Finance and Economics Study Shows Brexit May Lower Europe’s GDP

April 01, 2017

Britain’s exit from the European Union may reduce GDP growth for the entire region according to a new study from professors from the School’s finance and economics departments. The dire prediction is based on research published in the January 2017 issue of the Journal of Monetary Economics.

The study looked at the impact of reduced cross-border lending in the wake of the 2008 financial crisis. It found that while this change in lending pattern may have been intended by policymakers to reduce systemic risk, it also resulted in a loss of $90 billion Euro (USD 97 billion) for the continental European economies.

Researchers looked at data across 15 economies in the European Union to determine what GDP would have been in the years after the financial crisis if cross-border lending had been maintained at the level it was before the crisis. It found that the reduction in access to capital for firms in the European countries resulted in 0.54 percent loss in output.

“Our finding should be a red flag for the European Union and the U.K., showing that the Brexit talks should ensure that the difficulty of cross-border financing does not increase because of political changes,” said researcher Indraneel Chakraborty (pictured above), assistant professor of finance at the School. “If there is pullback in cross-border lending between U.K. and the European Union, then the countries will face slower economic growth in the future,” added Chakraborty, who conducted the research with Rong Hai, an assistant professor of economics at the School, along with colleagues from the University of Oslo and Ecole Polytechnique Fédérale de Lausanne.

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