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Brexit: analysis of the main economic and financial challenges

Abstract

The referendum in which the UK will decide whether to remain in the EU will take place on 23 June. Prime Minister David Cameron, having won most of the concessions he had sought to obtain from Brussels, will be actively campaigning in favour of the status quo. The polls indicate that the two sides are neck and neck. However, unless events unfold that cause undecided voters to flock to the pro-Brexit camp, such a worsening of the refugee crisis, a political crisis or terrorist attacks, it is highly likely that they will ultimately opt to keep the UK in the EU.

It is hard to say what the costs associated with Brexit might be, but they could be potentially too high to ignore. The financial markets are certainly keeping a close eye on the vote, as evidenced by the pound’s recent depreciation. Although most studies conclude that from an economic standpoint the UK has more to lose than the EU, the analysis is less clearcut from a political standpoint. Even an orderlyBrexit could severely undermine the cohesion of the EU and would require it to issue a strong political response in the form of a reinforcement of the Union’s institutions and a strengthened Franco-German partnership. On the commercial front, the impact could easily be contained by negotiating new trade deals. In contrast, the future of the UK’s financial system could be compromised. In the short term, no European financial centre can measure up to London. In the medium term, however, the European authorities would be unlikely to accept an agreement protecting the City’s interests.

Notwithstanding the strength of its economy, should Brexit occur, budgetary and current account imbalances would render the UK vulnerable. Even though the UK remaining in the EU seems to be the most likely scenario in our opinion, a risk premium on all UK assets is liable to materialise in the run-up to the 23 June referendum, particularly if the polls show increasing support for Brexit.

Introduction

Following his victory in the April 2015 elections, British Prime Minister David Cameron announced that an In/Out referendum on the European Union would be held “by end-2017”. After winning on his primary demands, Mr Cameron turned his efforts toward campaigning to keep the UK in the EU and called a referendum for 23 June. He also announced that the members of his government would be free to campaign for or against the Brexit, as their conscience dictated. On 22 February, the Prime Minister also laid out the modus operandi the day after a possible vote for Britain’s exit from the EU (Brexit). The government would immediately invoke Article 50 of the Treaty of Lisbon1, opening up a “two-year period to negotiate the terms of exit”.
The forces propelling increasing EU integration have always prevailed until now. The United Kingdom is the first country to openly debate whether to stay in the EU2. There are several reasons for this. Despite an initially sharp output contraction, the UK has come out of the crisis ahead of the eurozone, even if the comparison is limited to the core countries only. The Great Recession of 2008-2009 and the sovereign debt crisis that followed have put paid to recent calls to one day join the eurozone. And since the summer of 2015, the refugee crisis has changed the tone of the debate and deepened the rifts among Britons. Though the latest polls show that the Yes (to stay in the EU) and No (Brexit) camps are side by side, they also show that a significant portion of the population is still undecided; uncertainty that will probably last until the very last moment. 
The financial markets did not wait for the results of the vote, as evidenced by the pound’s recent depreciation. Although most studies conclude that from an economic standpoint the UK has more to lose than the EU, the analysis is less clear-cut from a political standpoint. Even an orderly Brexit (“soft Brexit”) could severely undermine the cohesion of the EU and would require the EU to issue a strong political response.

1. What are the studies saying about the impact of the Brexit?

It’s hard to measure the impact of membership in the EU because the economic and political dimensions are so closely intertwined. Of course, it’s impossible to say what might have happened to the British economy had the UK not joined the EU in 1973. Specifically, the gains linked to EU membership go hand in hand with the gains of globalisation. Still, a number of studies have attempted to measure the costs and benefits of membership. Most of these analyses are focused on elements that are the easiest to measure, in particular static gains (linked to the growth of the size of the market).

