Damage from a rolling stone Brexit implications for Europe Economics 24 March 2016 The UK referendum on its EU membership and the resulting threat of ‘Brexit’ have already taken their toll on financial markets. If the UK were to vote in favour of Brexit, further turmoil seems guaranteed, with significant negative effects on the British economy. But the European economy will not remain unscathed either. From our baseline forecast we estimate that the initial hit to Eurozone GDP could be a cumulative 0.3% by end-2017. But the extent of the damage will depend heavily on the political impact, which is likely to be profound. The risk of further fragmentation is high, which suggests that the damage could be greater and longer lasting. However, one cannot entirely exclude the possibility that Brexit might give dramatic impetus to European integration and reform. One thing is for sure: the genie has already left the bottle. The stone is rolling and will do some damage. In this note, we investigate the potential political and economic implications the British referendum could have for the rest of Europe and, more specifically, the Eurozone. The main findings are: • By agreeing to a ‘deal’, the rest of Europe has made itself vulnerable to copycats: other countries may also ask for exceptions and national special treatment. It is clear that the European Union and Eurozone are currently at a crossroads, facing further integration or disintegration. The success of ‘muddling through’ has seemingly come to an end. Brexit could be the catalyst or accelerator for one of the two directions. • In a Brexit scenario, the rest of Europe would go through a period of financial market, but also political, turmoil. European leaders would have to spend even more time on keeping emerging separatist and populist movements at bay in order to avoid further centrifugal forces. • While the political impact remains hard to quantify in a Brexit scenario, it seems certain that Europe will face a period of financial market turmoil, with collateral damage through FDIs and bank exposure and weaker trade. In the wake of a friendly divorce, the economy of the Eurozone would likely experience a cumulative loss of 0.3% by end- 2017, with Ireland, Malta and the Netherlands taking the biggest hit. But more negative scenarios with greater and longer lasting GDP impacts are not hard to envisage. The cost of Brexit for Europe (cumulative impact on GDP by end-2017) -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 IE MT NL BE LU CY EUR DE ES FR FI AT IT PT GR Cumulated GDP impact by end-2017(central projection, deviation from baseline in %) Source: ING estimates Peter Vanden Houte Chief Eurozone Economist Brussels +32 2 547 8009 [email protected]Carsten Brzeski Chief Economist Germany and Austria Frankfurt +49 69 27 222 64455 [email protected]FINANCIAL MARKETS RESEARCH research.ing.com SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION
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Damage from a rolling stone March 2016
1
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Damage from a rolling stone Brexit implications for Europe
Economics 24 March 2016
The UK referendum on its EU membership and the resulting threat of ‘Brexit’ have already taken their toll on financial markets. If the UK were to vote in favour of Brexit, further turmoil seems guaranteed, with significant negative effects on the British economy. But the European economy will not remain unscathed either. From our baseline forecast we estimate that the initial hit to Eurozone GDP could be a cumulative 0.3% by end-2017. But the extent of the damage will depend heavily on the political impact, which is likely to be profound. The risk of further fragmentation is high, which suggests that the damage could be greater and longer lasting. However, one cannot entirely exclude the possibility that Brexit might give dramatic impetus to European integration and reform. One thing is for sure: the genie has already left the bottle. The stone is rolling and will do some damage.
In this note, we investigate the potential political and economic implications the British referendum could have for the rest of Europe and, more specifically, the Eurozone. The main findings are:
• By agreeing to a ‘deal’, the rest of Europe has made itself vulnerable to copycats: other countries may also ask for exceptions and national special treatment. It is clear that the European Union and Eurozone are currently at a crossroads, facing further integration or disintegration. The success of ‘muddling through’ has seemingly come to an end. Brexit could be the catalyst or accelerator for one of the two directions.
• In a Brexit scenario, the rest of Europe would go through a period of financial market, but also political, turmoil. European leaders would have to spend even more time on keeping emerging separatist and populist movements at bay in order to avoid further centrifugal forces.
