June 24th 2016 – Brexit

They did it. With a larger margin then the polls were suggesting Britain’s voters decided to end their membership in the EU. Boris Johnson will have the task to trigger article 50 of the Treaty of Lisbon that sets the general frame for negotiations about the details of the exit. Both sides will have two years to find a mode of divorce that minimizes costs on both sides. The immediate days after the referendum turned into a golden moment for economists who in a rare consensus argued that even short-term the economic exit-costs for the UK are pretty high. The tumbling Pound Sterling made imports quickly more expensive, and added pain to the already painful trade deficit. The extra money households and companies have to pay for – short-term, at least – non-substitutuable imports take away funds for other purchases, and drag the economy on a lower path. The rise of the inflation rate narrows monetary policy options of the Bank of England to support an ailing economy, increasing chances for a stagflationary situation. Given the fact that the UK is long-time dependent from the steady inflow of foreign funds, the spike in political-economic uncertainty is reducing capital inflows and makes the financing of its external deficit even more difficult. In brief, the new Tory government is dealing with a messy economic situation which is not helped by the the attitude of the European Commission and a critical number of member states who are not interested to reward the UK with favourable terms in the article 50-negotiations. The idea which was floated by the Leave Camp that the UK could step-by-step get rid of the EU-rules they don’t like a bit and still continue to keep the goodies, did not work out at all. In that situation more and more international companies openly look for alternatives, mainly in Ireland but also on the Continent where the French government eagerly roll out the red carpet to get the best catch.

This opening hints to more black clouds on the horizon. Rather then entering a new golden era of self-determination and economic prosperity, the new government needs to roll out austerity measures that handele the fallout of Brexit.