Economic Impact

Brexit, an Underestimated Risk

Britain’s Prime Minister David Cameron leaves Number 10 Downing Street to attend Prime Minister’s Question Time in Parliament
British Prime Minister David Cameron last week laid out his key demands to the E.U.
  • Why it matters

    Why it matters

    If the British voted to leave the European Union, the loss of one of the bloc’s biggest economies and centers of growth would have a greater impact than many now realize.

  • Facts

    Facts

    • The British people will vote in a referendum on E.U. membership by 2017.
    • Prime Minister David Cameron has said he will campaign to stay in if Britain’s relationship with the E.U. can be renegotiated.
    • Last week he outlined his key demands, which included protection for non-euro-zone members and curbs on E.U. migration.
  • Audio

    Audio

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The European Union has been exposed to many crucial tests. The latest terrorist attacks in Paris underscored the threat posed by fanatic Islamism from home and abroad, while the refugee crisis puts European solidarity to a serious test. Furthermore, Europe still has a long way to go before overcoming the economic consequences of the euro crisis.

But the greatest threat to the continued existence of the euro zone in the long term stems from a vote that many in continental Europe often view as a curiosity: The referendum on European Union membership to be held in Great Britain, most likely next year. A “Brexit” would not only plunge the E.U. into an identity crisis, but would also be a disaster in economic terms.

Nevertheless, there is growing support for a Brexit in Great Britain. Euroskeptics are gaining ground in the ruling Conservative Party. The populist UK Independence Party, or UKIP, has been successful in beating the drum for limiting immigration from E.U. countries. And although the Labour Party leadership supports E.U. membership, it can no longer completely rely on support from its base, as the election of the left-wing Jeremy Corbyn as the party’s new leader demonstrated.

Even the business community is by no means united in its support for the European Union, as became clear at the annual German-British Economic Königswinter Conference in Brocket Hall near London this weekend. Aside from a few prominent voices from industry and the financial world, small and medium-sized companies, in particular, tend to support Britain going it alone.

Germany would lose its most important ally in its effort to expand and intensify the single market.

It would be shortsighted to see a Brexit as being primarily disadvantageous for the British. Germany would lose its most important ally in its effort to expand and intensify the single market. The E.U would also lose even more of its stature and image when it comes to security policy. A Brexit would also open up a severe economic hole.

With 65 million residents, Britain has Europe’s third-largest population. And with a gross domestic product of €2.22 trillion, or $2.38 trillion, it recently moved up to second place among E.U. economies. Its economic performance since the financial crisis is among Europe’s best, with 2.6 percent GDP growth in 2014. Unemployment is just above 5 percent, and the labor participation rate of about 75 percent is higher than ever before.

The British economy is in good shape, even though the “rebalancing” announced by Prime Minister David Cameron was a failure. He wanted to reduce reliance on the financial sector and City of London, and to promote industry, small and medium-sized businesses and regional development.

But London, the real estate market and private consumption continue to drive the economy. Industry’s share of GDP has fallen below 10 percent and its economic performance is also 10 percent lower than it was in the first quarter of 2008, before the financial crisis erupted. Conversely, the substantially larger service sector has grown by 11 percent in the same period.

Oxford Economics, a research institute, predicts annual growth rates of between 2 and 2.5 percent for the next decade, which is significantly stronger than the growth forecast for the euro zone. Much of this anticipated growth will be a result of strong population growth. The Office for National Statistics estimates that Britain’s population will increase by 10 million to 74.6 million by 2040. The country would then have surpassed France and would also challenge Germany for its position as the most populous E.U. country.

If the British left the European Union, the bloc would lose a dynamic center with a demographic development that favors growth. At the same time, London, a globally significant financial center and magnet for talent from around the world, would no longer be part of the union.

What can their E.U. partners do to convince the British to stay? Mr. Cameron has presented a list of demands, some of which are reasonable and understandable, while others are unreasonable. With some diplomatic dexterity, it ought to be possible to devise a face-saving compromise that satisfies Mr. Cameron’s most important demands.

The only problem is that merely satisfying these demands will not convince British euroskeptics. That too became clear at this weekend’s Anglo-German conference, as did the fact that the E.U. needs a new, positive and concrete “story.”

It could consist, for example, of a digital single market to provide impetus for growth to a new generation of company founders. Another option would be a common energy policy that provides greater climate protection at lower costs.

Both are doable – and certainly necessary.

 

To contact the author: heilmann@handelsblatt.com

 

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