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Bremain or Brexit? A question for more than the UK
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“BREMAIN or Brexit” has become a catch phrase these days when the United Kingdom still wavers in its decision of whether or not stay with the European Union after joining it in 1973. The referendum, scheduled to be held tomorrow, will have a far-reaching impact on the economy of the country, the region, as well as the world. Léon Cornelissen, chief economist at Robeco, tries to give a hint about the impact it may have.
Q: How do you assess the likelihood of a Brexit?
A: The ‘fear factor’ will play an important role in convincing the UK electorate of the potential consequences of a Brexit. Historically, those undecided have tended to vote with the status quo. The bookmakers’ odds – which have frequently proved more reliable than opinion polls since it is real money and stake – suggest a much larger victory for Bremain, with 70 percent in favor and 30 percent against.
Q: If the UK really leaves the EU, which market or asset class do you think will be hardest hit in the short term?
A: The pound could suffer a heavy sell-off after a convincing Brexit vote. The United Kingdom is vulnerable because of its unusually high current account deficit. Brexit would make the UK unattractive for foreign direct investment as the nature of future trading relationships would be uncertain. The UK economy could easily drift into a recession despite sterling weakness which in principle could stimulate exports.
Q: What would be the impact of a Brexit on the UK economy? And what would be its long-term implications for the EU?
A: The Bremain camp has consistently warned that leaving would have major short-term and long-term economic costs, knocking as much as 8 percent from GDP within three years according to the most pessimistic estimates. The lack of open access to the world’s largest free market would certainly badly affect British trade, though Brexit supporters have counter-argued that it would also liberate the UK from EU red tape and allow trade deals to be forged with other regions such as the US.
The EU is by far the most important trading partner for Britain, accounting for 44 percent of total exports and 53 percent of imports. This is based on access to the single market, so leaving the EU would necessitate negotiating an adjusted trading relationship. In principle, existing agreements between the EU and non-EU countries could be used as a model for a future UK-EU-relationship following a Brexit.
Commentators speculate whether a Brexit would provoke greater dissent within the EU, giving encouragement to nationalist movements that exist in other member states, and lead to a Frexit (France), Grexit (Greece), Itexit (Italy) or any other –exit. Alternatively, the EU’s remaining members could close ranks as the wounded divorcee, in fact fostering further integration.
Q: How do you think investors should prepare for the referendum?
A: A Brexit would be negative for the UK and to a certain extent also for European equity markets. It is unlikely in our opinion that a Brexit would be considered a global negative. How the global capital flow will be disturbed before and after the Brexit depends on the reaction of the EU to a Brexit. Would it lead to greater cohesion in the bloc? If not, it is to be expected that capital will flow to the US and Japan, generally considered to be safe havens.
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