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Brexit: Economics Professor Farhad Rassekh Explains What it Means for the World Economy

Posted 06/28/2016
Posted by Rose Brodeur

Economics Professor Farhad Rassekh

Economics Professor Farhad Rassekh

Britain’s vote to leave the European Union continues impacting U.S. and global financial markets in the short run. We asked Farhad Rassekh, professor of economics and associate dean in the University's Barney School of Business, what "Brexit" means for the world’s economy moving forward.

As both a political and economic partnership involving 28 and now, soon to be 27, European member countries, the European Union (EU) has arguably grown to become a “single market”, sometimes operating more as one country. How do you think Brexit will affect Great Britain and the European Union?

Brexit may have more political ramifications than economic. In fact, the economic impact of it after a year or two may not be significant. In the short term, people are either reacting or overreacting to the vote. The stock market’s initial reaction last Friday was volatile; however, markets are improving. The future depends on how politicians and policymakers in Great Britain will embrace the vote of the majority and formulate a sound economic plan for their country going forward. In some ways, that can’t be predicted because there will be a different cast of politicians since Great Britain’s Prime Minister David Cameron announced his resignation.

Additionally, Great Britain has one of the strongest democratic parliamentary systems in the world, making a long-term economic crisis less likely. There may be some corrections in the form of a mild economic recession, but it’s difficult to predict. The European Union (EU) seems to have more of a struggle in store because they have lost their second largest economy. London is the largest financial sector in the world, providing financial services across all of Europe. There is no reason to believe this shouldn’t continue, but some of it does depend on the reaction of the EU leaders to this vote.

Do you see trade and immigration as issues at the forefront of the exit vote?

If we are to believe some headlines, the issue of immigration, which seems to have become a problem for all of Europe, especially in the last few months, was a major driver for the Brexit. Many people believe it was because they could not control borders, but there are other arguments. Some have pointed out, accurately, that many immigrants coming into Britain are from outside the European Union and not from other European countries. And many who go into England move on and go into other countries because once you are in the EU you can move freely between countries.

Trade was also an important factor because outside of London, which provides financial services, other areas in England have traditionally been reliant on manufacturing, which has declined. In fact, in the U.S., both political parties focus on declining manufacturing jobs. This same phenomenon is happening in Europe.

Much of the decline in manufacturing jobs is due to advances in technology. Technology is, in some cases, replacing the work human beings do. Technology has the characteristic of being almost a public good. It can go anywhere. It goes to places where labor is cheaper. Great Britain and the U.S. or any other country may be able to control its borders and the flow of immigration but technology can go anywhere in the world. It is a force that cannot be resisted.

Some experts suggest the exit will trigger a domino affect and prompt other countries that might be disenchanted by its membership in the EU to seek to sever ties. How likely do you think it is that other countries will soon follow?

It is possible a few countries might consider leaving the EU. Some have been asking what the EU has done for them, and some believe the answer is nothing. Norway and Switzerland are not members of the EU and they are doing just as well and in some respects better. Not because they are not members, but the fact remains you don’t have to be part of the EU to have a prosperous economy and have more control over fiscal policy, monetary policy, and taxation and immigration regulations.

My view is that the EU can be beneficial; however, there may be flaws. I think EU bureaucrats may have posed too many regulations and restrictions and didn’t realize the unintended consequences of what they were doing. Nonetheless being a member of any union and especially one as powerful and advanced as the EU has advantages. In the end, Brexit was a wake up call for policymakers in the EU to temper their power.

It is said that it will likely take up to two years for the UK to make this transition. As one of our most important trading partners, what impact, if any, do you see the UK’s exit having on the U.S. economy in the short and long run?

I think this is an opportunity for the U.S. to reach out to Great Britain, who has one of the largest economies in the world. Historically and traditionally we have had great ties and this could be an opening for the U.S. to establish free trade between the two countries. We already have tremendous economic ties with respect to foreign direct investments, which is when a country establishes a business in another country. The largest foreign direct investments made by the U.S. are in Great Britain, and similarly, we are the most popular investment destination for Great Britain, so there is great potential for mutual growth.
Economics Professor Farhad Rassekh

Economics Professor Farhad Rassekh