Skip to main content
SpringerLink
Log in

Brexit, the City of London, and the prospects for portfolio investment

  • Original Paper
  • Published:
Empirica Aims and scope Submit manuscript

Abstract

This paper examines the international financial consequences of Brexit. It first provides a survey of the still limited literature on EU membership and international capital flows. It then provides new estimates of the impact of Brexit on cross-border investment utilizing data from the IMF’s Consolidated Portfolio Investment Survey. It lastly provides a comparative analysis of these same issues using data on crossborder capital flows from the BIS. The conclusion is that the impact on cross-border capital flows to and from the UK is likely to be substantial.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. IMF (2016) provides a survey of studies of these macroeconomic and growth effects. The majority of these conclude that Brexit would have a negative impact on the British economy, although the IMF mentions three (Mansfield 2014; Booth et al. 2015; Minford 2016) that argue for positive effects.

  2. All this assumes that the past is a good guide to the future, that hysteresis in financial flows is limited (that just as inward FDI rose with British accession it will now fall with Brexit), and that financial and nonfinancial FDI respond similarly (inward FDI in financial services accounting for a large share of all inward FDI for the UK than for the typical EU country). The limited evidence on this last question suggests that financial and nonfinancial FDI do in fact respond similarly (see e.g. Davies and Kileen 2015). These estimates also assume that UK financial institutions do not receive special passporting rights that are financially equivalent to membership in the Single Market and that the UK does not reach a customs union agreement with the UK, outcomes that would presumably reduce the negative impact of Brexit on capital mobility. Note that Bruno et al. find that membership in the European Free Trade Association and the European Economic Area do not substitute for access to the Single Market in terms of their implications for FDI.

  3. This study encompasses years both before and after the advent of the Single Market, enabling the authors to pursue a quasi-difference-in-differences approach.

  4. They impose this limitation for reasons of data availability.

  5. The authors also find an impact of bilateral trade for the volume of bilateral bank flows, but this effect is relatively small.

  6. Following previous literature, the common language dummy equals one when a language is spoken by at least 9 per cent of the population in both countries.

  7. One can imagine also other channels that might amplify or attenuate the effects of Brexit, such as the induced response of exchange rates and interest rates, for example. (Recall how the Bank of England took down the interest rate and allowed the sterling exchange rate to depreciate following the 2016 referendum.) Modeling these channels would, however, require ancillary assumptions about the impact on the exchange rate and interest rates, assumptions that would inevitably be arbitrary, historical experience providing no guidance here.

  8. In robustness checks we also estimate equations where we drop the entire set of offshore centers identified by the International Monetary Fund.

  9. The one anomaly is the sign of destination-country population.

References

  • Booth S, Howarth C, Persson M, Ruparel R, Swidicki P (2015) What If…? The consequences, challenges and opportunities facing britain outside EU. Open Europe, London

    Google Scholar 

  • Born B, Muller G, Schularick M (2017) The economic consequences of the Brexit vote. University of Bonn and University of Tubingen (unpublished manuscript)

  • Bruno, R, Campos N, Estrin S, Tian M (2016) Gravitating towards Europe: an econometric analysis of the FDI effects of EU membership (unpublished manuscript)

  • Campos N, Corcelli F (2015) Some unpleasant Brexit econometrics. VovEU

  • Ciuriak D, Xiao J, Ciuriak N, Dadkhah A, Lysenko D, Narayanan GB (2015) The trade-related impact of a UK exist from the EU single market, Ciuriak consulting (unpublished manuscript)

  • Coeurdacier N, De Santis RA, Aviat A (2009) Cross-border mergers and acquisitions and european integration. Economic Policy 24:55–106

    Article  Google Scholar 

  • Davies R, Kileen N (2015) Location decisions of non-bank financial foreign direct investment: firm-level evidence from Europe. Research technical paper no. 4. Central Bank of Ireland, Dublin

  • Davies A, Jones H, MacAskill A (2017) How Brexit is set to hurt Europe’s financial systems. Reuters. https://www.reuters.com/investigates/special-report/britain-europe-cost/

  • Dhingra S, Ottaviano G, Sampson T, Van Reenen J (2016) The impact of Brexit on foreign investment in the UK. CEP Brexit analysis no. 3

  • Ebell M, Warren J (2016) The long-term economic impact of leaving the EU. Natl Inst Econ Rev 236:121–138

    Article  Google Scholar 

  • Eichengreen B (2019) The international financial implications of Brexit. IEEP 15:37–50

    Article  Google Scholar 

  • European Parliament (2016) Brexit: the United Kingdom and EU financial services. Directorate-General for internal policies

  • Hale G, Obstfeld M (2014) The Euro and the geography of international debt flows. Federal Reserve Bank of San Francisco and University of California at Berkeley (unpublished manuscript)

  • International Monetary Fund (2014) Offshore financial centers (OFCs): IMF, IMF Staff Assessments, Washington, D.C., 20 November. http://www.imf.org/external/NP/ofca/OFCA.aspx

  • International Monetary Fund (2016) United Kingdom—selected issues. IMF country report no. 16/169

  • Kalemi-Ozcan S, Papaioannou E, Peydro Jose-Luis (2010) What lies beneath the Euro’s effect on financial integration? Currency risk, legal harmonization, or trade? J Int Econ 81:75–88

    Article  Google Scholar 

  • Lane P (2006) Global bond portfolios and EMU. Int J Cent Bank 2:1–23

    Google Scholar 

  • Mansfield I (2014) A blueprint for Britain: openness not isolation. Institute for International Affairs, London

    Google Scholar 

  • Minford P (2016) Brexit and trade: what are the options? The economy after Brexit. Economists for Brexit, London, pp 13–15

    Google Scholar 

  • Simionescu M (2016) The impact of BREXIT on foreign direct investment in the United Kingdom. Bulgarian economic papers 07-2016

  • Straathof B, Jan Linders G, Lejour A, Mohlmann J (2008) The internal market and the Dutch Economy: implications for trade and economic growth. CPB document no. 168. CPB, The Hague

Download references

Acknowledgements

University of California, Berkeley; University of Minnesota; and University of Southern California, respectively. Eichengreen thanks the Bank of England, where some of this research was undertaken, for its hospitality.

Author information

Authors and Affiliations

  1. Department of Economics, University of California, Berkeley, CA, 94720-3880, USA

    Barry Eichengreen

  2. Department of Economics, University of Minnesota, St. Paul, MN, 55108, USA

    William Jungerman

  3. Department of Economics, University of Southern California, Los Angeles, CA, 90089, USA

    Mingyang Liu

Authors
  1. Barry Eichengreen
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. William Jungerman
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Mingyang Liu
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Barry Eichengreen.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 3, 4, 5, 6 and 7.

Table 3 EU membership, Euro area membership and cross- border portfolio investment stocks, selectivity corrected estimates
Full size table
Table 4 EU membership, Euro area membership, and investment in equity and investment fund shares, selectivity-corrected estimates
Full size table
Table 5 EU membership, euro area membership, and Investment in all debt securities, selectivity-corrected estimates
Full size table
Table 6 EU membership, Euro area membership, and long-term portfolio investment, selectivity-corrected estimates
Full size table
Table 7 EU membership, Euro area membership, and short-term portfolio investment, selectivity-corrected estimates
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Eichengreen, B., Jungerman, W. & Liu, M. Brexit, the City of London, and the prospects for portfolio investment. Empirica 47, 1–16 (2020). https://doi.org/10.1007/s10663-019-09447-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10663-019-09447-4

Keywords

Search

Navigation