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Analysis
Awakening for Europe’s believers

Awakening for Europe’s believers

Bad and good news if Britain leaves

by Jacques Lafitte in Brussels

Fri 15 Apr 2016

The ‘Panama papers’ tax avoidance affair has badly dented the authority of David Cameron, the UK prime minister – and could fatally undermine his ability to win the 23 June referendum. Britain’s departure from the European Union would have important implications.

The UK economy is not nearly as strong as many Brexiteers like to think. At times, when it suits them, they like to present it as strangled by EU red tape. The reality is much worse.

The UK current account deficit reached an alarming 7% of GDP in the final quarter of 2015. It will get worse before it gets better. UK manufacturing output fell in February to the level of three years ago.

A key reason why the UK has been able to stay out of the International Monetary Fund’s clutches is because of large inflows of foreign direct investment. Britain guarantees access to Europe’s single market, free of tariffs and non-tariff barriers. So the UK has been immensely successful in convincing Japanese and US firms to invest and create jobs in Britain.

That guarantee may soon be gone, at least for the 10 years or more needed for negotiation of a post-Brexit UK-EU agreement. Partly because of worries about the referendum outcome, net foreign investment into the UK has already fallen sharply and could soon turn negative.

The consequences for sterling (down) and interest rates (up) are clear. The IMF has warned of ‘severe’ damage to the British and world economy if the UK leaves. International business leaders this week have told Cameron of the crucial importance of EU membership for foreign investment.

We will see another effect on the property market. According to The Economist’s calculations, the UK has the world’s third most overvalued real estate sector. A sharp rise in interest rates would burst the bubble. A correction has already started at the high end of the market.

The Brexit omens aren’t good for the City. A sizeable chunk of the UK’s GDP is at stake. A senior City figure has told me that plans are in place for relocating tens of thousands of jobs to, in this order, Dublin, Frankfurt and Paris. Among many other examples, regardless of the regulatory fate of the Deutsche Börse-London Stock Exchange merger, the European Central Bank would force repatriation to the continent of euro-denominated securities and derivatives clearing. The impact would be well over 1% of UK’s GDP, and the most successful part of it.

Renewed questioning about the future of Scotland and the likely tensions in Northern Ireland would take their toll too. France would denounce the Le Touquet treaty and put back the British border where it belongs according to Brexiteers – in Dover – resulting in more refugees arriving in the UK, not fewer. This would harm UK-EU relations and create yet more uncertainties for foreign investors.

That’s the bad news. Now for the good. A bleak UK scenario might turn out to be just what the EU needs: proof that the grass is not greener but scarcer outside. It may be salutary for the rest of Europe to show what happens when a country leaves for good.

If Britain leaves, there would be tensions – particularly in Poland, the Czech Republic and Hungary, and also in the Netherlands, France, Italy and in Nordic countries. But a British exit, for those who are left, would give a fillip to European integration. It’s important to remember that the present state of Europe has been frustrating not just for europhiles, but for eurosceptics too. Now there’s a chance to change that for the better, thanks to the coming reality check. For true believers in Europe, a British exit could bring a reawakening.

Jacques Lafitte is Chief Executive of Avisa Partners, Brussels, and a former aide to Yves-Thibault de Silguy, the European Commissioner responsible for introducing the euro in 1999. This is No.34 in the series.

OMFIF’s series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

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