> The EU and the United Kingdom in brief 

 

  • The EU is the largest economic space in the world, outstripping the United States: 505 million people (60% more than the United States); i.e., equal to 37% of China’s population or 40% of India’s population
  • After Germany, the UK is the second largest EU economy, whether economically speaking (16% of the EU’s GDP) or population-wise (64.6 million people, i.e. one in eight of the EU’s population) 
  • One-third of global trade takes place with the EU as a partner, of which threefifths inside the EU. Excluding interzone trade, the EU is the biggest exporter and importer in the world
  • The EU is the UK’s No. 1 trading partner
  • UK: exports and imports represent 60% of GDP. Half of which involve the EU. Seven out of the 10 main countries with which the UK trades are EU members 
  • Two-thirds of cross-border investments worldwide involve the EU: one-third inside the EU and the other third with the rest of the world 
  • In the UK, foreign investors hold £10.6 trillion (more than 500% of GDP) of FDI. British investors hold about the same in foreign assets 
  • The EU represents two-thirds of cross-border FDI (whether as the destination or the source) 
  • The UK is one of the leading destinations for FDI, whether within the EU or worldwide 
  • The UK is the EU’s largest financial centre: it accounts for about 25% of all EU financial services and 40% of its financial services exports. Financial services account for 8% of Britain’s GDP 
  • The EU is home to 14 of the 30 systemically important banks in the world (vs. 8 for the United States) and accounts for 50% of global financial services exports.

 

Source: Bank of England

 

From a trade standpoint, it has to be said that the EU is more important to the UK than the UK is to the Union. UK exports to the EU represent almost 13% of GDP while exports to the UK from the EU represent only 3% of GDP. Estimates converge on the asymmetry of the cost of Brexit, with a far greater shock for the UK than for the rest of the EU (See box: study summary). 
This is why it is highly unlikely that we will see the UK leave the EU without negotiating a few trade deals that would absorb all or some of the shock of exiting the Single Market. However, because the costs are asymmetric, so are the negotiating positions. Admittedly the Europeans would have nothing to gain from throwing the UK into turmoil and so they are likely to make a few concessions to limit the costs of Brexit. However, under this scenario, it would be in their interests to negotiate an exit that is not completely painless to discourage others from following in the UK’s tracks. In this respect, there are several options available (See box).

> Should the Brexit go ahead, what kind of trade deals would the UK seek to negotiate?

It is clear a Brexit would not mean a return to the situation before the UK joined in 1973. Decommitment would be very gradual, and negotiating the exit would take a long time. Many often sticky legal issues would have to be resolved (competent courts), not to mention the institutional problems. To avoid a “confidence shock”, the British government and the European Commission would immediately try to reassure partner countries and would quickly begin negotiations. Clearly, attention would initially polarise on the trade relations component.
Several types of trade deals are possible. Those campaigning in favour of the UK leaving the EU are rightly putting forth alternatives for maintaining close ties with Europe. In this regard, it bears repeating, there are two distinct spaces: the European Economic Area (EEA) and the European Free Trade Association (EFTA).

1. European Free Trade Association (EFTA)

Today, Iceland, Norway, Switzerland, and Liechtenstein are the EFTA’s only four members. Created in 1960 by countries that were looking to benefit from trade deals without being full members of the EEC, the EFTA is a pure free-trade zone (with no transfer of powers), not a customs union like the EU1.

2. European Economic Area (EEA)

Created in 1992, the EEA is an economic union of 31 countries (28 EU members plus the EFTA’s member countries excluding Switzerland). Switzerland rejected EEA membership in a 1992 referendum. Just like the EFTA, this is a regional free-trade zone, not a customs union. The EEA confers the four freedoms (free movement of goods, services, capital, and persons). Furthermore, the EEA covers cooperation on R&D, education, social policy, the environment, consumer protection, tourism and culture. As such, EEA countries make a financial contribution to the EU budget in order to have access to the single market. However, the EEA does not cover the following key areas which remain under the EU’s remit: (1) common agriculture and fisheries policies, (2) customs union (i.e. no common external tariff in the EEA), (3) common foreign and security policy, (4) justice and home affairs and (5) monetary union (EMU). As such, it is not a genuine single market2. Moreover, Norway actively participates in several EU programmes, notably covering security and defence (European Defence Agency, Europol). It is estimated that only 20% of European legislation applies to Norway.

Two models have attracted the most attention

1. The model of Switzerland

Switzerland is a member of the EFTA, but not the EEA or the EU. That hasn’t prevented it from negotiating bilateral trade deals (120 agreements with EU countries, 20 of which are major agreements). Ultimately, the Swiss enjoy the same rights as EEA nationals with regard to the free movement of persons. One key difference with the EEA/EU is that bilateral agreements are fixed in time and cannot be changed without new negotiations. Moreover, there is no mechanism for enforcement. Finally, the Swiss have no say in European economic regulations, but they are so tightly wound in with EU countries that they have gradually had to comply with many regulations. 

