Brexit has returned to the headlines lately, as Britain has started to negotiate the terms of its exit with its European counterparts. On the one hand, Britain is trying to maintain as many privileges as possible. On the other hand, Europeans are trying to punish the "black sheep" in order to set the example for the other EU members, which may consider heading for the exits in the near future. While the potential consequences of Brexit on the UK have been widely analyzed, I have not seen any analysis on its impact on the EU countries. This impact is likely to be greater, particularly on the small countries, than the impact on the UK.
First of all, while some pundits predict that Brexit will be catastrophic for the UK, the truth is that the UK has very little to be afraid of. The UK has always had its own currency, had a great economy before it joined the EU and will most likely maintain its great shape even after its separation. Even better, it will get rid of the exhaustive bureaucracy of EU and will be able to restore a more competitive and flexible business environment for its corporations. I have analyzed the benefits of Brexit for UK in a previous article.
While some sectors in the UK will be adversely affected by Brexit, others will markedly benefit and the overall effect on the whole economy is likely to be limited. As most people become very emotional when they analyze the impact of Brexit, it is much more reliable to take a look at the UK stock market, which has rallied 10% after the referendum. This certainly bodes well for the UK. Nevertheless, while the UK is likely to experience a positive or neutral overall effect from Brexit, some European countries are likely to experience a much stronger effect due to their size.
Due to the pronounced weakening of the British pound, which has depreciated by about 15% since Brexit, UK citizens will find it increasingly expensive to travel to foreign countries. Therefore, they are likely to limit the amounts they spend for traveling abroad. While this may not seem as a major effect, it may significantly hurt some European countries, particularly the small ones, such as Greece, which largely relies on its tourism in order to pay for its expenses.
To be sure, tourism accounts for about 20% of the Greek GDP. In addition, UK visitors in Greece increased 14% last year, from 2.1 M to 2.4 M, and accounted for 15% of the total revenues of the country from tourism. Consequently, as the weak pound is likely to reduce the number of UK visitors in Greece, the latter is likely to experience a meaningful hit in its revenues. The same impact will be felt in other tourist destinations, such as Italy and Spain, though it will be somewhat less severe, as these are larger countries, less dependent on tourism.
On the other hand, the UK concentrates hundreds of thousands of students from all the EU countries. This has been a reliable incoming cash flow stream for the country, as foreign students spend enormous amounts, not only on tuition, but also on their living expenses. Actually many students borrow extreme amounts in order to pay for their studying years in the UK.
However, the tuition fees are likely to greatly increase in the aftermath of Brexit, even for European students. This is likely to significantly reduce the number of foreign students that choose the UK for their studies. While the tuition fees have not increased yet, the current expectations have already scared many future students away from the UK, as they are afraid their tuition fees will skyrocket in the middle of their studies, in about two years, when Brexit materializes.
The UK has been a major trading counterpart for most EU countries. More specifically, thanks to its remarkably strong currency in all the recent years, UK has been a major importer of goods from most EU countries. This is clearly depicted in the chart below, which shows that the imports of UK have exceeded its exports every single year in the last decade.
However, the plunge of the British pound in the aftermath of the referendum has rendered foreign goods much more expensive to the UK citizens than they used to be. Therefore, Brexit is likely to limit the amount of goods that are imported in the UK while it will also increase the UK exports, as they are now cheaper to the other countries than they used to be. All in all, the EU countries will have a negative impact in their trading surplus with the UK, as their imports will increase and their exports will decrease.
Finally, the EU countries will miss the huge contribution of the UK to the EU budget every year. More specifically, the UK contributed 16.6 B euros in the total budget of 142 B euros of the EU in 2015. Thus the UK made up 12% of the EU budget last year. When Brexit materializes, this significant contribution will be lost and hence the EU countries will have to raise their own contributions accordingly.
To sum up, while most analysts have been discussing the effect of Brexit on the UK, they should realize that the effect will probably be much greater on some EU countries, particularly the smallest and most vulnerable ones. Thanks to its weakening currency, the UK will enjoy a significant improvement in its trading balance, as its imports will decrease and its exports will decrease, while its European counterparts will experience the opposite. Moreover, the latter will miss the great contribution of the UK to the EU budget and thus they will miss a meaningful external boost in their economies. Of course this does not mean that the EU will suffer as a result of Brexit. It only means that some EU countries, particularly the smallest and most vulnerable ones, may incur a significant drag in their economies due to Brexit.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.