How will ‘Brexit’ Impact the Bay Area?

Institute Senior Director Sean Randolph offers initial analysis of the historic vote in Britain to exit the European Union and its impact on the Bay Area economically.

The full implications of Britain’s decision to leave the European Union remain uncertain, but some are foreseeable. In the short term equity markets – particularly financials – will be hit, with new uncertainty in global financial markets. Economists predict that Britain’s departure will cloud the prospects for its economy, leading to a recession. If this occurs Bay Area companies may be impacted, since Britain is one of the region’s leading trade and investment partners. A significant devaluation of the pound and strengthening of the dollar could negatively impact exports in particular.

The long term implications are less predictable, but could be large. London – where a number of Bay Area banks base their European operations – will see its status as a global financial center diminished, as institutions doing business in Europe shift their operations. Other US companies with European headquarters in London will also shift resources to the continent. This could benefit other European centers, such as Germany. Companies located in the UK will find it more difficult to attract European and other talent, with significant implications not only for large companies but for startups as well.

By raising a border between Britain and Europe, the regulatory cost and complexity for Bay Area companies conducting business in Europe will increase, as the efficiency of what is now a single market in Europe for trade in goods is reduced. Business and leisure travelers between Europe and the UK will likely face new visa requirements.

Within the EU, Britain has been a voice for market policies similar to those in the US, but will no longer be at the table. This could impact future policy direction in the EU in ways that are not helpful to Bay Area technology and other global companies.

At the political level, anti-EU and separatist movements across Europe will be encouraged. Britain’s exit will encourage sub-national entities seeking independence from their countries to make a break. Scotland, where an independence referendum only narrowly failed in 2014, may move first, and Catalonia in Spain may not be far behind. The creation of a border between Northern Ireland (which is part of the UK) and the Republic of Ireland raises further issues.

In the end, Britain’s departure points toward a less integrated, more divided Europe, and increased business costs. The growing strength of populist movements in both Europe and the US will add to the growing political pushback against trade agreements such as the Trans-Pacific Partnership with Asia and the Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe. Many of the issues that Brexit raises will be worked out in Britain’s negotiations with the EU, and Britain will remain an important long term partner for the United States. What is also clear, however, is that in the post-Brexit environment the economic globalization on which much of our recent prosperity has been based is open to question.

(Image from Flickr used Davide D’Amico)