Europe’s economy and the Brexit effect

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  • 04 mins 09 secs
How is the European Union’s economy weathering the uncertainty over Brexit? London-based economist Robert Lind identifies the issues both European and British companies are facing and touches on the political undercurrents that are complicating a swift resolution.

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              Capital Group video transcript: “Europe’s economy and the Brexit effect”


Mike Utley: We have Brexit, which has been one of the longest running political soap operas of our time. New headlines every day. The story seems to be changing all the time. But big picture, whether the U.K. stays in the European Union or leaves, how much is that cloud hanging over the broader European economic outlook? 

Robert Lind: I think it's a fairly significant problem for the European economy. I think it's pretty evident that British companies have stopped investing because there is deep uncertainty about whether they should be investing in the U.K. or whether they should be investing elsewhere in Europe. And obviously, as British companies have cut back their investment spending, companies in the rest of Europe have started to think about where to locate their businesses. And that's caused a lot of concern. 

And obviously, there's the direct impact we were just talking about, which is that British consumers are buying fewer German cars — partly related to the issues we were talking about, but also partly related to Brexit uncertainties. People don't want to buy new cars given that they don't know what's happening with Brexit. 

So I think that kind of uncertainty is unhelpful, and I think over the course of the next few months, hopefully we should see a resolution of that uncertainty. And that should help to lift some of the demand that has been suppressed by this uncertainty. We should start to see some pent-up demand coming back, and that might give economies a lift around Europe.

Mike Utley: There are many, many people who don't want the U.K. to leave the European Union. Is there a chance that Brexit doesn't happen?

Robert Lind: I think the challenge with Brexit is that it exposes a tension that has been part of the U.K.’s relationship with EU for the last 70 years, which is that there is a deep skepticism about closer political relationships between London and Brussels and Paris and Berlin. So there is a political skepticism coupled with an obvious economic pragmatism that recognizes that there are very strong links between companies in Britain and companies in the EU. Companies tend to trade very closely with countries that are close by, and that's what we see.

Mike Utley: Right.

Robert Lind: And so you can leave the EU in political terms, but it's very hard to leave the EU in economic terms. And that tension is what is at the heart of the difficulties of engineering a Brexit that satisfies the people who want to leave, as well as the people who want to stay in the EU.

Mike Utley: Right.

Robert Lind: I don't see any easy resolution of that. I think it could take many years before we get to a satisfactory resolution. It's likely to mean that we see continuing political division in the U.K. And it's also likely to trigger, potentially, quite a significant economic rebalancing away from bits of the economy that have done well over the last 20 or 30 years. We need to see the U.K. economy adapt to a model that is very different from what we've had over the last 30 or 40 years within the EU.

Mike Utley: So just to put you on the spot, does Brexit happen at some point, or do you think it's possible that maybe it doesn't?

Robert Lind: My base case would be that we will, for political purposes, leave. But for practical economic purposes, we will still be in a very close economic relationship with the EU. 

Mike Utley: Right.

Robert Lind: I think that is the compromise that I would see. So we'll lose our political representation in the EU institutions.

Mike Utley: Right.

Robert Lind: We won't take part in European parliamentary elections. We won't be part of the European Commission. We will no longer be formally a member of the EU. But for practical reasons, as I say, trade between U.K. companies and EU companies is still likely to remain at a very high level, simply because it is already at a very high level. Trade with the EU is roughly about 50% of our overall trade. I don't see that changing rapidly.

Mike Utley: Right.

Robert Lind: And so therefore, from an economic perspective, we will still have to remain aligned fairly closely to the EU single market and customs union.

 

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