• While the political impact remains hard to quantify in a Brexit scenario, it seems certain that Europe will face a period of financial market turmoil, with collateral damage through FDIs and bank exposure and weaker trade. In the wake of a friendly divorce, the economy of the Eurozone would likely experience a cumulative loss of 0.3% by end-2017, with Ireland, Malta and the Netherlands taking the biggest hit. But more negative scenarios with greater and longer lasting GDP impacts are not hard to envisage.
The cost of Brexit for Europe (cumulative impact on GDP by end-2017)
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-0.8
-0.7
-0.6
-0.5
-0.4
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IE MT NL BE LU CY EUR DE ES FR FI AT IT PT GR
Cumulated GDP impact by end-2017(central projection, deviation from baseline in %)
Carsten Brzeski Chief Economist Germany and Austria Frankfurt +49 69 27 222 64455 [email protected]
FINANCIAL MARKETS RESEARCH
research.ing.com SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION
Damage from a rolling stone March 2016
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The rolling stone… In a speech at the London School of Economics on 5 February 2016, Martin Schulz, president of the European Parliament, made some interesting observations on the difficult marriage between the UK and the rest of the European Union: “The British often test our patience and good will with their continuous demands. They are demanding. They push hard. They insist. They just don't let go. Many of my colleagues say behind closed doors: Don't stop a rolling stone. If the Brits want to leave, let them leave." He immediately added, however, that it is not just because the UK can be frustrating that it would be in the European Union’s interest to let it go. Nevertheless, these comments confirm that at least political Europe is more concerned about the potential political impact from Brexit than the pure economic impact. These concerns fit into the current more general mood: rather than “it’s the economy, stupid”, Europe seems to be shaped by “it’s politics, stupid”.
We first of all take a look at the political impact that the British referendum – with a result going either way – could have on Europe, before presenting a more in-depth and quantitative analysis of the economic impact.
EU politics have already changed In fact, even before the British referendum has taken place, it has made a political mark on the rest of Europe. By offering the UK government a ‘deal’ at the February summit, the EU has left itself vulnerable to future renegotiations and cherry-picking from other member states. Why not do it like the Brits did, is what many national governments could ask, making further integration more difficult, with or without Brexit.
So, even if the British referendum brings a majority for British EU-membership, the genie is out of the bottle and other member states could follow, demanding exceptions and their own deals. Indeed, a recent survey revealed that a majority of European citizens already thinks that any special arrangement for the UK should apply to all member states1. Further disintegration of the EU is likely to follow. What could be a rather benign scenario for financial markets, a victory of the in-camp, could potentially still cause long-term damage to the EU.
Turning to the more obvious negative scenario, a victory of the out-camp, we see two main scenarios for the political fallout on the rest of the EU: a negative and a positive. On the negative side, it is clear that Brexit would knock the EU's finely balanced power structures off kilter. Without the British and their advocacy for free trade, the influence of more interventionist European countries, led by France, would become greater. In this regard, Brexit could also derail the current negotiations between the EU and the US on the Transatlantic Trade and Investment Partnership (TTIP). According to the latest Eurobarometer from November 2015, the pro-TTIP faction in Europe would lose an important voice as 62% of Brits were in favour of the TTIP (compared with an EU average of 53%).
In the same vein, there might be a shift towards more regulation and less liberalisation across industries. In May 2015, nearly all British MEPs voted in favour of a proposal to withdraw from the legislative process those bills that are considered obsolete or are suspected to add too much administrative burden to institutions and businesses working across the EU. Without British members, the majority in support of the cutting of red tape would have been only 58%2. Today, those countries considered to support a more liberal agenda would fall from a vote share of 25% (41% if Germany is added, sufficient for a blocking majority) to 15% (no longer a blocking majority if Germany is included)3.
1 Eichhorn,J, Hübner,C. and D. Kenaely, The view from the continent: What people in other member states think about the UK’s EU referendum, University of Edinburgh, 2016. 2 Frantescu,D.P.,Top 5 likely effects of Brexit on EU’s policies, VoteWatch Europe, December 2015 http://www.pubaffairsbruxelles.eu/top-5-likely-effects-of-brexit-on-eus-policies-by-d-p-frantescu-votewatch-europe/ 3 Global Council, Brexit: the impact on the UK and the EU, June 2015.
