Report

Here’s What Happens if Britain Dumps the EU

A Brexit could make the U.K.’s special relationship with the United States a lot less special.

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The death of London as a financial center. A trade war between Germany and Britain. The possible collapse of a historic trade deal. When British voters head to the polls this summer to decide whether to stay in the European Union, the results will have major repercussions at home and abroad — and could trigger economic meltdowns in both the U.K. and Europe.

At issue is the so-called Brexit, which would see London choosing to leave an alliance it helped create 43 years ago. For ordinary British citizens, the impact would be felt at airports and train stations, where it could be more difficult to freely move across Europe for the first time in decades. They could also see European-produced goods become more expensive because of an expected fall in the value of the pound. On Feb. 21, amid Brexit fears, the sterling had its biggest one-day drop since the U.K.’s 2009 banking crisis. It could even affect their favorite sports teams because it would be harder to sign soccer players from mainland Europe to contracts in the U.K. because they would not meet more stringent visa requirements.

Not surprisingly, Brexit advocates see things very differently. To them, leaving the EU would keep European immigrants from abusing Britain’s welfare system. They say it would give the British government more freedom to negotiate independent trade deals with countries like India, China, and the United States. And advocates say severing the relationship would put Europe’s Syrian refugee problem squarely in the hands of Brussels, not London.

That may be significantly understating the real-world economic impact of a Brexit. U.S. Trade Representative Michael Froman said last year that it would not negotiate the Transatlantic Trade and Investment Partnership (TTIP), a deal that would create a free trade zone between the United States and Europe if it does not stay in the EU. According to Michael Leigh, who served as director general for enlargement at the European Commission from 2006 to 2011, “you could almost forget” TTIP if a Brexit occurs.

“The U.S. would need to work out a new position in terms of its relations with key European countries,” added Leigh, who is now a senior advisor with the German Marshall Fund. “The U.K. would become more marginal.”

Add uncertainty to the mix: Nobody’s quite sure what happens to the EU without Britain because no nation has left the EU before. This is the same fear that gripped the EU last summer, when Greece was on the verge of going its own way rather than accepting the onerous austerity measures Brussels was pushing it to adapt.

A recent research note published by economists from Citigroup said the Brexit “will be highly negative” for both economies because it would throw out the trade blueprint between the European alliance and the U.K. About 45 percent of British exports going to Europe would be at risk, as would the 16 percent of total EU goods that cross the English Channel to the U.K.

If Britain leaves, the EU would lose about $3 trillion in GDP because it would lose the alliance’s second-largest economy (Germany has the largest). In February, Moody’s, the ratings agency, said “the economic costs of a decision to leave the EU would outweigh the economic benefits,” citing declining exports and “a prolonged period of uncertainty, which would negatively affect investment.”

German parliamentarian Gunther Krichbaum, a close ally of Chancellor Angela Merkel, has threatened a trade war if Britain leaves, warning that Berlin would slap steep tariffs on British exports coming into Germany. In Rome, meanwhile, Italian Prime Minister Matteo Renzi said he hopes “Britain remains inside the EU, but if it leaves, the consequences will be worse for British citizens than for European ones.”

“It’s a very uncertain scenario. If the U.K. votes to exit, it will be a long, protracted process to come to terms with the EU,” Nicolas Véron, a French economist and visiting fellow at the Peterson Institute for International Economics, told Foreign Policy. “You could have a reasonably friendly divorce, or you could have a very acrimonious one. It’s really uncharted territory.”

Pro-Brexit backers take a different view. They argue that the U.K. doesn’t have enough influence in Brussels, despite sending 350 million pounds, or $498 million, to the EU capital each week. Capital Economics, a research consultancy, predicted “business as usual” if a Brexit occurs, anticipating no major economic disruptions. Nigel Farage, leader of Britain’s far-right U.K. Independence Party (UKIP) has proposed giving the U.K. the same status as Norway, which has access to the single market but is not bound by many EU regulations on farming and domestic policy.

The move toward a Brexit began in 2013, when the country’s Conservative and eurosceptic prime minister, David Cameron, promised to give British voters a chance to leave Europe. Since then, he has demanded a reform package from Brussels that would end what he derisively terms “benefit tourism,” a system that allows EU citizens to come to the U.K. and immediately claim welfare benefits. Cameron wants them to wait four years to be eligible and to stop Europeans working in Britain from sending money to children in their home countries.

