51吃瓜

The UK referendum could have serious but not calamitous economic effects on the nation over the long-term. The bigger worry is that an exit by one country might lead others to follow.

On June 23, the British people will vote on a historical referendum on whether they want the United Kingdom to stay in the European Union (EU). Just what the economic impact will be is hard to assess, say Wharton experts, because no nation has ever left the 28-member economic and political bloc.

鈥淣o one knows what the economic impact will be鈥� and most analysis 鈥渋s just speculation at this stage,鈥� says Wharton Finance Professor聽. 鈥淭here are no firm studies. There is no hard data.鈥� What鈥檚 more, it is the political consequences that may have the biggest impact on the EU鈥檚 future, at least in the short- and medium-term because should one nation leave the group, others could follow.

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Specifically, the UK鈥檚 referendum will determine if Britain will exit the European Union, popularly called a Brexit. The idea of a possible British exit from the EU was seeded in a campaign promise. David Cameron, now prime minister, promised the referendum should the Conservative Party win No. 10 Downing Street. There would be a vote by the end of 2017, Cameron pledged at the time, in part to win over the 鈥渆uroskeptics鈥� in his own party and among the British population more generally.

, strategy and business policy professor at HEC business school in Paris and a senior fellow at Wharton鈥檚聽, adds: 鈥淭he people who want the referendum didn鈥檛 want to be in the EU in the first place.鈥� They have made different arguments against membership at different times. But 鈥渢he point is they don鈥檛 want to be in the EU.鈥� In his view, however, it鈥檚 better for the UK to exert influence from inside of the EU rather than the outside.

Referendum Mechanics

Recently, Cameron flew to Brussels to negotiate concessions favoring the UK from European leaders in order to persuade the British people to vote to stay in the European Union. If the British people vote to leave, the UK has two years to renegotiate all of its treaties and trade deals, among other things. It would not be simple. As Gomes points out, a Brexit would require approval by the other 27 countries in the EU, and their parliaments might not ratify it.

No one knows what will happen with the politics of it all because no one has done this before, says Chatain. 鈥淧eople want the UK to stay in the EU because they don鈥檛 want uncertainty.鈥�

With a migrant crisis underway, which transplanted more than a million people last year on a scale not seen since World War II, the British people were agitated at the prospect of being forced to comply with European quotas to take in more refugees than they want to support. Gomes adds that the 鈥渘ext few months will be tougher with migrant pressures increasing. Fundamental trends will work against an EU vote. There鈥檚 no doubt that that will throw in more fear 鈥� Migration is not going to help as it increases in the spring.鈥�

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, Wharton finance professor and Brevan Howard Centre director at Imperial College in London, explains that the number of refugees allowed through the UK鈥檚 borders is 鈥渓ow anyway and not complying with EU quotas.鈥� He adds that if there was a Brexit, the 鈥渃hange would be low-skilled people would find it difficult to come [to the UK]. For educated people, it won鈥檛 change that much.鈥�

More generally, according to Chatain, 鈥渢his is purely a political issue between Cameron and his own party.鈥� He adds the rise of right-wing elements is happening in many nations, notably with Donald Trump in the United States and Marine Le Pen in France. 鈥淲hat distancing oneself from international organizations like the EU is supposed to fix is almost beside the point. It鈥檚 a deeply political thing. It鈥檚 not an economic calculus.鈥�

Moreover, the eurozone recession is also scaring some Britons into thinking that they will be dragged down by a stagnant European economy while the British economy is recovering at a decent pace from the 2008-09 downturn.

Straws in the Wind?

As the countdown to the referendum ticks closer, the value of the pound has been sliding. According to聽The Daily Telegraph, Goldman Sachs believes the pound could lose a fifth of its value and plummet as low as $1.15-$1.20 by the time of the vote this summer. Allen adds that the pound will recover rather quickly if the British vote to stay in. However, 鈥渋f it鈥檚 an exit vote, there will be a lot of uncertainty. The value of the pound will probably go down. In 20 years though, it won鈥檛 make that much difference.鈥�

Wharton Management Professor Mauro Guill茅n points out that the pro-Brexit campaign is downplaying the fact that the 鈥淯K is tightly integrated in trade and investment with the EU. They don鈥檛 understand or fully grasp the extent of that relationship.鈥�

One of the most vital aspects of the British economy is its financial services sector. Known as the City, London is an international hub for banking, investment services, capital markets, etc. By staying in the EU, the UK would retain access to the single market. 鈥淭he UK is more integrated to financial services in the EU. They get access to euros so the UK does really well without being part of [the common currency regime],鈥� says Gomes.

On the macroeconomic side, the UK has a large current account deficit, the difference between the money flowing in and out of the UK, and capital could flee the UK under a Brexit scenario, inflating the current account deficit even more. The Bank of England warns that a Brexit could endanger the UK鈥檚 economic stability.

Allen notes that the pro-Brexit campaign is arguing that the UK will still have access to the single market even if it chooses to leave the EU. 鈥淭hat鈥檚 true in the long-run, but in the short- and medium-term, it鈥檚 not all clear that will happen.鈥� In addition, Guill茅n explains that the British financial services sector doesn鈥檛 like the idea of additional financial integration with the rest of the EU, and what that could mean for salaries, bonuses and more stringent bank regulations, but they have been resisting some of the regulations that would facilitate this anyhow.

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Chatain notes that one of the demands the UK has made in recent negotiations is that it should continue to vote on euro-related matters even if the country is no longer part of the eurozone. 鈥淵es, there鈥檚 a lot of financial business in London, but they are pushing their luck with eurozone countries. On the one hand, the UK is saying the EU is terrible and doomed to failure, but on the other hand, they want to help make decisions because they鈥檙e profiting from it. The UK is not making friends with that stance.鈥�

Killing the Golden Goose?