The story of the rolling stone… …which could do both political and economic harm
…as the UK has been the strongest advocate of more liberalisation and the reduction of red tape
Damage has already been done
Most Europeans think that the UK’s arrangements should apply to all member states… …risking more disintegration
Brexit would change the balance between liberal and more interventionist European countries…
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If the UK were to secure a good post-Brexit deal, the risk of copycats would clearly increase, claiming the same sovereignty. It cannot be denied that support for the European Union has diminished, even among core members. While the percentage of people holding a positive attitude towards the European Union still holds a relative majority, the number of people expressing a negative view is rising.
Pressure from very vocal nationalist parties could actually deter mainstream parties from moving on with deeper integration and push them instead to campaign for more devolvement of power to member states. In France, the far-right FN party is claiming that it would also seek to renegotiate EU membership if its leader, Marine Le Pen, is elected president in 2016. What’s more, 53% of the French population4 would now also be in favour of an EU referendum in France, with 33% advocating ‘Frexit’ against 45% preferring to remain in the EU. If Scottish independence also comes about, separatist movements, such as the one in Catalonia, could gain confidence and support.
The risk of broader fragmentation of the European Union has therefore increased, with potential negative economic consequences in the longer run. This is especially relevant in a context where the free movement of people has come under increased scrutiny in the wake of the refugee crisis. Just think of the possibility of the reintroduction of permanent border controls in the Schengen Area. This could reduce GDP in the Schengen Area by about 0.8% by 2025.5
Fig 1 The deteriorating image of the European Union: Percentage of negative answers
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Source: Eurobarometer
There is also a possible positive scenario for the political impact on the rest of the EU. Though the EU would be smaller in size post-Brexit, it is far from certain that a smaller EU would lose significant power at international institutions such the IMF or UN. In fact, the EU is still mostly represented by its member states. More importantly, Brexit could also be the catalyst for a political backlash and the long-awaited quantum leap towards a fully integrated monetary union. Indeed, it should not be assumed that the European idea has been completely shattered. In fact, a majority of people still support the commitment to an ever closer union. According to a recent survey, only 17% in France, 14% in Ireland, 10% in Germany and 5% in Spain disagree with this6. Brexit could be the beginning of a multi-layer European Union with different degrees of integration (more than only two). This
4Eichhorn,J, Hübner,C. and D. Kenaely, The view from the continent: What people in other member states think about the UK’s EU referendum, University of Edinburgh, 2016. 5 Aussilloux,V. and B. Le Hir, The Economic Cost of Rolling Back Schengen, France Stratégie, 2016. 6 Eichhorn,J, Hübner,C. and D. Kenaely, The view from the continent: What people in other member states think about the UK’s EU referendum, University of Edinburgh, 2016.
Risk of copycats and free-riders…
…with risk of fragmentation rising
Brexit could also be a chance for greater integration
…in France, the FN is talking of a referendum…
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might make it easier for the EU to bring Turkey closer to the EU, helping to find a deal in the refugee crisis. No matter what the outcome of the British referendum, it will have a lasting impact on EU, one way or the other.
Calibrating the economic impact Let’s turn to the economic consequences of a possible Brexit. Obviously, the magnitude of these consequences will depend crucially on post-Brexit relations between the UK and the European Union. While it is in the European Union’s best economic interest to renegotiate as quickly as possible a number of treaties with the UK, this outcome is not guaranteed. Having said this, we see several channels through which Brexit would affect growth in the European Union and the Eurozone, mainly through a short-term negative demand shock and a longer term less certain supply shock. In short:
• There will be an immediate impact on exports on the back of a sharp weakening of the GBP and a short negative demand shock in the UK.
• Sentiment in the European Union might also be impacted, hurting especially companies with large operations in the UK, but also more generally as fears of other separations might emerge and adverse market reactions create negative wealth effects.
• Investment both in the UK and the European Union will be affected, be it through valuation effects, repatriations or an entire shift of foreign direct investments.
• Economic policy might look different in a European Union without the UK, with potentially less emphasis on liberalisation and free trade.
