2016 has seen significant upheaval and sets the stage for an even bumpier 2017. Leading up to national elections in several major European economies—Germany, France, the Netherlands, and potentially Italy—voters and politicians alike are watching closely to see how Britain’s economy fares as Brexit plays out.
The average individual has personally felt few effects of the June 23 vote so far, so the real hazard with the coming elections is that the negative consequences of Brexit will not be realized until Britain actually leaves the European Union, which still seems a long way off. This could mean that the rising anti-globalization parties across the continent, to the extent they wish to pursue similar referenda to leave the EU, could use the post-Brexit illusion of stability to their advantage to win votes.
It is true that we did not see the drastic economic fallout that some of the more pessimistic analysts predicted leading up to Brexit. Growth has proven surprisingly resilient the last several months, and the effect of Brexit on British households’ perceptions of their job security, incomes, and spending has been quite limited. However, it was probably unrealistic to believe the referendum would have had an overnight impact, since the terms are yet to be determined.
As we know from geology, an aftershock is often stronger than the initial earthquake. There is a lot of uncertainty about specifically when and how Britain will exit the EU. It is therefore still too early to appraise the exact long-term costs, but the general belief is that Britain’s GDP and household incomes will decline as a result of higher barriers to trade, less immigration, and lower foreign investment and productivity. In the meantime, fears of inflation are mounting. Inflation in Britain is likely to hit 3 percent by the end of next year, which is enough to decrease living standards by lowering the real wages of workers.
If other countries also vote to leave the EU, that could cause problems in the United States as well. Right now, the dollar is appreciating because it’s seen as a safe-haven in a time of uncertainty, but a strong dollar could also hurt U.S. businesses that export to other countries. This is because U.S. products could become more expensive for others to buy, leading to lower profits for American companies.
For the rest of the EU to stay together and for the transatlantic economic relationship to prosper despite Brexit, economists and moderate politicians should not try to out-smart or out-rhetoric populists, but do need to do a better job of reaching their audiences in explaining the longer-term consequences of an exit that are not yet necessarily apparent with Brexit.
Katrina Knisely is a first-year graduate student in Georgetown University’s Master of Science in Foreign Service program. She is a participant in AICGS’ project “A German-American Dialogue of the Next Generation: Global Responsibility, Joint Engagement.”
This blog post is sponsored by the Transatlantik-Programm der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministeriums für Wirtschaft und Energie (BMWi).