The political and economic chaos unleashed in Britain by the 2016 vote to leave the European Union was not limited to causing problems at home, but also sent “financial shockwaves” across Europe, new research has found.
The trade barriers and labour shortages, which have contributed to the long-term damage to the UK economy and fall in per capita income since exiting the EU, have been accompanied by years of political turmoil, with six prime ministers taking office since the referendum was called a decade ago.
But the impacts of the immediate post-Brexit vote chaos has also served to expose how tight-knit the financial ties across the developed world can be, and what happens when these bonds are tested.
Researchers at the University of Surrey analysed more than two decades of stock market data from across the EU, and found that Brexit-related events “significantly increased volatility spillovers between European markets”.
The upheaval of Brexit and the Conservative government’s navigation of the process, which saw political announcements, negotiations and repeated leadership changes as the country tried to sever ties with the EU, “repeatedly triggered financial reactions that spread across the EU and markets”, the researchers noted.
At one point in 2017, the inconsistency of the UK’s position led EU diplomats to suggest the whirl of Cabinet rifts, contradictions and confusion were too farcical to be true and must be part of an elaborate bluff to lull EU negotiators into believing the UK had no plan.
This political chaos was chiefly disseminated via uncertainty in large markets, which in turn transmitted shocks out into smaller markets where they were then felt acutely.
The researchers said that rather than Brexit being a single economic shock, it functioned as “a prolonged sequence of uncertainty”.
“Each political milestone, from the referendum result to parliamentary votes and trade negotiations, altered investor expectations and sent signals through financial markets across Europe,” they said.
The analysis highlights how the larger financial markets, such as those of Paris and London, tend to transfer volatility to smaller ones: “France emerged as the most persistent transmitter of volatility across the EU during the Brexit period, while the UK acted as a major transmitter during the early stages of negotiations,” they said.
But it was the smaller markets operating in countries including Ireland, Portugal and Spain that were most affected by the turbulence.
To understand and measure the way in which political and economic shocks rippled out of Britain, the Surrey team scrutinised more than two decades’ worth of daily market data from EU countries, from 2000 to 2021.
They then designed a new “Brexit intensity” index, which tracked around 500 political and economic events during the Brexit process, and they combined it with “volatility modelling”.
Each event was weighted based on how strongly financial markets reacted, using indicators including stock returns, exchange rate movements and other market volatility measures.
“Brexit was a long series of political shocks that financial markets here in the UK and across the continent had to absorb in real time,” said Dr Vasileios Pappas, lead author of the study and associate professor in accounting and finance at the University of Surrey.
“What we show is that each major announcement or political shift sent signals through European markets, spreading uncertainty far beyond the UK,” he added.
But as the frequency of volatile political events grew, the team said they saw changes in how markets reacted, and most strikingly, that Brexit weakened financial integration within Europe.
They said that following Brexit, the level of volatility transmission between EU markets dropped sharply, indicating that markets had begun reacting more independently amid heightened political uncertainty.
Dr Pappas added: “Financial markets are closely linked across borders. When uncertainty rises in one country, it rarely stays there. By understanding how these shocks travel, we can better anticipate the risks and strengthen financial stability.”
The research is published in the International Journal of Finance & Economics.