As demonstrated in an earlier report, The shock from Brexit, A sharp but short blow from a UK EU exit, 27 January 2016, Brexit would have a profound (albeit not necessarily lasting) impact on the UK economy. 2017 GDP growth could slow to 1.5%, some 1.2% below what it might have been, with the GBP under severe downward pressure. The damage might, however, be short-lived if a trade deal could be agreed on within two years and bilateral deals are reached with non-EU countries. Given that the UK would have to renegotiate more than 50 trade agreements the EU has made with different regions and countries, the time span involved could turn out to last longer than two years.
The reverse question is what Brexit would entail for the rest of the European Union or, more specifically, the Eurozone. Quantifying the impact from a possible Brexit is anything but easy. As so often in these unprecedented big bang events, headline estimates of a quantified economic impact on the Eurozone and individual countries should be taken with a pinch of salt. Similar experiences have, for example, been made with the estimated impact from the TTIP on growth in Europe. Nevertheless, such estimates give at least some idea of the possible magnitude of the impact. To give an example, a study by the German Bertelsmann Foundation7, relying on Ifo estimates, shows that Brexit could lower Eurozone GDP growth by between 0.01 and 0.03 percentage points each year, adding up to between -0.10% and -0.36% in 2030. As we argue below, our estimates suggest that the impact would be considerably greater in the short run.
7 Bertelsmann Stiftung, Brexit: potential economic consequences if the UK exits the EU, Policy Brief 2015/05.
Brexit would affect growth though several channels
Trade hit by weaker demand and GBP It is undisputable that Britain plays an important role in the EU. Whether it is the share of total population, total GDP or FDI, Britain ranks among the top three countries and a Brexit would be a big loss. Obviously, the trade channel is the most direct channel through which a Brexit would hit the rest of the European Union. Looking at bilateral trade, Ireland, Malta and the Netherlands, followed by Belgium, seem to be the most exposed Eurozone countries to a Brexit, even if Brexit would clearly not mean that all trade would disappear. According to our head of international trade research, Raoul Leering, trade with the UK accounts for around 2 million jobs in the Eurozone (1.5% of total employment). In terms of added value, exports to the UK account for 1.6% of GDP.
Fig 2 Ireland and Malta…
Fig 3 …most affected by Brexit through exports
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Added value related to demand from UK (in % GDP)
Source: ING estimates, WIOD Database Source: ING estimates, WIOD Database
While not every sector is as vulnerable to a British demand shock, mining and quarrying, manufacturing in general and air transport would definitely take a hit. These sectors could suffer the most from the expected depreciation of sterling after Brexit. In France, press reports have indicated the damage to tourism receipts, estimating the negative impact from Brexit at 0.05% of GDP8. This figure would probably not be lower in Spain. A simple elasticity test we performed shows that the number of British tourists in Spain might fall by 15-20% if sterling were to drop to 0.90 against the euro.
According to a recent Bloomberg survey, sterling could drop to its 1985 levels in the weeks following a Brexit decision. Our own FX strategists expect GBP to drop to 0.90 EUR/GBP in the initial wake of market turmoil after a ‘Yes’ vote for Brexit. Taking this into account, our UK economist expects volume growth of imports to decelerate from growth of around 6% per year to a contraction of 2-5% over 2016-17. This effect in isolation would cost both the EU and the Eurozone 0.16% GDP growth, probably spread over two years. As Brexit would also revive fears regarding the stability of the European construction as a whole, it could also push EUR/USD close to parity by the end of 2016. This could partially offset the negative impact of a weakening of sterling.
8 Barlan,J., Pourquoi le Brexit n'est pas dans l'intérêt de la France, La Tribune, 25 February 2016
The most obvious channel is trade…
…which would suffer a double whammy of a weaker pound and dropping confidence
Sterling could fall to 0.90 EUR/GBP in the immediate aftermath of Brexit
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Foreign direct investment – a potential positive? Fig 4 Added value related to demand from the UK (as a percentage of sector added value)
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Source: ING estimates
Regarding foreign direct investment (FDI), Brexit could have both a short-term negative impact and potentially a somewhat longer term positive impact on Continental Europe. At least in the short run, European companies might have to take losses on revaluations of their FDI in the UK and, with a weaker GBP, profits translated into euro would probably take a hit. In addition, European companies that export to the rest of the world from their production facilities in the UK face the risk of being confronted with higher trade tariffs as the UK would probably be unable to renegotiate in a short timeframe all its existing EU trade agreements with the rest of the world.
