Brexit: This Should Terrify Investors Everywhere
Prime Minister David Cameron is threatening Paris, Berlin, Rome and 24 other European capitals with a referendum over his country’s membership in the European Union (EU). Americans may feel shielded from European events, but Britain’s departure from the EU, nicknamed the Brexit, will cause a tsunami that will promptly reach American shores and Wall Street at the speed of internet communications.
The U.K. is one of the world’s largest economies. It’s not like Greece. Therefore, American investors should pay attention as the British government sets aside the next year for the process to leave the EU.
The Governor of the Central Bank of England, Mark Carney, explained the possible fiscal consequences of a Brexit; or as it has been called, the Bookend file. The Guardian newspaper disclosed that selected officials of the Bank of England are secretly at work on the so-called “Bookend” file thoroughly evaluating the potential financial implications if British voters choose to divorce the EU. (Source: Phillip Inman, “Secret Bank of England taskforce investigates financial fallout of Brexit,” The Guardian, May 16, 2015.) Carney warned Scottish voters about the dire financial consequences if they chose to leave the United Kingdom.
The latest polls have shown a greater willingness of the British people to leave the European Union compared to some time ago. However, should England really leave the EU? Carney doesn’t think so. David Cameron is trying to reform relations with the European Union. In fact, the Prime Minister wants his country to have a relationship similar to what Switzerland has with the EU. In some circles, this formula is known as having your cake and eating it too.
The EU and the U.S. Will Suffer from Brevity, But the U.K. Will Suffer More
The EU is unlikely to acquiesce to such favorable terms. If the British vote for a Brexit, the effects on the U.K. could be far more devastating than on the surviving EU countries. A study by Germany’s Bertelsmann Stiftung in collaboration with the IFO Institute in Munich suggests aBrexit could cost British taxpayers about $313 billion while gross domestic product (GDP) could drop 14% over a period of 12 years. (Giovanni Puglisi, “Brexit would cause more damage to European Integration than a Grexit,” International Finance Magazine, July-September 2015.)
Yes, by going out of the Union, the United Kingdom would save on the expenses paid to the EU participation for the European budget, which is 0.5% of GDP. However, that petty sum does little to compensate the GDP losses caused by the Brexit. EU countries could then decide to regulate trade more stringently with the United Kingdom. Such a move would affect the various sectors of the British economy.
The financial sector would lose five percent and could grow heavy when many financial institutions based in London decided to move their offices to other eurozone financial capitals such as Frankfurt, Dublin, or Milan. The chemical industry is the one that would suffer higher losses estimated at 11%. Other sectors such as the automotive, mechanical, and engineering sectors would suffer heavily because they are now too rooted in European economies.
The effects on the EU economy would be less severe but Germany would feel it most. The most affected sectors would be automotive, with losses estimated at around two percent; the electronics industry; the steel industry; and the food industry. In short, the Brexit is a game which has no winners.
It is no coincidence that the British financial community is feeling pressure to vote “No” in the Brexit referendum, and that Washington views it with concern. Now that the Eurozone along with other parts of Europe are beginning to see the first signs of recovery, a Brexit seems like an especially pointless populist exercise.
Brexit is Worse than Grexit
Cameron’s government has given the Union an ultimatum, including four ways to reform its governance and a year’s time to endorse the proposed changes. Failure to comply would set the trigger for an EU membership vote in 2016, opening the path to a Brexit, the word coined especially for Britain’s exit from Europe.
The first effect of the threat is to have made the EU weaker as the British referendum acts as a wedge that promotes destabilization. A “No” will trigger the so-called Brexit, pushing the U.K. and the EU to consider what we get by trying to divide one by zero. The answer is ‘E’ or undefined, because with the folkloristic exception of Greenland, there has not been any case of an exit from Europe. In the past two years, there has been talk of a Brexit and even more talk of Grexit in relation to the Euro crisis prompted by Greek sovereign debt and German rigor.
Yet, Greece still uses the Euro. And despite the victory of the Euro-skeptical Syriza party, which recently won yet another election led by Alexis Tsipras (who urged the Hellenes to refute the austerity terms imposed by the EU bank), there is no talk in Athens of Greece leaving the eurozone.
Surely, as the skeptics would imply; Greece has had all to gain and nothing to lose from its EU membership. But even Britain should consider the advantages membership brings, to quote a famous TV credit card commercial.
Indeed, Cameron is playing the Brexit card to hedge his party’s chances in the forthcoming 2016 election for the House of Commons. Polls have shown the British electorate to be fractured. And Cameron could suffer a bit of a virtual bloody nose because those in favor of remaining in the Union have a slight edge. Moreover, the loudest message in favor of a Brexit has come from Nigel Farage’s Europhobic UKIP, some Thatcher era remnants, and financiers embittered with Brussels.
Those opposing the Brexit include three former premiers like John Major, Tony Blair, and Gordon Brown. It is essential that the Euroskeptics are defeated, they say, but explaining the benefits of membership in the EU has always been a daunting task, especially to the British. The residents of the United Kingdom have been rendered almost defenseless before the numbers and statistics expertly modulated to persuade them to reject the EU, a sentiment that the fiercely anti-European Rupert Murdoch propagates through his media outlets.
How the Brexit Referendum Will Unfold
The travails of the euro, quite clearly, will do EU supporters no favors. Nor will the controversy on the cost of immigration to British taxpayers, accented by images of migrants trying to board boats for Dover from Calais. However, what is less clear beyond the British Isles’ shores is that a Brexit is merely one of the tools that the ruling Conservative party is using to avoid fracture.
PM Cameron is essentially pushing his country—and Europe—to face a major existential debate and referendum for the sole purpose of keeping the Conservative Party rather than the United Kingdom united. Cameron has not fully explained how humoring the whims of Euroskeptics will benefit the British economy or fill the pockets of people like Murdoch or his readers with more British pounds.
November is the month when the British delegation will be active in Brussels, getting their message and Brexit warnings across to the European Council. European sources have observed that Westminster has been slow to formulate concrete demands, delaying the negotiations. For now, Cameron has spoken mostly of reforms concerning the issue of social benefits to immigrants, urging these be cut. (Source: Yves Herman, “Cameron set for high-stakes game of bluff with Brussels,” Reuters, October 20, 2015.)
The British leader also wants to reserve the right to exempt themselves from greater EU integration even as he demands, paradoxically, concessions on economic competitiveness and greater protection for countries that do not belong to the euro area.