The risks behind Brexit

This Thursday, UK has to decide whether the country will leave the EU or not. For the past several months, the discussion of pros and cons around this action is the most popular topic across the world. Both Japan and U.S. chose not to change the interest rate partly based on the concern from Brexit. Moreover, the capital flow into German’s bond market just got named as a simple bubble where the price went up dramatically. The choice from UK this week is important which we have to measure the risks behind this choice.

As it mentioned, almost 50% of the foreign trade in UK is done with the EU under the free trade pattern. Leaving EU will shift this well developed and maintained expert business. More than that, the UK serves the center of financial service in EU that is the largest economy entity. Dumping this position will hardly hurt UK’s economy since 8.1% of jobs in the U.K. are in manufacturing, mining and quarrying compared with 83.1% service jobs. In 2014, U.K. exports of services reached £220 billion (about $311 billion today), or 43% of all British exports, the largest share for any major economy. The U.K. sold some £20 billion of financial services alone to the 27 other EU countries in 2014, its second-largest export to the bloc after oil and oil-products. Overall, the U.K. posted a £17 billion surplus on its EU services trade.

A new study by Deloitte LLP concludes London has 1.71 million high-skill, knowledge-based jobs, compared with 1.16 million in New York and 630,000 in its nearest European competitor, Paris. Finance and insurance alone account for almost a fifth of all employment in London, according to another report published this week by the mayor’s office. If UK leaves the EU, the impact on trade in services is thus a question of huge importance to the country and its capital. A new arrangement for market access could be negotiated, but any assessments of its likely scope are guesses.

The leaving of UK will create the biggest hurdle for the country to continue serve as the financial center of Europe. This lost position for UK could probably force the related labor market into a tighten one. Cutting jobs and lowering salary will not do any good thing to UK but leave the complaints from everywhere. Both entity have to restructure their finance industries and related sectors. This process will be so time consuming and annoyed.

Even though the poll is not an official decision and action, the consequences would be hugely impact the global market. If Brexit comes true, the pound will crash and more capital driven from UK will seek safer place. USD will appreciate and bonds from German are in high demand. 

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