How Brexit May Impact Bay Area Economically

(Bay Area Council Economic Institute Senior Director Sean Randolph offers initial analysis of the historic vote in Britain to exit the European Union and its impact on the Bay Area economically)

The full implications of Britain’s decision to leave the European Union are unknown, but some are foreseeable.  In the short term equity markets – particularly financials – will be hit, with uncertainty inserted into global financial markets. In the longer term London – where a number of Bay Area banks base their European operations – will see its status as a global financial center diminished, as institutions needing to do business in Europe shift their operations. This could benefit other European centers, such as Germany.

Economists predict that Britain’s departure will cloud the prospects for its economy, leading to a recession. Since Britain is one of the Bay Area’s leading trade and investment partners, Bay Area companies could be impacted. A significant devaluation of the pound and strengthening of the dollar could negatively impact US exports in particular. By raising a border between Britain and Europe, the regulatory cost and complexity for Bay Area companies conducting business on a European basis will increase, as the efficiency of what is now a single market in Europe for trade in goods is reduced. Business and leisure travelers between Europe and the UK may also face new visa requirements.

Within the EU, Britain has been a voice for market policies similar to those in the US, but will no longer be at the table.  This could impact Europe’s proposed Digital Single Market and policies on data privacy and cross-border data movement that are central to the interests of Bay Area technology companies.

The long term implications are less predictable, but could be large. Britain’s exit from the EU will encourage other political entities seeking independence from their countries to make a break. Scotland, where an independence referendum only narrowly failed last year, may move first, and Catalonia in Spain may not be far behind.

In the end, Britain’s departure points toward a less integrated, more divided Europe, and increased business costs. As populist movements gather strength in Europe and the US, it will add to the mounting political pushback against international trade agreements such as the Trans-Pacific Partnership with Asia and the Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe. Many of the issues that Brexit raises will be worked out in Britain’s coming negotiations with the EU. What is clear is that in the new post-Brexit environment, the economic globalization on which much of the Bay Area’s recent prosperity has been based is open to question.