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Brexit is a body blow to the political prestige of the European Union, and is already spurring euro-skeptics in the Netherlands, France, Italy, and potentially other member states to advocate for their countries to follow the U.K. in leaving the E.U. However, its economic effects are likely to be less severe, and will play out slowly given the presumed timeline of the U.K.’s withdrawal. After Brexit the Eurozone will likely still grow in the second half of 2016, but slower than our pre-Brexit forecast for 1.5 percent real GDP growth for the full year of 2016.
In a surprise outcome, 52 percent of the British electorate voted to leave the European Union in a referendum. Opinion polls prior to the referendum showed a narrow majority favoring remaining in the E.U. The vote gives a mandate to their government to initiate negotiations to withdraw from the European Union, but withdrawal will likely not occur until 2018 at the earliest. The U.K.’s Prime Minister David Cameron, who opposed Brexit, announced his plan to turn over the government’s leadership to a new Prime Minister by October, and that he would not formally initiate the U.K.’s withdrawal before then.
Under Article 50 of the Lisbon Treaty governing the European Union, when a member state notifies the E.U. of its intention to withdraw, it initiates a two-year negotiation of the state’s post E.U. economic relations during which status quo policies governing trade and migration continue to apply (the U.K. and E.U. would have the option to extend these negotiations if two years are not enough). The terms of negotiation would cover whether nationals from other E.U. member states residing in the U.K. could stay, whether British nationals living in other E.U. states could keep their foreign residency, and the terms on which British companies could export goods and services to customers in the E.U. (and vice versa). Given London’s role as the financial capital of Europe, the outcome of these negotiations would have profound implications for the U.K.’s financial and business services industries.
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