Policy Briefs

L. Codogno – Beyond Pride and Prejudice: The impact of Brexit on the rest of the EU

It is not obvious if the EU would lose or gain from Brexit. In theory, judging from trade and investment flows, Brexit should have less of a negative impact on the rest of EU than the UK. Some service sector businesses could potentially be relocated to the EU, and the area could divert foreign direct investment (FDI) from the UK.
However, financial market volatility, uncertainty, and loss of confidence in the EU project could pose an immediate and severe risk. There is the threat of political ramifications and domino effects, with the potential to have a huge negative impact on the rest of the EU, and especially the Euro Area.
Beyond pride and prejudice, which indeed plays a big part in the debate on the UK referendum, it is not clear whether the rest of the EU would benefit in the long run, whereas the risks of immediate potential losses are high. The EU and the Euro Area may remain stuck in the mud, still searching for their soul, and the UK referendum may expose all their weaknesses.

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