The new package would also eliminate EU regulations on employment law that Cameron says prohibits business. He wants Britain to be exempt from the goal of an “ever closer union” across Europe, something he believes impedes British sovereignty and gives too much power to Brussels.

His EU partners largely capitulated to these demands last month, at a summit in Brussels. Cameron proclaimed victory, saying the deal with the EU had “delivered on the commitments I made at the beginning of this renegotiation process.” He’s now pushing for Britain to stay in Europe.

Whether his fellow Brits agree with this sentiment remains to be seen. Boris Johnson, the eccentric mayor of London, is campaigning for Britain to leave, as is UKIP. Even some members of Cameron’s Conservative Party want to depart.

The British business community is divided over whether to stay or go. The Society of Motor Manufacturers and Traders recently reported 77 percent of its members believed staying in the European Union was best for business. Heads of 36 FTSE 100 companies signed a letter last month urging Britain to stay. On the flip side, 200 British entrepreneurs from different industries signed a letter to the Daily Telegraph last Thursday calling for Britain to leave, arguing that their companies would be more competitive and successful if they weren’t subject to the EU’s often-intensive regulation.

On Tuesday, Bank of England governor Mark Carney refused to explicitly take sides, but warned that the Brexit is “the biggest domestic risk to financial stability” and that some banks would leave London if it occurs. The U.K.’s famous bookmakers favor Britain staying, giving a vote to remain a 77 percent chance. Pacific Investment Management Co., a major bondholder known colloquially as PIMCO, puts the chances of a Brexit at 40 percent. A recent YouGov poll found about 37 percent of Brits wanted to stay in the EU, 38 percent wanted to leave, and 25 percent were unsure.

All of this uncertainty has British allies on both sides of the Atlantic spooked. U.S. President Barack Obama and Secretary of State John Kerry have urged Britain to remain a part of the European Union, and it is leading some to question the so-called special relationship between London and the United States.

“Britain has become — and is widely perceived to be — a less dependable and less capable ally, and reality and perception would intensify if the U.K. were to take a step that would marginalize its role on the continent,” Richard Haass, president of the Council on Foreign Relations, wrote.

“It is hard to envision Brexit resulting in anything other than a more parochial and less influential U.K.,” he added.

A British diplomat who spoke on the condition of anonymity to speak freely about Cameron’s pro-EU efforts told Foreign Policy that the prime minister is “making the case that to leave the EU is a leap into the darkness.”

“We have the best of both worlds at the moment — we can exercise our sovereign responsibility for national security but have the freedom to cooperate closely with our EU partners to tackle the threats we face,” the diplomat said.

One area likely to take a hit, according to Véron, is The City of London, which is similar to New York’s Wall Street, where many banks have offices. Véron said regulatory uncertainty about doing business in Europe from London could lead multinational banks like JPMorgan and Goldman Sachs to shift their operations to other countries; both have donated to the “Britain Stronger in Europe” campaign. He suggested the Netherlands, which has a banking history dating back to the 17th century. Paris has also been floated as a possibility.

The prospect of a Brexit is also dangerous politically, said Heather Conley, director of the Europe program at the Center for Strategic and International Studies. She said Europe is facing a “perfect storm” of crises: the ongoing debate about bailing out Greece, the Syrian refugee crisis, and the looming Brexit referendum. The Greek flirtation with leaving the EU, combined with the U.K. referendum, has made the prospect of abandoning the alliance a possibility for other members who don’t want to deal with broader European issues.

“The migration crisis has put the foot down on the accelerator of saying no to Europe, saying no to refugee quotas,” Conley told FP. “What other EU countries in the EU will say is, “I don’t want to be part of an ever-closer union.’”

It also emboldens Europe’s burgeoning far right movement. Conley said one of the motivations behind Cameron’s referendum demand was to freeze UKIP out of mainstream British politics. Since then, UKIP and other far right parties, like the National Front in France, have grown only more powerful.

National Front leader Marine Le Pen “can now demand the same bargain that Cameron got” and call for a French referendum on Europe. Le Pen has called herself “Madame Frexit.”

“There’s a democracy deficit in Europe. People feel alienated from technocratic Brussels,” Conley said. “Every time they ask in a referendum, Europeans reject Europe.”

Photo credit: John Thys/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis

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