The portmanteau “Brexit” has been one of the most overused terms in the last few months, referring to the exit of the United Kingdom from the European Union. As 23 June, the date of the referendum to determine this issue, draws closer, it has become even more difficult to ignore the implications of this event. It will affect not only the UK, but all of Europe, both economically and politically.  While public opinion regarding this topic vacillates, the short- and long-term consequences of an affirmative vote can be discerned with certainty. 

The latest polls show increasing support for Brexit among the citizens of the United Kingdom, making the withdrawal of the United Kingdom from Europe a very real possibility.  The United Kingdom has become the hub of Europe’s deeply rooted Euro-skepticism due to a deeply entrenched preference for the decentralization of government. The UK referendum is only the most extreme indicator of a growing dissatisfaction with the EU that will not disappear irrespective of the outcome of the referendum.  In the case of the UK’s exit, a negative impact on financial markets is inevitable.  Moreover, unintended consequences on the European political scene are also a likelihood.

What kind of world will we wake up to on June 24th in case of an affirmative Brexit Vote?

Recent reports published by the OECD indicate that Brexit could have detrimental effects on Britain’s economy, as well as on those of its continental counterparts. According to reports, financial markets will become highly unstable and European stock markets could experience a drop of up to 20 percent, which will trigger significant pension and investment fund losses.  Although there are arguments that claim that this is an over exaggeration, acclaimed British historian Niall Ferguson does not believe this to be the case at all.  At a book promotion and discussion held in Belgrade in early June, he declared starkly that “on June 24th, we may wake up to a world in the midst of a financial crisis.”  Ferguson’s pessimistic view of this event and its consequences mirrors that of many other scholars, experts, and analysts.  

Although the extent of the long-term macroeconomic impact of Brexit on the UK and Europe is uncertain, market volatility in the short-term is inevitable.  London, considered Europe’s financial hub, plays an important role in the continent’s financial markets.  London’s status in this regard could be hurt if a large number of European businesses migrate elsewhere following Brexit, seeking alternatives in cities such as Frankfurt and Paris.  Furthermore, there is a risk that some financial services providers and banks may leave Europe altogether, such as mobile derivatives businesses that are currently largely harbored in the UK.

Post-Brexit outcomes also anticipate a rise in import costs between the UK and the rest of Europe, which would be harmful for both sides.  The UK is Europe’s greatest recipient of foreign direct investment (FDI), and subsequently both the UK and Europe may see a decline in this type of investment.  This is especially the case as most foreign companies in Europe are headquartered in London.  Jamie Dimon, the CEO of JPMorgan Chase, has stated that Brexit will likely have a negative impact on his bank’s business in London, already announcing the possibility of job cuts.  The UK’s heavy dependence on FDI for long-term financing options, utilized for government infrastructure and company funding possibilities, is also a matter of concern in the event of a Brexit.  If funding ceases, this will put pressure on the already weakening pound sterling.  Overall, a lower GDP prognosis and market uncertainty will shake financial markets after next Thursday’s vote. 

Populist Uptick in Europe? Maybe.

Rising populist popularity in Europe is a very likely outcome, according to Ferguson, who claims that in case the UK says yes to Brexit, “the effects of it will be felt for years.”  In particular, Brexit could fuel the uncertainty of Europe’s political climate by furthering the momentum of European populist parties.  Distrustful of Brussels’ institutions, the UK aims to have a greater say and to influence EU policies in many areas, including in immigration and EU enlargement.    According to Ferguson, populist parties in Europe will likely start winning elections, adding that other countries may be encouraged to emulate what they have just seen the UK do in the case of a Brexit.  Ferguson also suggested that the UK also not be able to get a “Norwegian deal” as has been previously suggested in the media, claiming that “Britain cannot just leave and stay in the arrangement.” 

From a political perspective, the long-term consequences of Brexit are concerning and will be far-reaching.  However, this does not seem to be affecting voters.  The “leave” campaign has swung into a lead for the first time, proving that despite the potential Brexit risks presented in the media, realistic or not, anti-European sentiment is growing.  Anti-EU forces will certainly spread, as countries in the union are ineffectively trying to tackle migration issues and an economic crisis.  Although Britain is not in the euro zone and has not been affected by refugee migration, the recent turbulence in Europe has led to calls for more centralization, which is not in line with the growing Euro-skeptic sentiment.  Brexit will inevitably trigger more skepticism of the EU, whose tenets of a “border-less” Europe and single currency are being questioned now more than ever.

Last note…

Multiple studies published in recent months indicate that “leave” voters are not likely to change their opinion based on the inevitable economic impact that Brexit will have on the country.  As these voters may have placed priority on other issues, England’s economic well-being and the overall political climate in the European Union are in a precarious position.  Saying nay to a Brexit would be best for both.  Although the UK will face immediate financial hardships, the long-term political impact in Europe will lead to even more negative ramifications, as it will disrupt internal political dynamics in an already unstable environment. Whether the UK decides to stay or go, the European project is in deep trouble and an affirmative Brexit vote will only make this more apparent.

by Sara Djuric
Senior Project Manager