Introduction
The Centre for Economic Performance (2016) points out that since the United Kingdom referendum to withdraw from the European Union predominantly referred to as 'Brexit', standard measures point toward a substantial rise in uncertainty. Bloom (2009) describes uncertainty as the incapability of economic agents, for instance, investors, politicians or consumers to develop clear expectations as regards forthcoming economic developments. Accordingly, in the context of the United Kingdom's vote to leave the EU, there is for example, considerable uncertainty concerning the future arrangement of trade relationships after Brexit has been effected. As such, Schwab (2016) states that the financial consequences of the UK's 'leave 'vote are being experienced already. Additionally, there are high likelihoods of these effects increasing once Article 50 of the Lisbon Treaty is implemented. The Lisbon Treaty handles the withdrawal of a member state from the EU (Schwab, 2016). Also, the Bank of England (2016) notes that as a result of Brexit, there is a material slump in the prices of certain euro-area risky assets, for instance, bank equities, where the fall in prices is aggravated by concerns regarding the profitability of some banks in the euro region. Besides, slower growth in the UK, as viewed through the Bank of England (2016), could also weigh on export growth in the euro region to some extent. Accordingly, this paper analyses the uncertainty, as well as implications of Brexit to the United Kingdom and the European Union.
The Uncertainty and Implications of Brexit to the UK and EU
The European Commission (2016) notes that the results of the referendum to leave the EU which took place on the twenty-third of June 2016 have altered the settings for the way ahead. For instance, the vote to withdraw from the EU has caused a considerable increase in uncertainty, sudden exchange rate fluctuations and financial market instability. Furthermore, Breinlich et al. (2016) assert that the developments instigated by Brexit, including the rising uncertainty brought about by what is likely to be a prolonged period of withdrawal from the EU negotiations have the capacity to damage the recovery in the European Union. Even so, the European Commission (2016) suggests that while uncertainty is anticipated to fade away in the end, future changes in the political, as well as economic relationships between the United Kingdom and EU Member States might have an enduring effect on the medium to long-lasting economic outlook. At the present moment, the economic outlook, according to Fichtner et al. (2016) and the European Commission (2016), is chiefly influenced by the uncertainty as a result of the United Kingdom's vote of withdrawal from the EU. Hence, without clear information regarding the circumstances after the implementation of Brexit, for instance, policy responses, the mobility of products, labour and services, as well as trade patterns, it is hard to outline the 'new equilibrium'; and as such, it is difficult to specify the adjustment path. Therefore, according to the European Commission (2016), this indicates that the uncertainty shock might possibly develop quite differently in terms of duration and dimension.
Also, as noted by the Bank of England (2016), the sterling ERI (Exchange Rate Index) has slumped by nine per cent since the 'leave' vote on the twenty-third of June 2016 as shown in figure 1 below; and by fifteen per cent since its peak in November 2015, having declined against both the US dollar and the euro. As such, the Bank of England (2016) reasons that in part, this could point to concerns that, depending on the results of any upcoming negotiations, withdrawing from the EU has the possibilities of reducing the competitiveness of the UK. Nevertheless, there remains considerable uncertainty regarding the type of the UK's forthcoming trading engagements, as well as the implications for competitiveness. As viewed through Walduck (2016) and the Bank of England (2016), this has the probability of increasing the risk premium needed by investors to hold sterling-denominated assets.
Figure 1: The Sharp Fall of the Sterling Exchange Rate after the Referendum
Source: Adapted from Bank of England (2016)
Following Brexit, the exchange rate has sharply dropped as shown in figure 1 above, and as such, the outlook for growth in the short-to-medium term has deteriorated significantly. Accordingly, the plunge in the UK's sterling pound has high chances of pushing up CPI (Consumer Price Index) inflation in the near term (Bank of England, 2016; Acs, Szerb & Autio, 2016). The World Economic Forum (2016) explains that in the actual economy, even thou