2. The model of Turkey

On 1 January 1996, the customs union between the EU and Turkey came into effect. Goods are able to circulate unrestricted. Agriculture (bilateral agreements required), services and public procurement contracts are not covered by this union. It is important to note that Turkey de facto renounced part of its sovereignty in the hope of joining the EU. Specifically, in order to implement this customs union, Turkey was obliged to agree to: (1) the treaties previously signed between the EU and non-EU countries, (2) commit to not enter into treaties with non-EU countries without the knowledge of the EU, (3)
comply with all EU customs laws, and (4) accept the rulings of the European Court of Justice (in the absence of a single competent jurisdiction in Turkey).

The model of Norway would probably be the most attractive one for the UK post Brexit (the less costly and the easiest to put in place). But keep in mind that this option could only be secured through EEA membership and that it is far from obvious that EU countries would all agree to facilitate the UK access to the single market in the wake of Brexit.

Actually, we can see that none of the existing models would be likely to fully satisfy the UK and the EU in the wake of a Brexit, which means that it is highly likely we will see the negotiation of customised free-trade agreements, potentially with other additional bilateral agreements. In the latter case, the process would naturally be even longer and more arduous. Finally, the UK may wish to limit itself to the agreements negotiated under the auspices of the WTO. However, this is the least favourable outcome for the UK, and therefore the least likely.

In the negotiating period - which could last up to two years or be extended pending an agreement - governments would seek to minimise the impact on confidence by guaranteeing that trade between the EU and the UK would not be disrupted. The common interest requires, in this case, that everything possible be done to ensure a soft Brexit to minimise the impact on trade. Negotiations on the financial sector
and regulations are expected to be more tense (diverging interests in terms of where businesses are located and regulations). In the longer term, the array of possible agreements makes any ex ante assessment of the Brexit impossible.

1 The U K was one of the founding countries, but left in 1973 when it joined the EC.
2 It is not possible to be an EEA member without being part of the EU or the EFTA. So, practically speaking, for a Brexit, the UK should formally rejoin the EFTA if it wants to stay in the EEA. The UK would probably have to apply for EEA membership. Nothing is automatic. There would probably be tough negotiations ahead. Nonetheless, Article 127 of the EEA provides some time, because it makes trading possible in a context that does not change for 12 months after departure.

 

The dynamic impacts (productivity, the location of economic activities, etc.) are rarely analysed3 while the impact on EU governance goes largely unreported. Ultimately, however, the “dynamic impacts” are actually the most likely to affect the potential growth rate4 of the United Kingdom, not to mention Europe’s entire institutional structure. This is because a Brexit runs the risk of setting the stage for the unravelling of the Single Market. The UK’s withdrawal from the EU would undermine it by showing that the European Project can be called into question. However, the gains linked to the European Project are partially associated with the fact that the commitments undertaken were assumed to be permanent. And thus the costs to the rest of the EU may be underestimated.

2. The future of the british financial system is at stake

This is clearly the most sensitive aspect of the Brexit. The British financial system has an old competitive advantage that dates from the 19th century and that one post-war government after another has learned to leverage. The size of the financial sector has grown eightfold over the past 50 years. It represents 830% of GDP (2014); the banking sector accounts for the lion’s share (410% of GDP while the remainder is made up of insurance companies, pension funds and other financial institutions (asset managers, hedge funds, private equity etc.). The UK is financially integrated with the rest of the EU: the assets of the British banking system in the EU-15 represent $880 billion (mainly loans to corporations and households) and the UK’s exposure to EU banks stands at $1.7 trillion. A few figures sum up the scale of the challenges facing the economy: the financial services sector represents nearly 4% of all jobs; exports of financial services represent 9% of total UK exports, of which 40% are absorbed by Europe.

No European financial centre can hold a candle to London as long as the UK remains in the EU. In the event of a Brexit, current European regulations would make access to the Single Market difficult. Moreover, it would be very costly to European banks, which would have to relocate entire swaths of their activity from London to elsewhere. No to mention that very few European financial centres today can offer satisfactory conditions as a fall-back solution. Lastly, the entire European financial sector would lose in the short run. However, unlike what would happen to trade, it is hard to believe that the European authorities would agree to negotiate an agreement protecting the interests of the City in the event of Brexit. From a strategic point of view, we could even uphold the idea that it would be in the interest of the major EU countries for the UK not to come out of the negotiations completely unscathed, in order to discourage smaller countries from following in its footsteps. Negotiations over finance and agriculture are expected to be some of the most difficult.

