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The exit of the United Kingdom from the membership of the European Union has painted an unclear picture concerning the long-term outlook of the European Union. It will depend on what form the new EU–UK relationship takes, including decisions on trade, regulation and competition. The UK’s departure may temper its dominance of EU financial services, potentially to the advantage of other financial centres.
The UK is one of the largest recipients of foreign direct investment (FDI) in the EU. The UK is also by far the most popular location for large corporate European and global headquarters. The potential disruption and costs of relocation are likely to have a negative short-term impact on some EU companies, but the longer-term impact is unclear, as it will depend heavily on the regulatory environment. This point is particularly relevant for financial services where the UK is the undisputed EU leader, BNP Paribas reported.
Furthermore, Brexit is expected to have a significant impact on the migration of the country, given that the European Union hosts a large number of immigrants each year. UK’s exit is expected to reduce the total number of people moving to work in the country. In the short-to-medium term, the UK’s exit is likely to reduce the remittances of EU migrants to their home countries.
However, in the longer term, less number of immigrants into the UK is expected to benefit the EU. EEA migrants to the UK tend to be relatively young and educated. Some of these migrants may opt for other non-EU destinations, but a slowdown or a reversal of migration to the UK would very likely increase the working-age population of the EU, with a positive, albeit limited, impact on trend growth.
"The key risk for the EU is that the UK’s departure could have a contagion effect and that support for EU-sceptic or protest parties would increase. If so, the impact could be bigger in non-eurozone countries than in the euro area, which has successfully managed periods of market tension in the past," BNP Paribas commented in its latest research note.
