TRU economics prof weighs in on EU Referendum results

On June 23, the United Kingdom voted to leave the European Union.

While a majority of England and Wales voted to leave the EU, only 38% of Scotland and 44% of Northern Ireland voted to leave. In Scotland’s case, there’s already talk of another separation referendum to gain independence of its own.

The results have created a time of uncertainty. UK Prime Minister David Cameron has resigned and will leave it up to his successor to invoke Article 50 of the Lisbon Treaty, the official means to a British exit from the EU.

As a result of this uncertainty, the British Pound took a nosedive – dropping from $1.50 U.S. dollars to $1.31 in the days that followed. The Canadian dollar dropped as well, but only slightly from $0.78 U.S. down to $0.76. This marks a 31-year low for the pound.

“In uncertain times, people look for safe assets, and in this case the U.S. dollar was safe, so it went up and the gold price went up,” said Hasnat Dewan, chair of the Thompson Rivers University economics department.

“Exports and imports and the tourism industry will be affected based on the change in the Canadian dollar and based on the change in other currencies, but I don’t expect a big change in the Canadian dollar against the U.S. dollar.”

The drop in currency value brings to mind the 2008 financial crisis, which brought similar dips in currency around the world, but Dewan says that the two shouldn’t really be compared.

“In 2008, that problem started from the financial markets. This time, it’s more political than financial. Yes, we saw an immediate effect on the financial markets, but that will settle down and whether or not we see any big effect on unemployment, inflation and growth rates, that depends on how world leaders and the central banks deal with it,” he said.

If the British exit goes ahead in the coming years, the future of the UK’s economy may depend on how and what it manages to negotiate in terms of trade agreements.

“If they keep the same terms that the EU had, they won’t see any big impact. For example, Norway and Switzerland, they’re not in the EU, but they have free trade relationships with other EU countries. Whether Britain will follow that path or not, we’ve yet to see, but the problem with following that path is that they’ll have to allow foreign workers to go there and work, which they don’t want to do – that was a main reason why the Leave campaign won.”

Dewan said that the problems perceived by the Leave campaigners were overstated, however, and that there was no evidence that increased immigration caused unemployment and the wage rate to go down.

Back here in Canada, Dewan says it’s unlikely B.C. will feel an economic hit, since only three per cent of Canada’s trade with the UK is through the province. Ontario, on the other hand, accounts for 83 per cent of Canada’s trade with the UK, so they may feel the effects of uncertainty.

But overall, Dewan is optimistic that Canada and the rest of the world will weather the storm.

“We are more prepared now after seeing the 2008 financial crisis. The central banks around the world and the governments are more prepared. The U.S. central bank and the Bank of England have earmarked $250 billion pounds to handle any potential crisis,” he said.

“We’ll survive. There’s nothing to be too worried about.”