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By Sebastian Mallaby

The economic shock of a ‘Brexit’

Published on: June 19, 2016 10:51 PM

 

For the first time since the start of Britain’s referendum fight over Europe, the polls predict “Brexit.” The four most recent national surveys put the “Leave” side ahead with margins of between one and 10 percentage points. Most people, including many disaffected Britons who want to shake up the system by backing a Brexit, understand that this would mean a political and economic shock. But they underestimate its severity. The morning after a “Leave” vote, Britain would find itself in a political, legal and constitutional limbo. Having staked his credibility on a “Remain” victory, Prime Minister David Cameron would probably be forced out, despite his recent protestations to the contrary – his senior Conservative colleague, Ken Clarke, says he “wouldn’t last 30 seconds.” Choosing a new Conservative Party leader is a two-stage process, with the second stage involving party members voting by mail. It could drag on for three months or so. Britons – and British businesses, especially – would confront a nightmare of legal uncertainty. Large swaths of British regulation derive from EU rules and would have to be rewritten. Britain’s commercial relationship with its main trading partners would be up in the air, with no clarity about whether, or on what terms, Britain would retain membership in the EU single market. Global businesses with London headquarters would be scrambling to figure out if they should move. Fully 40 percent of Europe’s top companies and 60 percent of non-European multinationals have chosen London as their EU base. Their departure could trigger a real estate bust, clobbering consumer spending. The United Kingdom would find itself considerably less united. A majority of Scots want to stay in the EU and might seek to do so by demanding a referendum on independence from Britain. The last Scottish independence vote, in 2014, went in favor of the union because Scots were persuaded that the economic price of breakup was too high. But if Britain quits the EU and succumbs to a recession, the economic case may become too weak to trump Scottish nationalism. Northern Ireland would also be destabilized. The Catholic half of the population wants to stay in the EU, alongside the Irish Republic. If Northern Ireland were dragged out of the EU by voters in England, Catholics would be resentful. Meanwhile, the basis for Northern Ireland’s economy – a porous border with the south – would take a whack. A business on the north side of the border would face greater hassles in recruiting workers and customers in the south, because the inter-Irish frontier would have to be subjected to passport and customs checks. This uncertainty could last anywhere from a couple of years to, say, seven – the number plucked out of the air this week by a senior EU leader. The only precedent for Brexit was set by Greenland in 1985. But Greenland’s population came to a grand total of 53,000, the only issue Greenland cared about was fish, and even then the divorce proceedings took three years to settle. Britain is Europe’s second-largest economy. A breakup would be altogether messier. 

Filed Under: Business

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