That said, in the longer run a Brexit could actually reroute investments to Continental Europe, either through repatriations by EU companies or new investments from non-EU countries, which previously took the UK as an entry point to the European Single Market. Last summer, it was reported that Deutsche Bank had set up a working group to investigate whether London business should be returned to Frankfurt in the case of a Brexit. HSBC Holdings Plc announced that it would keep its headquarters in London but would probably have to move up to 1,000 investment bankers to Paris. Other international banks also mentioned contemplating moving a part of their business from London to the Continent (with Luxemburg also cited) in the case of Brexit.
These considerations are unlikely to remain limited to the financial sector, especially if post-Brexit free trade negotiations were to be rather difficult. The fact that the favourable tax treatment through the Parent-Subsidiary Directive would also have to be renegotiated in new tax agreements could also be a deterrent to FDI in the UK. A survey of 378 international companies with headquarters in Germany found that 29% would either reduce capacities in the UK or relocate capacities away from the UK9. This feeling was more prominent among financial service providers.
It seems fair to assume that in the short run, the countries with the highest FDI exposure in the UK would face the biggest negative impact on sentiment on the back of the
9 Bertelsmann Stiftung, The impact of Brexit, Views from the German and British business communities, February 2016.
The eventual net balance is unclear
FDI will suffer first, but relocation could eventually lead to a positive impact…
One survey suggested 29% of companies would cut back in the UK
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uncertainty created, the negative growth impact in the UK and the weaker GBP. In the longer run, however, relocation of investments should be growth-supportive in the EU, mainly in the Eurozone. However, this analysis doesn’t take into account the possibility of the UK actually taking measures to increase the attractiveness of the country again among foreign investors. So the potential positive impact on the rest of Europe shouldn’t be overestimated either.
Fig 5 FDI stock in the UK by country in 2014 (as a percentage of GDP)
Fig 6 Earnings from FDI in the UK in 2014 (as a percentage of GDP of country of origin)
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Source: ONS Source: ONS
In terms of GDP, Luxembourg, the Netherlands, Cyprus and Malta (though the FDI figures for Malta have been very volatile over the past few years) would be hit the hardest through the FDI channel in a Brexit scenario. They derive annual earnings of more than 1% of GDP from their FDI in the UK. A 10% decline in the GBP exchange rate could therefore potentially shave off 0.1% of GDP earnings derived from investment in the UK. However, one should be cautious when assessing these figures. Indeed, it is no secret that some of the countries mentioned have tax codes that implicitly encourage multinationals to channel their FDI via a holding company in the country concerned. It is therefore difficult to determine in which country exactly the ultimate investor is located.
Overall, the EU derives approximately 0.3% of its GNP10 in revenues from FDI in the UK. Hence, a 10% GBP depreciation would amount to a 0.03% loss, barring any additional impact on profits from weaker growth. Of course, Continental European financial investors would also suffer, but we discuss this in terms of wealth effects later.
Losses on banking exposure A third channel through which the European continent might be affected is banking exposure to businesses, households and the public sector in the UK. The exposure of Continental European banks to the UK is far greater than it ever was to Greece. That said, one shouldn’t push the comparison too far: banks have always been aware of exchange rate risk in the case of the UK, while for Greece they were confronted with a non-hedgable redenomination risk. Therefore, there doesn’t have to be a negative impact per se, though weaker growth in the UK in the wake of Brexit and a fall in the GBP exchange rate might still lead to some losses. Among the Eurozone countries, Germany, Spain and France are the most exposed in absolute terms. In relative terms, Spain and Ireland are by far the most exposed, followed by the Netherlands and Germany.
10 Theoretically, this directly affects GNP, rather than GDP, but some indirect negative impact on GDP should probably be taken into account.
