by Simeon Djankov (PIIE)
In March 2017 the UK government will formally begin the process of ending its membership in the European Union. According to estimates presented in this Policy Brief, the direct negative effect of Brexit on the financial sector in the City of London will be a 12 to 18 percent loss of revenue and a 7 to 8 percent drop in employment, clearly significant effects. The UK government may revisit some of its financial regulation in an effort to bring in more investment. Djankov warns that such a policy move may trigger a regulatory race with other major financial markets, harming the global financial system. In the meantime, uncertainty surrounding the transition from the European Union and the possible changes in the UK government’s regulatory stance will deter new business. The biggest uncertainty, however, is whether the UK government will be able to deliver on the various promises made with Brexit: Can corporate taxes by reduced without jeopardizing the fiscal outlook? Can immigration reform maintain the flow of talent to the City of London and to UK universities and companies? Can reforms of executive pay and transparency in corporate decision making be implemented without making the United Kingdom less attractive to foreign investors? So far there is little sense of how any of these changes will take place.