Bank of Estonia: UK decision likely won’t lead to economic decline (1)
While the decision of the United Kingdom to leave the European Union increased uncertainty, it probably would not result in major economic decline, the Bank of Estonia stated on Friday.
The Bank of Estonia’s vice president, Ülo Kaasik, said to BNS on Friday that though the UK’s decision to leave the EU was regrettable, there wouldn’t be any immediate changes, just a lot of uncertainty for businesses.
Companies now couldn’t be sure how to plan ahead, he said. “On one hand there’s a lot of uncertainty on the financial markets, on the other hand there’s a significant amount of uncertainty when it comes to investment decisions of businesses, since it is not clear what the economic relations between the United Kingdom and the European Union will be like,” Kaasik added.
Where in the short term the UK’s leaving the union may bring with it a decline of the markets, it shouldn’t lead to an economic decline, Kaasik said. “But of course it is difficult to predict what the developments will be.”
Problems could be expected in the longer term, Kaasik said. Integrated markets had stronger growth potential and were able to function more effectively, but separated, markets definitely had a weaker growth potential, he added.
Kaasik said there would likely be no immediate setbacks for the real economy, but if uncertainty was to remain very high for a longer period of time, it might have a short-term negative effect and cut into economic growth in the short term.
The UK's leaving should not have a negative effect on the financial systems of the EU. In addition, the central banks were keeping an eye on the situation and were ready to step in and provide liquidity should the need arise, Kaasik said. The UK meanwhile was in a more difficult position, especially considering the size of its financial sector compared to the rest of the economy.
Asked if the City of London could lose its status as the financial center of Europe, Kaasik said that whether or not the financial center would move elsewhere depended on the agreements to be negotiated between the EU and the UK.
“It is clear that should the relationship become very distant, it may prove difficult to provide some services to the European market from London. Some services may not be moving to Europe at all. There are many financial centers in the world.”
Estonia wouldn't be affected much as a direct result of the referendum. The indirect impact via trading partners may be more significant, Kaasik said. At the same time, various surveys indicated that the negative economic impact on the UK itself would be bigger than that on the EU, he added.