Banking exposure is the third channel through which Brexit could affect the rest of Europe…
Luxembourg, the Netherlands, Cyprus and Malta would be hit the hardest through the FDI channel
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Fig 7 International banks' exposure to the UK as a percentage of GDP (3Q15)
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Banks, total Non-bank private sector Official sector All sectors (NL only)
Source: BIS
A stock market shock to wealth As we think a Brexit outcome would lead to a bout of risk aversion in financial markets; with stock markets likely to tank, a negative growth impact through a confidence shock is not unlikely. While this is hard to quantify ex ante, we start from the hypothesis that stock markets fall 10% across the board, a crude but not improbable assumption. The ECB estimated that a 10% increase in financial wealth in the Eurozone leads to a 0.6% (short term) to 1.5% increase in consumption11. While in general these effects are not symmetrical, showing a more subdued impact in the wake of a fall in financial wealth, there is likely some impact, probably close to 0.1% of GDP, if the financial market turmoil persists for a while.
In Belgium, Spain and Finland, households might experience a greater negative wealth effect than in France or the Netherlands, though the total impact on the consumer and sentiment probably goes beyond the assessment of the wealth effect.
Fig 8 Listed equity and mutual funds as a percentage of household income (2015)
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11 Sousa, R.M., Wealth effects on consumptions: evidence from the euro area, ECB Working Paper 1050;May 2009
…further contributing to negative wealth effects…
…particularly in Belgium, Spain and Finland
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The EU would lose UK budget contributions The final tangible and direct economic or financial impact from Brexit on the rest of the EU would be contributions to the EU budget. As the UK is one of the net contributors to the EU budget, the remaining countries would have to shoulder the missing money. The biggest burden would be on the biggest countries, with Germany having to pay €2.5bn in addition to its current €30bn to the EU budget. France would be in for an additional €1.9bn. Broadly speaking, all the remaining EU member states would see an increase in their gross contributions by around 8% to offset the British contribution to the EU budget – roughly speaking, less than 0.1 percentage points of the countries’ GDP. That said, even after a Brexit, the UK would not be free of payments to the EU. A lot would depend on future trade agreements between the UK and EU. Other European countries that are not part of the EU but belong to the European Economic Area and are organised in the EFTA actually do have to contribute to the EU budget. For example, in 2014, Norway, an economy smaller than the UK, contributed roughly €300m to the EU budget.
After the initial economic hit, politics would be key Adding it all up and after a few calibrations, this provides us with our own estimate of Brexit’s growth impact on the rest of the EU and Eurozone. In our view, on the back of financial market turmoil, GBP depreciation, uncertainty and investment effects, growth in the Eurozone could be some 0.1 percentage points lower this year and could lose another 0.2 percentage points by end-2017. The negative growth impact stemming from a weaker GBP should be mitigated by broader euro weakness vis-a-vis other major currencies. Thereafter, in the absence of further disintegrational forces and other shocks, the Eurozone should start to benefit from relocation of (foreign) investments, though this impact is surrounded by even more uncertainty. Given this uncertainty, we have given a range for the potential GDP impact.
The above computations represent a static analysis of the impact of Brexit if a new modus vivendi between the UK and the EU is found after a vote to leave. However, if the post-referendum negotiations turn out to be relatively acrimonious and no quick fix is found to retain free trade and a normal economic relationship, trade and investment might be further hampered after the two-year transition period.
If we suppose that import tariffs are reintroduced, the cost of Brexit would indeed rise further. Currently, tariffs in the UK are of course the same as in the EU. A rough calculation from Bruegel came to the conclusion that under the Most-Favoured Nation arrangement, British exports would on average face an import tariff of 3.2%. While the composition of EU exports to the UK is not entirely the same, and it also remains unknown whether the UK would apply the same import tariffs as the EU, a 3.2% tariff on European exports to the UK would cost close to 0.1% of Eurozone GDP.
Our trade economists also note the possibility of non-tariff barriers emerging, which after ten years would shave off a cumulated 0.25-0.6% of GDP. The negative impact on multinationals with subsidiaries in the UK would also be greater, though this might to some extent be compensated for by more business relocating from the UK to the EU.
