Brexit: What If?

A serious shock

If UK voters decide on June 23rd to leave the European Union, the UK and, to a lesser extent, Europe as a whole could plunge into a significant crisis. Markets would price in the risks, possibly overdoing it in a first knee-jerk reaction.

Poorer than before

The UK would end up poorer, more isolated and somewhat at the mercy of a big neighbor over whose affairs it would have forsaken all influence.

The EU would face a serious identity crisis with some risk of potentially losing a few further members later on.

Brexit would not be a black swan

Markets have discussed the threat for the last six months; we identified it as the key risk to our modestly positive outlook for European economies long ago.

The world as we know it would not end with a Brexit. It would just be a more risky place for a while.

Serious short-term and long-term economic damage for the UK

The uncertainty caused by the UK filing for divorce from its major trading partner could lead to a modest UK recession with a plunge in business investment.

This short-term demand shock would be followed by a permanent decline in trend growth as Brexit hurts the UK’s supply potential.

No long-term damage to EU economy

The EU would likely suffer a significant short-term dent to growth. But as long as the EU does not fracture much further, a Brexit would not hurt trend growth.

Modest losses from less trade with a less dynamic UK would be offset by the relocation of some jobs from the UK into the EU.

Opening a Pandora’s box of political risks

In the UK, Conservative EU skeptics would likely topple Prime Minister Cameron and Chancellor Osborne immediately or within a few months.

Scotland may hold a second independence referendum later on, the future of Northern Ireland would become more uncertain as Ireland may again be separated by a visible border.

In the UK as a whole, the political situation may become unstable if the UK falls into the recession that the victorious Brexiteers had promised would never happen.

Fodder for the right

Across the EU, a UK vote for Brexit could embolden anti-EU populists in the mold of America’s Donald Trump and Britain’s Boris Johnson. Doubts about the future cohesion of the eurozone could potentially trigger a small new euro crisis.

However, we would expect the EU-27 and the eurozone to remain largely intact after some modest political initiatives to strengthen the cohesion of these two clubs of European nation states. ECB bond purchases mitigate the risks.