The political fallout from a Brexit — Britain leaving the European Union — could have greater repercussions than any impact to the economy.
That’s according to Simon Wells and his team at HSBC who released a report saying that while “a UK vote to leave the EU could dampen European economic activity … the political fallout could be greater.”
Britain’s government released an in-depth 200-page report on Monday stating that a Brexit will make Britons £4,300 worse off a year, shrink the economy by 6% by 2030, and of course cause major issues on trade.
However, while analysts at HSBC agree that the UK leaving the EU will have a detrimental economic impact, Wells and his team highlight how the political implications of Brexit could prove more damaging (emphasis ours):
The concerns of the UK electorate — migration and a loss of sovereignty — are being voiced by voters in most EU countries. And, as in the UK, Eurosceptic parties are increasingly influencing the mainstream political agenda. This has two implications.
First, there is likely to be considerable disagreement within the other EU states about how to handle the UK in the event of a vote to leave and what access to provide the UK to the free-trade area in a post-referendum deal.
Second, the UK provides a litmus test for other countries and referendum contagion is a risk. Other countries may not wish to leave but might increasingly push back on further integration. The ambition of political and fiscal union to secure the monetary union is looking increasingly hard to realise.
The HSBC report also supports the views from the UK Treasury. Wells and his team highlighted how trade ties are not only likely to become a big issue for Britain if it were to leave the EU, but for the rest of the 28-nation bloc. This is because the EU relies on Britain just as much as Britain relies on its importing and exporting relationship with the EU:
And here is the summary of the economic and trade impact from a Brexit from Wells and his team:
The UK is a major source of demand for goods from the continent.
But the UK is also closely integrated into European supply chains. If the UK were to choose to leave the EU and trade barriers were to rise, cross border flows would be disrupted to the detriment of producers on both sides of the channel.
The UK is also a major provider of financial services to the EU.
Cities like Paris and Frankfurt might hope to build up their own financial centres. But it is unclear how London’s position as a global financial services provider would be affected if there were to be a Brexit.
The UK’s decision could also alter capital and labour flows.
And a reduction, or absence, of contributions to the EU budget might put pressure on ‘social cohesion’ funds which have proved influential in developing Eastern Europe.
The economic implications alone are significant.
We could end up downgrading European growth by a few tenths of a per cent. Given that we only forecast growth of around 1.5% this year and next it would only make the recovery more sluggish.