Global Economic & Market Outlook (5 July 2016)
Brexit: potential implications for Greece, Cyprus and the CESEE region
The Brexit vote is expected to have a profound impact on the UK, the EU and the rest of the world both at the economic and the political level. Some of the main transmission channels are expected to include trade, investment, banking and finance, labor markets and public finances. Yet, the exact size of output losses that other economies may encounter will depend on their individual linkages with the UK, the form of future UK-EU trade arrangements and domestic authorities’ response to adverse spillover effects. According to the IMF , among larger EU countries, Ireland, the Netherlands and Belgium are expected to be most affected given their close trade, labor and financial ties with the UK.
In more detail, under a limited scenario in which post-Brexit uncertainty dissipates relatively quickly and the UK negotiates with the EU a European Economic Area (EEA) – type of arrangement, the IMF staff project respective cumulative GDP losses of 0.2% and 0.0% for the EU-exUK and the rest of the world by 2018. Under their adverse scenario, which assumes heightened uncertainty and new UK-EU trade arrangements defaulting to WTO rules, the Fund estimates cumulative GDP losses of 0.5% and 0.2% for the EU-exUK and the rest of the world by 2019. Along these lines, ECB President Mario Draghi told EU leaders at the June 28th EU Summit that Brexit is estimated to have a negative cumulative impact between 0.3% and 0.5% on euro area GDP growth over the next three years, compared to the Central Bank’s earlier projections. Notwithstanding, the political consequences may prove even more overwhelming.
The risk of “political contagion” in the euro area prevails as Eurosceptic parties may become more vocal using the Brexit vote as an electoral argument ahead of the 2017 elections in the Netherlands (March), France (May) and Germany (September). Undoubtedly, EU leaders’ agreement at the June 27/28 EU Summit to revive the EU project as well as reassurances by the G4 major Central Banks that they stand ready to safeguard financial system stability, constitute steps in the right direction. Yet, market uncertainty is unlikely to fade significantly any time soon unless there is more clarity as regards the timeline of UK’s withdrawal from the EU and the future principles that will govern its trade relationships with the EU. This report, which constitutes a supplement to our June 24th note on the Brexit vote , takes a closer look at its potential ramifications for Greece, Cyprus and a number of developing economies in the CESEE region.
Viewers can log herebelow and read the full report: GLOBAL FOCUS NOTE_5 July 2016