There is no precedent for a country withdrawing from the EU so a high degree of uncertainty exists about how the separation might work. The vote does not force the UK out of the EU immediately. What Could Brexit Mean for the United States and the U.S.-UK Relationship? With the UK commonly regarded as the strongest U.S. partner in Europe and a partner that usually shares U.S. views, U.S. officials have conveyed concerns that a UK break from the EU would reduce U.S. influence in Europe, weaken the EU's position on free trade (because the UK generally acted as a leading voice for economic liberalism in EU debates about trade and the single market), and make the EU a less reliable partner on security and defense issues (because British participation is widely regarded as essential for efforts to develop more robust EU foreign and defense policies). NATO remains the preeminent transatlantic security institution, and the UK will remain a leading member of NATO. In particular, financial markets reacted negatively to the referendum on the UK exit from the EU. The British pound depreciated to its lowest level in more than 30 years; while the dollar, the yen, and other major currencies appreciated sharply, as indicated in Figure 2 . The BOE argued that a vote to leave the EU could
materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy; cause households to defer consumption and firms to delay investment, lowering labor demand and causing unemployment to rise; increase the risks for the global economy due to spillover effects through financial market and confidence channels; lower supply growth, reflecting slower capital accumulation and the need to reallocate resources; depreciate the international exchange rate of the British pound, perhaps sharply; and lead to a materially lower path for growth and a notably higher path for inflation through the combination of influences on demand, supply and the exchange rate. These scenarios suggest that Brexit could affect UK GDP in the range of -1.3% and -5.5% per year in the short run (2020) and between -1.2% and -7.5% per year over the long run (2030). Loss of income per UK household is estimated at between -£600 (about $900) and -£5,200 (about $7,500) per year. A study by the London School of Economics (LSE) and the Center for Economic Performance (CEP), which considered the fewest number of factors in their analysis, had the lowest negative assessment in the short run, ranging from -1.3% per year to -2.6% per year, and one of the most negative estimates of the impact of Brexit on the UK economy over the long run, -6.3% to -8.5%. Central banks have been muted in their response to Brexit. Brexit also raises issues about the status of ongoing EU trade negotiations, including current U.S.-EU negotiations to conclude a Transatlantic Trade and Investment Partnership (T-TIP) free trade agreement (FTA). An appreciation in the value of safe-haven currencies, especially the dollar, can affect a broad range of economic activities. Some analysts expect the uncertainties created by Brexit to have a negative impact on global markets beyond the immediate turmoil. A protracted political leadership struggle could add to uncertainties over the UK's ability to take the necessary economic and financial measures to restore stability. The simultaneous depreciation of the pound and appreciation of the dollar could add to economic pressures on both developed and emerging market economies. In addition, capital flight from emerging economies to safe-haven assets could further add to the economic challenges facing developed and emerging economies and potentially add negatively to global growth prospects. The Brexit vote also confronts Congress with questions about the future of U.S.-EU and U.S.-UK trade relations, including prospects for the potential T-TIP agreement and any other trade agreements the United States may pursue with the UK going forward.
This report provides an analysis of the possible economic implications for the United States and the global economy of an exit from the European Union (EU) by the United Kingdom (UK), commonly referred to as Brexit. It offers background information on possible implications of the vote to leave the EU, an overview of U.S.-UK trade and investment relations, and various estimates of Brexit's financial implications for the U.S. and global economies. For Members of Congress, economic fallout from Brexit could increase the risks of a slower rate of economic growth and potentially complicate economic policymaking. Brexit also could have implications for congressional oversight of U.S. trade policy, including ongoing U.S.-EU negotiations on a Transatlantic Trade and Investment Partnership (T-TIP) free trade agreement (FTA). Since the Brexit vote, resolutions have been introduced in the House and Senate supporting the negotiation of a U.S.-UK FTA. (See S. 3123 (Lee), S.Res. 520 (Rubio), H.Res. 817 (Dent), and concurrent resolutions H.Con.Res. 146 (Brady) and S.Con.Res. 47 (Hatch).)
Factors that could shape the possible impact of a UK exit from the EU include the following.
There is no precedent for a country withdrawing from the EU, so there is a high degree of uncertainty about how a separation might work. The vote does not force the UK out of the EU immediately. Negotiating the UK's withdrawal and future relationship with the EU could take years to complete. NATO remains the preeminent transatlantic security institution, and the UK will remain a leading member of NATO, but Brexit may affect Euro-Atlantic cooperation and unity on a range of security issues. Various studies project that Brexit would lower UK GDP between -1.3% and -5.5% per year in the short run (2020) and between -1.2% and -7.5% per year over the long run (2030). Estimates of the yearly income loss per UK household are at between -£600 (about $900) and -£5,200 (about $7,500). Immediately following the Brexit vote, global financial markets reacted sharply: the pound depreciated by more than 10% at one point, reaching its lowest level in more than 30 years; the dollar appreciated against major currencies; and the yen and Swiss franc appreciated. Other currencies were mixed as some emerging market currencies depreciated; most major stock indexes and government bond yields were lower. Global financial markets recovered substantially by the end of June, although the pound and stocks of British firms remained lower.
According to some analysts, uncertainties created by Brexit may have a long-term negative impact on global markets, given the tepid pace of the current global economic recovery. A protracted political leadership struggle in the UK also could add to uncertainties over the UK's ability to implement the economic measures that may be necessary to restore stability. To date, various central banks have taken steps to calm financial markets. The depreciation in the pound and simultaneous appreciation in the value of the dollar and other currencies considered to be safe havens could add to the challenges facing some central banks in formulating monetary policy over the near term. Capital flight from emerging economies to safe-haven assets could further add to the economic challenges facing developed and emerging economies and potentially harm global growth prospects.