What Would A Brexit Cost Europe And The U.K.? by [email protected]

Mauro Guillen and Bulent Gultekin on the Costs of a Brexit

Fears triggered by last week’s terrorist attacks in Brussels by the Islamic State hang heavily over the prospects for Britain’s decision on whether or not to stay within the European Union. British Prime Minister David Cameron has called for a referendum on June 23 to decide on a “Brexit,” or a British exit from the EU.

The Brussels attacks, combined with concerns over the influx of migrants into the EU from the Middle East and North Africa, have provided more ammunition to right-wing political parties in the United Kingdom that are pro-Brexit. Recent polls put a Brexit closer to becoming a reality than it seemed a few months ago.

However, a Brexit will disrupt trade and hurt businesses both in the U.K. and the EU at a time when Europe needs investments and jobs, according to Wharton experts.

The Brussels attacks will certainly affect sentiment in favor of Brexit, noted Mauro Guillen, Wharton management professor and director of the school’s Lauder Institute. “There are people and parties in the U.K. that want to exploit any opportunity to their advantage,” he said, referring in particular to the U.K. Independence Party, or UKIP. “They can claim that the U.K. is at risk of more terrorist attacks if the country remains part of the European Union.”

Guillen said a vote against a Brexit is crucial for Cameron to survive in government. “If Brexit were to win the referendum, Cameron’s government would fall immediately. He would have no other option but to resign.”

Wharton finance professor Bulent Gultekin agreed that the sentiment has turned in favor of a Brexit following the Brussels attacks. “If one incident creates so much havoc, it signifies the underlying problems in Europe,” he pointed out. However, he noted that referendums are “notoriously difficult to predict.” Also, sentiments could change before the referendum in June. “In politics, three months is a long time.”

“[Right-wing political parties] can claim that the U.K. is at risk of more terrorist attacks if the country remains part of the European Union.” –Mauro Guillen

Guillen and Gultekin discussed the implications of Brexit for the U.K. and the European Union on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Power to the Right

Gultekin noted that recent reports of the Islamic State, or ISIS, moving more of its people across Europe for potential attacks has strengthened the argument of right-wing political parties against the migration of refugees into Europe. “The extreme right in Europe has risen in popularity,” he said, citing the National Front in France led by Marine Le Pen and True Finns in Finland as political parties that have used the platforms of anti-immigration, nationalism and populism to gain followers.

Guillen noted that no country has left the European bloc in the 50-year history of the EU and its predecessor, the European Economic Community. “[A Brexit] would be unprecedented and highly disruptive because [many] agreements and arrangements that facilitate trade would become void,” he said. It would have a major impact on the U.K. in the short run and also the EU over time, he added. “You’re putting everything at risk, and you don’t know if you’ll come back to the current status,” Guillen had said in a recent [email protected] article on how a Brexit could sink the EU.

Gultekin pointed out that the founding fathers of the EU desired full integration. “The EU was supposed to be like a Catholic marriage – never going to split.”

‘Disastrous’ Impact

The impact on the U.K.’s financial sector would be “disastrous” if the country were to leave the U.K., predicted Gultekin. “[For] those who argue that [Britain could] pull a better deal with the EU, London [would no longer] be their financial center,” he added. “That would have a tremendous impact because the U.K. economy is very dependent on services.”

Already, the Schengen Agreement that allows free movement of EU citizens across Europe is not working in practice thanks to tighter border controls in the wake of the Brussels attacks, said Gultekin. “The whole idea of the EU is to get rid of borders and have one unified market,” he added.

If Britain stays in the EU, it will avoid export tariffs, its businesses will benefit from EU regulation that collapses several national standards into one European standard, and it will gain an extra seat on international forums, according to a report published by The Economist. If it exits the EU, it could negotiate a new EU relationship without being bound by EU law, regain control over employment law, health and safety, and exert more influence from outside in international trade forums than it could while being within the EU, the report added.

“If Brexit were to win the referendum, Cameron’s government would fall immediately. He would have no other option but to resign.” –Mauro Guillen

According to Guillen, the impact would be felt most by companies that assume free movement of people and goods across borders. “Many companies have set up operations in Europe assuming that there would be no borders,” he said. “Those controls would interfere with the logic of those investments companies have been making over the last 10 years.” The impact would be felt also in terms of worries about what the future holds. “Neither investors nor businesses in the real economy like uncertainty.”

Clouds over Investments, Political Peace

Those worries come on top of concerns over global economic headwinds such as falling commodity prices, the slowdown in China or what would happen more broadly with emerging markets like Brazil, said Guillen. “[This is occurring] precisely at a time when you need more investment in Europe, more job creation, so that the consequences of the crisis, especially in terms of unemployment, are addressed. [These concerns] send a signal to many companies that maybe they should put their investment plans on hold.”

Amid all those worries, it hasn’t helped that the EU did not do a good job in dealing with either the eurozone crisis or the recent refugee influx, said Gultekin. In the eurozone sovereign debt crisis that began in 2009, Greece, Portugal, Ireland, Italy, Spain and Cyprus were unable to meet their debt obligations and needed the intervention of the European Central Bank and the International Monetary Fund. Now, with the refugee crisis, “the entire European Union is falling apart,” he added.

According to Guillen, “Cameron had better win this referendum … because most of the population in Scotland is unambiguously pro-European.” He explained that most of the people who want the U.K. out of the EU are in England, and not in Scotland. A vote in favor of Brexit “will just add more fuel to the independence movement in Scotland because most Scots want Scotland to be part of the EU.” A Brexit would also create a border between the Republic of Ireland and Northern Ireland, becoming “a very difficult situation to manage,” he added.

Chances of a Brexit

Guillen put the chances of a Brexit at “less than 50%” even as recent polls show more people veering towards it. Gultekin noted that much depends on the participation in the referendum.

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