng's College, London 11-30% Confident
There would certainly be considerable market volatility. I am reasonably confident that the authorities have contingency plans in place, and the appropriate tools, to deal with the most adverse possible impacts (eg a loss of liquidity in certain markets). However, it is certainly possible, if not probable, that volatility would be such as to result in significant (not in my view catastrophic) negative short-term economic impacts.
Charles Nolan University of Glasgow > 70% Very confident
Costas Milas University of Liverpool 31-70% Confident
The day after a Brexit vote, David Cameron will have to step down at once. Indeed, Eurosceptic Tories would not ‘digest’ the paradox of Mr Cameron negotiating, in a credible manner, BREXIT when he has ‘passionately’ argued in favour of Remain. Whether transition to a new leadership proves smooth or turbulent remains to be seen. Bearing though in mind that Tory Eurosceptics have made substantial noise during the Brexit campaign, it is more likely than not that we will witness political instability. On the economics/financial front, credit rating agencies will respond by cutting our credit rating score. This will hardly be surprising as academic studies have shown that EU membership enjoys a ‘premium’ of as many as two notches. With voters ‘kissing goodbye’ to EU membership, this 'premium' will not hold any more. All of the above will (a) put upward pressure on our borrowing costs (and of course mortgage rates) even if the BoE decides (in a rather desperate move) to cut the policy rate down to zero and (b) trigger financial volatility which, together with rising political instability at the Tories headquarters, will take time to sort out…It is sad really: David Cameron warned voters against a Do-It-Yourself recessionary damage when, in fact, it will be a David It's You damage...
Richard Portes London Business School and CEPR > 70% Extremely confident
We are running a current account deficit of 6-7% of GDP, financed by portfolio capital inflows and FDI. It is highly likely that there would be a 'sudden stop' to these capital flows, a sharp depreciation of sterling, and a sharp fall in asset prices. We would no longer be the 'safe haven' that we have been in 'risk off' episodes of recent years. We could draw on our Fed swap line for dollar liquidity needs, but that would not deal with the problem of quickly bringing down the current account deficit. Typically in these episodes, the exchange rate adjustment takes time to affect exports, and the fall in the deficit comes through a compression of imports that in turn comes from a fall in output, employment and incomes (as one saw in almost all advanced countries in 2009). Depending on its assessment of balance sheet effects, the Bank of England might feel compelled to raise policy interest rates to defend the exchange rate.
Michael Wickens Cardiff Business School & University of York ≈ 0% Confident
Like most of the predicted economic gloom this too is an exaggeration. More significantly, the point of Brexit is the long-term, largely non-economic benefits, not short-term costs.
Morten Ravn University College London 11-30% Confident
Financial markets will anticipate the outcome of any negotiations between the EU and the UK should Brexit be the outcome in the referendum. In the short run, the sterling will most likely lose some value. In the median term, inflows of foreign capital will probably diminish and house prices - especially in London - could suffer. But thereafter a lot will depend on the outcome of the UK-EU negotiations and on UK policies. Both of these are to a large extent unknown so it is hard to make guesses apart from the fact that the uncertainty that will follow will be harmful.
Angus Armstrong National Institute of Economic and Social Research 11-30% Not confident
Much will depend on responses. Will there be a leadership challenge and who would be the favourite? Will credit ratiing agencies downgrade the UK one or two notches; and what would be the implications for OTC derivative contracts and structured products which often include provisions about ratings of counterparties? My answer assumes that the UK authorities at least are well prepared and will respond accordingly to mitigate disturbance.
Sean Holly Cambridge University > 70% Confident
Jan Eeckhout University College London 31-70% Confident
Panicos Demetriades University of Leicester > 70% Extremely confident
This event will unleash the kind of uncertainty that Keynes had in mind when he said "we simply do not know" when referring to the likely effects of war. Such uncertainty can only be disruptive for financial markets. We will enter a new era of volatility that is likely to last until these difficult negotiations are completed.
John VanReenen London School of Economics > 70% Confident
Akos Valentinyi University of Manchester 31-70% Very confident

Broader implications of Brexit

Participant Answer Confidence level Comment
Jagjit Chadha National Institute of Economic and Social Research Mildly negative Very confident
There will be some short run negative effects but in the long run the measured risks to trade, FDI and the fiscal position will tend to bear down on income. The final impact will depend on how well we re-orient trade to the rest of the world and how well the financial sector absorbs the shock of Exit.
Gianluca Benigno London School of Economics Neutral Confident
Andrew Scott London Business School Significantly negative Confident
Ethan Ilzetzki London School of Economics Mildly negative Extremely confident
The consequences will be only mildly negative because I forsee post Brexit arrangements as being a alightly worse version of the status quo. The UK will not forgo the benefits of free trade with the EU and will negotitate a trade agreement with the EU. The EU will insist on terms comprable to Switzerland or Norway, so that the UK would be required to join Shengen to retain reasonable access to the EU. I forsee the ultimate outcome as the UK having slighlty less free trade, slightly freer migration with the EU, and only slighlty lower de facto exposure to EU regulation. However the UK would have substantially less influence in Brussels. This is not the end of the world, but there is no dimension along which even the greatest proponents of Brexit should wish for such an outcome.
