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Brexit: What If?

What happens if the UK voters decide on June 23, 2016 to leave the European Union?

June 17, 2016

Britain and the EU

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.

Takeaways

#Brexit: What happens if the UK voters decide on June 23, 2016 to leave the European Union?

Markets have been trying to predict and manage risk from a potential UK departure from the EU.

If the UK leaves the EU but Ireland remains, things will get complicated again for Northern Ireland.

A UK vote for Brexit could embolden anti-EU populists in the mold of US Trump and UK Boris Johnson.