News Tip: ‘UnBrexit’ Could Give UK ‘Bargaining Power’ with EU, Says One Expert; Vote Raises Risk of Global Recession, Says Another

The fallout from last week’s vote for the United Kingdom to leave the European Union is widespread and varied. A Duke finance professor and a Duke economics professor give their respective takes on what we might expect in the coming months and years.• Quotes: “This will be a real-world lesson in game theory,” says Duke University finance professor Campbell Harvey.“Contrary to popular opinion, the leave vote has given the UK credible bargaining power with the EU. In the past, David Cameron failed to get significant concessions from the EU. Now the EU faces a catastrophic situation -- not just losing the UK but potentially losing other countries like The Netherlands and France. They have every incentive to offer the UK a dramatically better deal to stay in the EU -- a deal substantial enough for all major parties in the UK to set aside the referendum that was passed by voters but which is not legally binding.”“You might think -- if the UK is offered a better deal, then won’t other EU countries ask for the same deal? The answer is yes, and these countries will be granted concessions too. Again, changing the deal will be perceived as preferable to the potential dissolution of the EU.”“The concessions may be very substantial and will likely focus on immigration and the UK’s ability to strike bilateral trade deals -- without the EU.”“Over the next few months, there will be a lot strong words and warnings. For example, it is difficult to tell whether yesterday’s statement by Merkel and Hollande ruling out ‘informal’ talks is just bluster or strategic posturing.”• Bio:Campbell R. Harvey is professor of finance at Duke University’s Fuqua School of Business and an author of “The European Union, the Euro, and Equity Market Integration.”• https://www.fuqua.duke.edu/faculty_research/faculty_directory/harvey/ For additional comment, contact Harvey at:cam.harvey@duke.edu._ _ _ _ Quotes: "The Brexit vote has already had an effect on the U.S. economy, with the Dow Jones down by about 1,000 points from its position last week,” said A. Craig Burnside, professor of economics at Duke University. “In the short run this is where we are likely to see the main effects, with financial markets responding to political uncertainty and investors flying to perceived higher-quality assets such as U.S. Treasuries. “ “In the medium term I would expect this financial turmoil, and fears of a possible global recession, to result in a more cautious approach to monetary policy in both the U.S. and Europe. Other things being equal, the Fed is now less likely to raise its target for the federal funds rate than it would have been had the ‘Remain’ side won the vote in the United Kingdom. Given that there has never been a European Union exit by a country as economically and politically important as the U.K., it is unclear how the Brexit process will work and what the outcome will be in two or three years’ time.”  “In recent years, markets and economies have not dealt well with this type of uncertainty. On balance, the risk of a global recession has probably gone up, but it is hard to make sharp predictions about how serious the outcome will be, especially now that banking systems in the U.S., U.K. and Europe seem to be on a more solid footing than they were in 2008.” • Bio:A. Craig Burnside is a professor of economics at Duke University. His research concerns U.S. business cycles, currency markets and government finance.  • http://people.duke.edu/~acb8/Burnside/Home.html   • For additional comment, contact Burnside at:craig.burnside@duke.edu