How Brexit would impact the EU

Whilst Britain leaving the EU would have dramatic impacts for Britain, the rest of the EU has to think about how it could dampen EU activity. A vote to leave in June would send major financial and political shockwaves through Europe.

The importance of Britain to Europe is not just seen in the total amount of trade between countries.  British intermediate goods make up 15% of Europe’s finished products. But similar figures apply the other way round. The leave campaign maintains that negotiation of trade deals should be quick and easy, as Britain runs a current account deficit with the EU, meaning it imports more than it exports. Therefore EU members will not want to lose access to the British market. However, this varies differently between countries; most of the deficit comes from trade with Germany and the Netherlands. EU countries may want differing deals with a non-EU Britain dependent on their trade with Britain, any such disagreements would put even more pressure of the two-year time limit to negotiate an exit.

Britain has always been a major destination for migration from the EU. Particularly people from Central and Eastern European countries such as Poland. It is safe to assume that all EU citizens currently working in the UK would remain after a potential Brexit, but it would have significant future impacts. After leaving it is conceivable that a points system would be introduced for EU migrants looking to come in, much the same as Britain currently has with much of the rest of the world. Although this would all depend on whether Britain would also remain in the European Economic Area. This would be the simplest and least disruptive move and would result in a similar relationship with the EU as Norway currently has. This would give Britain access to the single market, but excludes it from EU agricultural, judicial and foreign affairs policy. But this move would still require Britain to pay into the EU, implement regulations from Brussels and accept free movement of Labour. All of which are the main arguments that Vote Leave are putting forwards in their case to leave.

If Britain were able to impose migration restrictions, people from countries with higher unemployment will have to find a different destination, Germany being a likely candidate. An increase in migration to Germany and other high employment countries, would only serve to increase tensions around immigrants in those countries. There would be benefits as well. Without Britain, some people may choose to remain at home and slow the ‘Brain Drain’ that worse performing nations experience, boosting their economies.

Britain pays more money into the EU that it takes out, so a Brexit would result in greater strain on the EU’s budget. The net contribution is around £130 million a week, this is far lower than the £350 million that Vote Leave claim is being sent to Brussels every week. They have been accused of misleading the public by the statistics watchdog, as their figures fails to account for the rebate and other payments. £130 million a week represents about 0.4% of UK GDP, but 5% of the EU budget, that would need to be found elsewhere or through cuts. If Britain were to stay part of the EEC, there would still be a payment to the EU, but it would be lower. No matter the agreement and the payment, there would be a strain on the EU budget after a Brexit.

London is arguably the financial centre of the world, according to the Global Financial Centres Index, London ranked top in 2015, with Frankfurt 18th and Paris 32nd. There would be potential for London to lose some of its standing and European cities would be the likely beneficiaries of this in the event of a Brexit. Although, this was also a claim back in the 90s, when people thought not joining the Euro would lead to a loss of London’s importance. Clearly this did not hinder Britain and for many of the same reasons, a Brexit may not prove too much of a burden to London as a financial centre. Language and time-zone are perhaps the largest advantage London has and these would not change, the tax code is also favourable for business in the UK. A Brexit would cause political instability that could weaken London, but political worries would hurt the rest of Europe as well. So as things stand it is difficult to see how Europe would be able to erode London’s financial standing.

There is always the possibility that a Brexit would strengthen London and weaken the rest of the EU. Free from certain regulations the financial sector in Britain may actually experience a boost, although the renegotiations made in February show that Britain will be exempt from the ‘single European rulebook’ either way. Meanwhile the EU could see its share of global GDP slip from nearly 25% to 20% and therefore lose a chunk of its importance as a global player.

Over time though, with a concerted effort, Paris and/or Frankfurt could become major financial hubs. Changes to the EU tax code, infrastructure and labour market investments, would be difficult be achievable measures they could make to gain market share. They could go the other way and introduce legislation that means certain Euro transactions would not be allowed to take place outside the EU, similar to a previous rule that Britain had removed last year. This could have major implications for trading firms in the UK that trade European markets, such as us. There is another possibility; a Brexit leads to a weakening of all European countries' financial clout and Asia or America benefits from it as they claim more of the economic balance of power.

The political fallout is also a concern for Europe, with immigration and sovereignty at stake. Euro sceptic parties are not isolated to the UK, and they have been influencing politics in Europe. Remember, this referendum is only as a result of the rise of UKIP in Britain, resulting in a Conservative pledge in an attempt to get UKIP supporters to vote Conservative. A more Euro-sceptic and less cohesive EU will also make any negotiations with Britain after a Brexit more difficult.  There are also independence movements that would gain impetus if Britain were to leave, such as Scottish and Catalonian independence.

Sterling has been weak so far this year as the probability of a Brexit increases. Cable has risen off lows of 1.38 seen in February and is comfortably back above the 1.4 handle. It is not difficult to see it tumbling to historically low levels, below 1.35 and heading towards 1.30 in the event of a Brexit. There is little evidence that the Euro has fallen against other currencies so far because of this, but it is very likely to if Britain were to leave. A test of the 1.05 level in EURUSD would be on the cards in June if Britain were to leave.

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Reuters: Business News