> Concessions made to the British Government: David Cameron won on the main issues

The demands were on four key points:

1. SOVEREIGNTY. Explicit protection of the interests of the EU member countries which are not in the eurozone; in others words, the Cameron government wants decision-making rules that guarantee that the UK would be exempt from eurozone decisions. David Cameron partially won his cause with a so-called “red card” mechanism for EU projects, enabling him to block Brussels legislation as long as there is a m ajority of 15 national parliaments opposed to it.

2. COMPETITIVENESS. A stronger approach on competitiveness: strengthening of the Single Market, in particular building a larger energy market; free trade negotiations in the context of the TTIP. David Cameron has obtained the vague assurance that the standards and regulations weighing down business will be lightened. 

3. MIGRATION. A limit on some social assistance to European migrants; this demand mostly concerns migrants from Eastern Europe. The government wants to deny them benefits during their first four years
in the UK. Actually, access to in-work benefits will be “graduated from an initial complete exclusion but gradually increasing”. David Cameron has scored a point on what appears to be a breach of the rinciples of non-discrimination among European citizens and freedom of movement1

4. GOVERNANCE. The deal recognises, for the first time: (i) that the EU has more than one currency, (ii) that British taxpayers will never be asked to support the eurozone and (iii) that any issues that affect all EU members will be discussed by all member states, and not only by eurozone countries. 

David Cameron, having obtained the main concessions he was seeking, has kept his word and is now actively campaigning to stay in the EU. Immigration is clearly the issue of greatest concern to the electorate, especially in the aftermath of the refugee crisis.

1 It should be noted that a breach in the fundamental principle of non-discrimination was opened up by the Court of Justice of the European Union (CJEU). In its decision of 15 September 2015 in a case brought by Germany, the Court ruled that that denying Union citizens, whose right of residence in the territory of a host Member State arises solely out of the search for employment, entitlement to certain social benefits does not contravene the principle of equal treatment. This precedent probably played a role in the negotiations. An amendment to the treaty is not necessary to satisfy Britain’s demands. Not to mention that this case-law ruling was deemed opportune by a number of EU Member States, worried about the social consequences of an increase in the flow of refugees in the future.

3. Brexit would have a sizeable impact on the UK's position in the world and the cohesion of the Union 

Leaving the Union would obviously grant the UK more leeway for negotiating free trade deals in line with its domestic priorities; however, its negotiating power would be lessened in international talks. For its part, the EU would lose some of its appeal – at least in the short term – by allowing a “financial market heavyweight” to leave. The Union could certainly compensate by deciding to push for closer integration among its members. But such greater coherence, without the UK, by moving the centre of gravity of the EU towards Continental Europe would very certainly alter relations between France and Germany, requiring the strengthening of a Franco-German axis, which has already been shaken by the financial crisis.
Not to mention that if the UK’s exit proves to be a success, other countries would likely follow in its tracks sooner or later. Hence, the Brexit is a threat to the Union’s cohesion. There is perhaps more to be feared from political contagion than from financial contagion because it would weaken Europe as a whole on the international stage. This aspect would play a key role in the declarations and negotiations that would follow a potential Brexit. All things considered, neither the British government nor the EU wants to leap into the void. The financial turbulence that started with the new year and the rise in macro-financial risks will inspire the greatest caution in the event of Brexit.

