13 May 2016
Brexit would breed market volatility and could spark a euro currency crisis, say economists
Leave the EU, in the face of high costs to the economy or play it safe by voting to remain: that is the dilemma for Brits in the upcoming referendum on 23 June.
The Remain campaign insists an EU exit would be disastrous for the UK economy. Carolyn Fairbairn, director general of the Confederation of British Industry, warned in March 2016 that Brexit could cost the UK £100 billion in GDP and 950,000 jobs by 2020. Speaking at an economics lecture held by London Business School (LBS), Fairbairn added that leaving could have a major impact on British exports, 45% of which go to the EU, and trigger serious economic disruption.
Other business voices have argued that they would rather be free of the various trade barriers that EU membership entails, as these mostly benefit multinationals representing 5% of UK business.
Let’s stay together
But in line with Fairbairn’s fears, LBS economists are clear that the economic cost of exit is negative: the debate is only around the nature, magnitude and impact of post-Brexit uncertainty.
“Even the proponents of Brexit have no clear view of what would happen – indeed, what they would like to happen – in regard to our subsequent relationship with the EU,” said Richard Portes, Professor of Economics at LBS.
Linda Yueh, Adjunct Professor of Economics at LBS, said the UK would, in the short term, likely struggle to attract investors.
“Markets dislike uncertainty and some firms may even put off investment and decisions around the location of their headquarters until Brexit is resolved,” she said. “That won’t help raise investment in the short term.”
Lucrezia Reichlin, Professor of Economics at LBS, said that this post-Brexit volatility would likely affect the UK recovery in the short term.
“The most interesting questions focus on the long-term implications: what will Europe look like if the UK exits and how would leaving affect Britain in future? Political and economic fragmentation is likely if the UK left.
“We would expect to see a euro currency crisis, with a move towards a two-speed currency union, Scotland’s exit from the UK and London establishing itself as a state within a state. But it’s unclear at this point what the costs of leaving are and who would benefit from Brexit.”
Other economists at British universities share Professor Reichlin’s concerns about the economic impact if the UK left the EU. More than 90% of academics questioned by the Centre for Macroeconomics (CFM) (including Professor Portes) said Brexit would cause market uncertainty and pose other economic risks such as damaging fluctuations in exchange rates.
Most expected increased volatility if the polls showed similar backing for the Leave and Remain campaigns in the run-up to the referendum. The economists also expressed concern about the impact that leaving the EU would have on the UK.
Not all about the economy?
Andrew Scott, Professor of Economics at LBS, said the discussion over whether to stay or leave the EU went beyond the British economy.
“It’s hard to see how Brexit can be seen as mainly an economic issue,” he said. “Any economic analysis seems, inevitably, to apply a negative value to Brexit. Any decision to leave is clearly bad news for the economy, but it’s hard to evaluate just how bad, because we don’t even know what trade negotiations would yield or how long that period would last.”
Professor Scott added that it is difficult to predict the precise effect of an EU exit would affect the British economy.
“In the long run, it’s hard to evaluate what’s best. It all depends on whether you think the UK government would be better than EU governments, given the advantages of belonging to a wider economic area.
“Whether that’s true is a leap of faith and not really a subject for economic analysis. On that basis, it’s hard to think that Brexit can be justified on economic grounds. The analysis can only be about trying to fix how bad the hit would be and calibrating whether Brexit really does lead to an increase in economic sovereignty.
“If you do that it’s hard not to conclude that we would end up paying a high economic cost for a small and potentially illusory slither of sovereignty. The Leave campaign therefore either puts a very very high value on sovereignty or doesn’t trust the economic analysis.”