In addition, the Brexit scenario could be followed by Scotland leaving the UK, with a referendum on this being likely within two years of a Brexit vote (see page 16 of our note The shock from Brexit, A sharp but short blow from a UK EU exit, 27 January 2016). This would obviously lengthen and aggravate the negative impact on the UK and, consequently, the EU and Eurozone. While we have made our impact estimates on the assumption that mutual economic interests will win the day in the post-Brexit phase, there is indeed the possibility of a more adverse scenario, with a rather hostile negotiation climate in which the UK would in a first phase end up more isolated from the EU. This would not only have a greater negative impact on the UK, but the EU would also suffer
Net contributions to EU budget will increase to make up for Brexit
All in all, the Eurozone would lose some 0.3 percentage points of growth by 2018…
…with obviously high uncertainty surrounding such estimates…
…especially if Brexit is followed by Scotland leaving the UK The economic damage could double if negotiations turn hostile
more in economic terms. In this case, a further 0.3 percentage points should probably be subtracted from the ranges in the Figure 9.
Fig 9 GDP impact of Brexit (divergence from baseline in %), ‘friendly divorce’
Cumulated impact by end-2017
Ireland -0.5 to -1.1 Malta -0.4 to -1.0 Netherlands -0.3 to -0.9 Belgium -0.3 to -0.7 Luxemburg -0.2 to -0.7 Cyprus -0.2 to -0.5 Germany -0.1 to -0.5 Eurozone -0.1 to -0.5 Spain -0.1 to -0.5 France -0.1 to -0.4 Finland -0.1 to -0.3 Austria -0.1 to -0.3 Italy -0.1 to -0.3 Portugal -0.1 to -0.2 Greece -0.1 to -0.2
Source: ING
Conclusion All in all, it is obvious that in the current slow growth environment the EU certainly doesn’t need a period of politically induced uncertainty. However, there is nothing the EU can do to influence the decision. In our view, Brexit would not only have a short-term negative impact on sentiment and trade, but also herald a long period of post-Brexit negotiations, diverting European leaders’ attention away from policies that might give the EU a fresh injection of dynamism. After the (still not resolved) troubles with Greece, too much political capital would have to be invested, not only in finding a new modus vivendi with the UK, but also in dealing with other members that become more vocal in demanding exceptions. Even these two authors do not fully agree on whether, politically, Brexit would do more harm or good in the longer term. For one, Brexit could be the trigger for stronger and closer integration, at least at the level of the monetary union, while for the other, Brexit could be the start of continued political uncertainty and too little focus and time for the really important issues in Europe.
Post-Brexit negotiations will divert attention away from more important initiatives
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Research analyst contacts Developed Markets Title Telephone Email
London Mark Cliffe Head of Global Markets Research 44 20 7767 6283 [email protected] Rob Carnell Chief International Economist 44 20 7767 6909 [email protected] James Knightley Senior Economist, UK, US, $ Bloc 44 20 7767 6614 [email protected] James Smith Economist, Developed Markets 44 20 7767 1038 [email protected]
Chris Turner Global Head of Strategy and Head of EMEA and LATAM Research
Padhraic Garvey Global Head of Rates and Debt Strategy 44 20 7767 8057 [email protected] Aengus McMahon Head of European High Yield Research 44 20 7767 8044 [email protected]
Amsterdam Maarten Leen Head of Macro Economics 31 20 563 4406 [email protected] Teunis Brosens Senior Economist, Eurozone 31 20 563 6167 [email protected] Bert Colijn Senior Economist, Eurozone 31 20 563 4926 [email protected] Dimitry Fleming Senior Economist, Netherlands 31 20 563 9497 [email protected] Raoul Leering Head of International Trade Research 31 20 563 4407 [email protected] Daniel Bosgraaf Economist, International Trade 31 20 576 4039 [email protected]
Jeroen van den Broek Head of DM Strategy and Research 31 20 563 8959 [email protected] Maureen Schuller Head of Covered Bond Strategy and
Romania Ciprian Dascalu Chief Economist, Romania 40 31 406 8990 [email protected] Silviu Pop Junior Economist, Romania 40 31 406 8991 [email protected]
Russia Dmitry Polevoy Chief Economist, Russia and CIS 7 495 771 7994 [email protected] Egor Fedorov Senior Credit Analyst, Russia and CIS 7 495 755 5480 [email protected]
Singapore Tim Condon Head of Research & Chief Economist, Asia 65 6232 6020 [email protected] Prakash Sakpal Economist, Asia 65 6232 6181 [email protected]
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