4. Brexit: what would the impact be on public finances? 

A gain for the UK budget? The supporters of the Brexit frequently point to the savings public finances would enjoy. The direct cost of membership in the EU from now until 2019 is estimated at between £8.5 and £9.5 billion, i.e. a little less than a ½ point of annual GDP. Ex-ante, Brexit would appear to be a source of savings for the budget. That being said, based on the partnership agreements being contemplated, the savings would not be the same. So, if the budget is calculated on the basis of Norway’s status, the cost would decrease only 9%; using Switzerland’s status, it would decrease by 55%. But as the UK would simultaneously lose the benefits it enjoys as an EU member, the ex-ante gain would be marginal. Furthermore, leaving the EU would result in a deterioration of the public deficit due to lower tax receipts. In other words, the estimated ex ante gain disappears ex post as any deterioration in the budgetary balance would ultimately depend on the extent of the loss of economic activity.
This is without considering that the EU’s main items of expenditure relate to agricultural and regional structural funding. Meanwhile, Scotland and Northern Ireland receive, per inhabitant, much more than England, which would require the British Government to provide compensation that would become a drain onthe State budget.
Toward losing its AAA rating? Standard & Poor’s has issued an unambiguous warning: Brexit would likely lead to a one notch downgrade in the UK’s credit rating, causing it to lose its AAA rating. Another reason given is the likely drop in FDI inflows to the UK. Furthermore, a repeat referendum on Scottish independence would most certainly be organised, which would weaken the UK. Still, we note that the agency’s concerns also relate to the risks to cohesion for the rest of the EU.

5. What are the implications for the economy and the markets?

Because of the uncertainty generated by the opinion polls, which remain close, the business climate could deteriorate during the in/out referendum. Notwithstanding the international context, domestic growth may slacken, prompting greater caution on the part of the Bank of England (BoE). Therefore, it is highly unlikely that key interest rates would be raised before the results of the referendum are known.
On the bond market front, the Brexit’s impact is uncertain On the one hand, the deterioration in public finances and the probable loss of the AAA rating should, all else being equal, drive bond yields higher (investor mistrust). On the other hand, the weak economic environment combined with the possibility of a shock to potential growth in the medium term – implying lower equilibrium interest rates – could justify a decline in bond yields. We note that potential upward pressure on yields could be contained by the BoE, which, under such a scenario, would strive to prevent a bond market shock from spreading to the real economy and threatening financial stability. That being said, with the extension of QE by the ECB, liquidity is going to remain very high and contribute to containing all long-term bond yields in Europe (search for yield).

6. Brexit would cause the pound to plunge

The UK’s current account deficit (-4.5% of GDP in 2015 after -5.0% in 2014) has never been so high since the UK entered the EU in 1973. Over the past five years, it has been more than 50% financed, on average, by net inflows of foreign direct investment (FDI). And FDI is directly related to the UK’s access to the Single Market. The very act of negotiating new agreements in the event of a Brexit could jeopardise future FDI inflows.
It is true that the UK’s foreign debt is fairly low (about -25% of GDP) and the pound’s real effective exchange rate is close to its 20-year average (barely higher than its median level since joining the EU). But with the strength of the recovery, the pound has appreciated these past two years. Currency appreciation and a deteriorating current account position usually do not mix. It is clear that the current account deficit would be unsustainable in the medium term if capital inflows to the UK were to fall. In this case, a realignment of the real exchange rate would become a necessity. 

Conclusion

At the end of the day, we expect the British to vote to stay in the EU, in order to avoid a leap into the unknown. However because of the uncertainty, it is hard to say what the costs associated with Brexit might be, but they could be potentially too high to be ignored. Notwithstanding the strength of its economy, should a Brexit occur, budgetary and current account imbalances would render the UK vulnerable. The pound is the market variable most likely to crystallise fears between now and 23 June. In addition, in the wake of a Brexit, David Cameron would no doubt have to resign ; Boris Johnson would likely succeed him but with no clear programme. For their part, EU countries will not want to facilitate the UK access to the single market. Subsequently, negotiations would be tense, notably concerning financial services. Against this backdrop, in the wake of a Brexit the pound would fall and the sovereign spread with core eurozone countries would most likely widen, at first, and the equity market would take a hit. Even though the UK remaining in the EU seems to be the most likely scenario in our opinion, a risk premium on all UK assets is liable to materialise prior to the 23 June referendum, particularly if surveys show that the probability of Brexit is rising (see Box: What do the polls say?).
In the event of Brexit, against a backdrop of a threefold shock (financial, economic and political), the withdrawal of the UK would be the opportunity to kick-start the eurozone (and in particular the Franco-German pairing), which would likely take the opportunity to strengthen the Union’s institutions and federal aspect. We have indeed seen that Europe has always been able to consolidate its institutions in times of crisis.
We can observe that the refugee crisis has had a big impact on the polls since last summer, with the gap between the two sides narrowing considerably. Between now and 23 June, polls will play a decisive role, especially if one of the two camps makes significant headway. If the pro-Brexit camp in particular were to take a commanding lead, this would undoubtedly weigh on business and consumer confidence and alarm the financial markets. A return to levels seen during the sovereign debt crisis (2011-2012) would warrant particular attention. On the other hand, a repeat of the trend from the first half of 2015 would spell good news for the economy, which already boasts strong fundamentals. In any event, the ‘undecided’ figure will also have to be closely monitored, as support could quickly spill over to the ‘leave’ camp if tensions resurfaced in Europe.
While the polls have recently stabilised, with no strong discernible trend since the beginning of the year, the final result will not be certain until the last moment. In our assessment, this is the most likely scenario. If major tension is avoided between now and the referendum date, we anticipate that undecided voters will ultimately take a cautious stance and opt to stay in the EU, siding against a leap into the unknown and a revival of tensions within the United Kingdom itself. This is, after all, the position being actively campaigned for by the Prime Minister and the business community.

