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Concerns over Brexit do not end at the English Channel. Other European economies are following events closely over fears they could suffer because of their ties with the UK.
“We keep all our fingers crossed for the Brits to decide to stay in the union,” Per Bolund, Sweden’s financial markets minister, said recently of Thursday’s vote in the UK on whether to remain part of the EU.
Daniel Mulhall, Ireland’s UK ambassador, said: “It would be remiss of us not to draw to the attention of [Irish] people here in Britain the implications and the risks we see to British-Irish relations”.
Financial markets have been roiled for weeks as opinion polls pointed to a lead for the Leave campaign, although the UK stock market and sterling rallied in recent days on fresh polling suggesting British voters would opt to Remain.
The consensus among economists is that Brexit would leave the UK’s economy up to 9.5 per cent smaller over the long-term. For the rest of Europe, estimates range from a hit of 0.1 per cent to up to 2 per cent of national income. The extent of the damage will depend on a host of short- and longer-term consequences of Brexit.
On day one after a UK vote to Leave, economists expect sterling to fall sharply, mitigating some of the pain for British exporters. But for other countries, weaker sterling will lower the value of the UK assets held by their governments, companies and households.
The Netherlands is particularly exposed: Dutch investors own €230bn worth of assets in Britain, equivalent to 34 per cent of its economy. A sterling depreciation of 20 per cent, forecast by the National Institute for Economic and Social Research, would cut their value by €46bn. Investors not adequately hedged against such a currency move would face a serious drop in wealth.
If the UK economy rapidly fell into a recession, which the Bank of England has said is a possibility, the countries exporting most to the UK would soon feel the effect. Germany is the biggest exporter, but the real pain would be most acute in Ireland and Malta, where about 5 per cent of jobs and economic activity depend on trade with the UK, according to analysis by ING, the Dutch bank.
In a nightmare scenario, a severe shock from Brexit to asset prices and the value of sterling could spread contagion through the European banking sector. Banks across 11 of the largest EU economies are estimated to own almost €1.3tr in UK assets: a severe Brexit shock could spark a series of banking failures that would make the Greek crisis of 2012 look small.
However, that outcome is thought to be low probability as banks are safer than before the financial crisis and the danger is well understood. “Banks have always been aware of exchange rate risk in the case of the UK,” say Peter Vanden Houte and Carsten Brzeski of ING, “while for Greece they were confronted with a non-hedgable redenomination risk.”
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After the initial shock of Brexit has passed, economists see longer term dangers for Europe.
If agreements to limit tariffs can be negotiated, the worry is that the largest effects on trade would come from new non-tariff barriers, such as different product standards, labelling requirements and border checks delaying movement of goods and services.
Ben van Beurden, chief executive of Shell, the Anglo-Dutch oil company, warns that, following Brexit, “there will be a path of divergence, and that will have all sorts of inefficiencies.
“That’s not good for companies like ours that thrive by there being no barriers”.
Even greater anxiety surrounds a potential domino effect on the politics of Europe, destabilising its fine balance of power.
Inspired by the UK, a number of European nationalist and far-right parties are demanding referendums on EU membership or their own concessions from Brussels.
Although the leaders of Germany and France would try to bind the rest of Europe closer together after Brexit, they would be hampered by pre-existing policy disputes and by public demands in many of the biggest economies for national parliaments to play a stronger role.
Some in financial services see opportunities for Europe after Brexit, notably the chance to win business and shift activity out of London.
Alex Wilmot-Sitwell, head of the European arm of Bank of America Merrill Lynch, thinks that “a significant amount of financial trade currently booked in London would leave if the UK left the EU”. Mathilde Lemoine, a member of the French government’s budgetary watchdog and chief economist at the Edmond de Rothschild private bank, agrees. “Brexit could boost eurozone gross domestic product by 1.3 per cent after two years”.
But most experts believe the gains for other countries would be outweighed by the costs. Klaus-Peter Müller, chairman of Commerzbank warns: “The reality is that an Out vote will produce only losers in the UK and across the EU.”
Additional reporting by James Shotter and Patrick McGee