Wouter Den Haan London School of Economics Mildly negative Confident
It is difficult to predict the future. I think that Brexit will be worse for the remaining countries than for the UK. It is exactly this negative impact on the EU that I think will be harmful for the UK. It will be much more beneficial for the UK if it can continue to influence the future of the EU even if it comes with some disadvantages.
Nicholas Oulton London School of Economics Mildly negative Not confident
The crucial issue is what sort of policies will be followed in the event of Brexit? If these are sensible, the result will be mildly negative since we would presumably be excluded from the Single Market but get some sort of free trade deal with the EU. Even if broadly sensible it is very unlikely that we would move to unilateral free trade with the whole world. And there is some risk of really stupid policies being adopted by a successor government.
Paul De Grauwe London School of Economics Mildly negative Not confident
Mike Elsby University of Edinburgh Significantly negative Not confident
Fabien Postel-Vinay University College London Significantly negative Confident
Sir Christopher... London School of Economics Mildly negative Very confident
The UK economy is in a good state and can withstand shocks. It relies a lot on the financial sector for its well being. Eventually, the economy will adjust to Brexit and restructure, at which point I expect the costs to be mildly negative. But on the way there I expect them to be strongly negative. the adjustment period could be more than 5 years.
Sir Charles Bean London School of Economics Significantly negative Confident
While the post-Brexit trade arrangements have yet to be agreed, I find it difficult to conceive of any viable arrangement that does not involve some lowering in the ease with which UK businesses can trade with the rest of Europe. The potential gains from an ability to de-regulate as a result of Brexit are in my view overstated, as the UK government is likely to wish to retain regulations relating to issues such climate change and banking regulation, even where they formally originate at the EU level.
Jim Malley University of Glasgow Significantly negative Extremely confident
David Cobham Heriot Watt University Significantly negative Extremely confident
Martin Ellison University of Oxford Significantly negative Confident
Paolo Surico London Business School Significantly negative Very confident
In the long-run, it would seem difficult to build a definite compelling argument for either front. But in the short-run, there seems to be mounting evidence that the economic consequences of Brexit would be significantly negative with the concrete possibility of significant capital flows and sharp drop in asset prices, including houses and exchange rate.
Ricardo Reis London School of Economics and Columbia University Mildly negative Very confident
There is great uncertainty on how large the effects will be, but few good arguments and no serious study showing that the effects would be anything but negative.
Michael McMahon University of Oxford Mildly negative Not confident
I am relatively confident that the overall economic cost will be negative. But it is hard to choose between strongly negative and mildly negative. The outlook for an economic gain through reduced regulation and greater control of immigration seems very slight to me given the overall positive effect of immigration on the UK economy and the already relatively free labour and product markets.
Jonathan Portes KIng's College, London Mildly negative Not confident
Economists agree that trade, migration and access to large markets are good for economies. EU membership has led to a relatively liberal approach to both and provides full access to the largest single market in the world. If this could be maintained outside the EU and better trade deals negotiated, then the economic impact might indeed be neutral or even a slight positive. But this would require benign political and economic developments in the UK, in the EU, and globally. Moreover, the potential downside risks of a decision to leave, while not susceptible to precise quantification, appear large, and need to be taken into account in assessing the overall costs and benefits. Risks are also attached to remaining in the EU, but appear easier to manage.
Costas Milas University of Liverpool Significantly negative Confident
Yes, please see my answer to Question 2 above.
David Miles Imperial College Neutral Confident
Sean Holly Cambridge University Mildly negative Confident
Panicos Demetriades University of Leicester Significantly negative Extremely confident
Uncertainty will weigh heavily on private investment and many companies will relocate elsewhere in the EU. The U.K. will eventually negotiate a deal that is bound to be much less favourable for UK industry and financial services than EU membership, partly to make sure that the precedent that is set deters other countries from leaving. There will likely be a dissolution of the U.K., due to Scotland rejoining the EU and adopting the euro. England on its own will have much less influence on world affairs than the UK within the EU and with less international support it will be less able to safeguard its national interests.
John VanReenen London School of Economics Significantly negative Extremely confident
The best work on this is by the LSE's Centre for Economic Performance which focuses on the long-term effects of Brexit. There will be substantial harm from lower trade and FDI which a more minor negative role from reduced immigration. For example on trade see http://cep.lse.ac.uk/pubs/download/brexit02.pdf or more generally http://cep.lse.ac.uk/BREXIT/. The UK will suffer most, but there will also be economic damage throughout the EU.