> Brexit: What do the polls say?

The “poll of polls” compiled by Financial Times researchers is the most comprehensive summary indicator of polling trends ahead of the 23 June referendum.

The poll of polls is “[calculated] by taking the last seven polls from unique pollsters up to a given date, removing the two polls with the highest and lowest shares for ‘remain’, and calculating the average of the five remaining polls”. To facilitate the readability of long-term trends, we smoothed the poll of polls data by calculating a series of moving averages each combining five results from different pollsters up to the date in question. For example, for 29 February 2016 (the last poll of polls available), we took the average of the polls conducted between 22 and 29 February (six polls in this case). We then removed
the ‘undecided’ figure, leaving only the ‘remain’ and ‘leave’ options.

 

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1 Article 50, introduced into the Treaty on European Union by the Lisbon Treaty, provides the legal basis and specifies the procedure to be followed. It is important to note that should the Brexit occur, the UK’s effective withdrawal from the EU could take up to two years: Article 1: “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.” Article 2: “A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union(...).” Article 3: “The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.”
2 A first referendum on staying in the Common Market was organised in the UK in June 1975. The Yes camp came out on top, winning nearly 63% of the vote, but at that time the context was strikingly different: there were only nine member EU countries and integration had to do first and foremost with trade. Moreover, we are disregarding the issue of Greece, whose membership in the eurozone and in the EU was debated amidst the throes of a crisis beyond its control.
3 The method used by Campos et al. is probably the best at capturing the dynamic impacts in because it seeks to infer, via the experiences of smaller European countries outside the EU, what would have happened had the UK not joined the EU. 
4 The impact on productivity is the first that comes to mind. But the contribution of demography should not be forgotten Since 1973, the UK’s population has increased by 8 million people. While 40% of this increase is natural, 60% is due to immigration, of which 20pp has been from other member states of the Union. The percentage of immigrants from the EU has grown dramatically since enlargement in 2004. The UK’s appeal would certainly be considerably tarnished should a Brexit occur. Which could, regardless of productivity developments, ultimately weigh on growth potential.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From an economic standpoint, the UK has more to lose than the EU…

 

 

 

 

 

 

 

 

 

…but from a political point
of view, that is less sure

 

 

 

 

 

 

 

 

 

 

 

 

There are alternatives to EU membership...

 

 

 

 

 

 

 

 

 

 

... But none of them would suit the UK government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The UK could officially ask to join the EEA, but the membership is not automatic

 

 

 

 

 

 

 

 

A Brexit could open the door to the single-market disintegration

 

 

 

 

 

 

 

 

 

David Cameron won on the main issues

 

 

 

 

 

 

 

 

 

 

 

 

 

Brexit would put the cohesion of the EU in dange

 

 

 

 

 

Leaving the EU would likely result in a deterioration of the UK’s public deficit

 

 

 

 

 

Neither the UK government, nor the European Commission want a leap into the unknown

 

The current account deficit has never been so high since the UK entered the EU

The external deficit would not be sustainable if FDI inflows were to dry up

 

A risk premium on all UK assets is liable to materialise prior to the 23 June referendum

 

 

 

The progress of undecided in polls must be closely monitored

Publication finalised on 1 March 2016 

Didier BOROWSKI, Head of Macro Economics

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Brexit: analysis of the main economic and financial challenges
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