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.
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, “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 and confusion were part of an elaborate bluff.
The analysis highlights how 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 measure the shock waves, the Surrey team scrutinised daily market data from EU countries from 2000 to 2021. They designed a new “Brexit intensity” index, tracking around 500 political and economic events, and combined it with volatility modelling. “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. He added that each major announcement or political shift sent signals through European markets, spreading uncertainty far beyond the UK.
The study also found that Brexit weakened financial integration within Europe. 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 noted that understanding how shocks travel can help anticipate risks and strengthen financial stability. The research is published in the International Journal of Finance & Economics.