Would financial services firms relocate out of the UK if a Brexit were to happen? Allen notes 鈥淚t鈥檚 difficult to say how much of that would happen. It depends on what negotiations happen for the short-term and medium-term [prospects]. In the long-term, the UK has a lot of advantages in terms of language and culture. Other countries would find it difficult to compete in the long-run. For example, American and Chinese financial services firms investing in the UK would stay in the UK, partly for the simple fact that people are speaking English. The number of Chinese people who speak German is quite small. And I don鈥檛 think Europeans will change very much about what they鈥檙e doing in the UK.鈥�

Some trade treaties between the UK and all of the countries it does business with, however, would have to be renegotiated under a Brexit. The trade deals the UK now has fall under the agreements the EU has negotiated jointly. In October, US Trade Representative Michael B. Froman said there would be no free-trade agreement between Britain and the US if it left the EU, and that Americans wouldn鈥檛 want to negotiate one, according to聽The New York Times.

But nearly half of the UK鈥檚 exports go to Europe and the EU has a trade surplus with the UK, so new trade agreements between the UK and EU would certainly have to be negotiated. 鈥淭his will have a disruptive effect. You鈥檙e putting everything at risk and you don鈥檛 know if you鈥檒l come back to the current status,鈥� says Guill茅n.

The UK will look at countries like Norway and Switzerland, which are not EU members, for what kind of trade rules make sense for non-EU members. However, no one knows what kind of position the bargaining parties will hold, says Chatain. Both non-EU countries comply with the notion of the free movement of people. They also contribute to the EU budget, with Norway paying twice as much per head as the UK, according to聽Euronews.

What kind of deal the UK would get following an exit will depend on who鈥檚 doing the negotiating, says Allen. Guill茅n adds that both Norway and Sweden have had very different historical developments of their economies than what has happened in the UK. Switzerland has always been a neutral country, while Norway doesn鈥檛 have a global financial services sector.

Internally, a Brexit will pose yet another set of problems. Scotland, which is more pro-euro, will hold another referendum to leave the UK, says Allen. The ruling Scottish National Party has been quiet in supporting the campaign to remain in the EU because it doesn鈥檛 want to be seen as supporting the Conservative Party, which is unpopular in Scotland, and would like to have another referendum to secede from the UK, Allen explains. 鈥淪cotland will most likely leave the UK. If they held the referendum again today, they might vote to leave.鈥�

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Northern Ireland is another country that might potentially hold a referendum to leave the UK should it vote to leave the EU. According to聽The Daily Telegraph, around 58% of Northern Ireland鈥檚 population support remaining in the EU, higher than the UK average. Northern Ireland also neighbors Ireland, a separate EU country, with no border control necessary if both are in the EU. Some experts have said a Brexit could destabilize the current peace between Ireland and Northern Ireland that has only been in place since 1998. A Brexit could 鈥渃omplicate the relationship quite a bit,鈥� notes Guill茅n.

As far as the global stage, the UK鈥檚 clout in the world is 鈥渕arginal,鈥� says Gomes. As a member of the European Union, the UK has more influence and can vote in trade matters. For instance, Allen points out the situation with Iran. 鈥淚 don鈥檛 think Iran would care if the UK [carried out sanctions on its own] but Iran clearly cares if the EU does it.鈥� Guill茅n adds that though the British have their own approach to international affairs, they 鈥渉ave more to lose if they leave鈥� since they would not have much political clout.

The Biggest Risk?

Outside of the UK, fallout from a Brexit could affect other EU countries in ways that may pose the biggest risk of all. Just as threats of a Greek exit prompted worries that other countries might follow its lead, the same holds true in the case of a UK exit, underlining the huge potential for political fallout. Discontented eastern European countries, for example, might follow suit and hold an EU referendum themselves. Gomes points out that the French presidential election is coming up in 2017 and Marine Le Pen might use the issues brought up in the EU referendum to close borders and push away immigrants.

Thus, apart from economic concerns, European leaders won鈥檛 smooth the path for a Brexit in an effort to discourage others from following.

On the likelihood of other referendums or exits, Chatain adds: If other EU members also face a major crisis, due to a migrant crisis for example, 鈥渁nd turn to the far right, yes it is possible. I would have never thought I would write that even three years ago.鈥�

Moreover, the subject of the UK exiting the EU may not end on June 23. 鈥淥ne wild card will be who the new prime minister will be, even if the vote is 鈥榥o鈥� to leaving,鈥� says Gomes. Cameron has said he will not run for re-election in 2020 and the new Tory leader may be more pro-Brexit than Cameron has been.

鈥淓conomically, it won鈥檛 be a catastrophe, but it鈥檚 manageable,鈥� says Chatain. 鈥淭he political consequence will be worse. Everyone will be worse off politically and the UK and EU will be weaker. There will be a lot of economic uncertainty, but it won鈥檛 be a disaster.鈥�

Gomes adds: 鈥淚t makes no sense to make great changes to leave this relationship. Even if the UK were to leave the EU, the situation will be very similar to what it is now, maybe with the exception of border control and possibly some aspect of social programs like benefits. That aside, in terms of free trade, mobility of free capital, the impact on the City, the impact will be slow 鈥� Nothing on the business side will basically change.鈥�

*[This article was originally published by , a partner institution of 51吃瓜.]

The views expressed in this article are the author鈥檚 own and do not necessarily reflect 51吃瓜鈥檚 editorial policy.

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