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A British Exit From the EU Would Have Global Consequences

Posted by hkarner - 11. Januar 2016

Date: 11-01-2016
Source: The Wall Street Journal  By SIMON NIXON

There are powerful reasons to believe Britons will ultimately vote to stay in the EU, but the alternative can’t be dismissed as a minor risk.

A British referendum on whether to remain a member of the European Union is the single biggest “known unknown” hanging over the European economy. The vote now seems almost certain to take place this year. Prime Minister David Cameron hopes to achieve a deal at a summit in February on the changes to the relationship that he thinks are necessary to persuade Britons to back continued membership. EU officials say the parameters of the deal are already hammered out. That should pave the way for a referendum either just before or immediately after the summer.

As things stand, bookmakers put the odds on Britons voting to leave the EU at 36%. That is roughly the same probability implicitly assumed by institutional investors, according to a survey by Absolute Strategy Research. There may be powerful reasons to believe that Britons will ultimately vote to remain, particularly when urged to do so by Mr. Cameron. But the possibility of a “Brexit” can hardly be dismissed as a minor risk. Investors should prepare themselves for the consequences.

Of course, the greatest impact would be on the United Kingdom itself. This would be felt via three main channels. The first is the risk of serious political instability. Although Mr. Cameron would likely to try to stay on as prime minister even if defeated in the referendum—he said as much in a TV interview on Sunday—it is unlikely he could cling on for long, not least since he has already announced he won’t seek a third term. Those who had campaigned for Brexit are unlikely to trust Mr. Cameron with the task of negotiating a complex and politically fraught divorce settlement.

Any political instability arising from a rupture within the Conservative party would likely be compounded by wider instability within the U.K. A Brexit vote would raise doubts about the long-term viability of the political union among England, Scotland, Wales and Northern Ireland. It is bound to trigger demands for a fresh vote on Scottish independence. Polls suggest Scots overwhelmingly back continued membership of the EU, and leading figures from both sides of 2014’s bitter independence referendum will be campaigning to keep Britain in the EU.

A Brexit vote also risks profoundly destabilizing the peace process in Northern Ireland. The Irish government has repeatedly argued that EU membership has played a significant role in bringing peace to the province, providing a neutral space where the two sides could meet as equals. The prospect of establishing a new external EU border—potentially introducing new restrictions on the freedom of movement of goods and people—along one of the most volatile political fault lines in Europe could stoke new tensions in the province.

A third area of concern for investors is the future relationship between the U.K. and EU. As things stand, those campaigning for Brexit are unable even to agree among themselves what kind of future trading arrangement the U.K. should demand, let alone what kind of arrangement the EU might be willing to concede.

What is clear is that an EU-lite arrangement similar to those currently enjoyed by Norway and Switzerland is out of the question, and Mr. Cameron has already explicitly ruled them out. That is not least because such an arrangement would require the U.K. to continue to accept the right of EU citizens to live and work in the U.K., the very issue that is most likely to have swung voters against continued membership. That therefore ensures there will be significant uncertainty over the conditions under which British-based firms will continue to be able to trade with the EU.

Many economists agree that the combined impact of all this uncertainty is bound to damage confidence and investment, damaging growth and weakening sterling. But the economic consequences of a Brexit would be felt well beyond the U.K. Hardest hit would be Ireland, which would likely suffer lower wages, higher prices and serious trade losses, according to the Economic and Social Research Institute, a leading think tank.

Meanwhile a Brexit would throw the wider European project into disarray, absorbing precious political space that is badly needed to focus on steps to bind the eurozone closer together, including completing its banking union and developing new mechanisms to help the currency bloc respond to economic shocks.

Inevitably, a Brexit would raise questions about whether other non-eurozone countries would follow the U.K. out of the door, sapping the EU of the cohesion it needs to address other common challenges including the migration crisis, deepening of the single market, and relations with Russia, leaving the continent more vulnerable to economic shocks

That could undermine corporate confidence just as the eurozone urgently needs increased business investment to help broaden a cynical recovery currently over-reliant on consumer spending. A Brexit-induced resurgence in the euro crisis would have global consequences. That much is a known known.

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