If the UK votes to leave the EU, it would have significant consequences across the region. Indeed, it would represent a third phase in Europe’s rolling crisis, following the Eurozone crisis and the migration crisis, both of which remain unresolved.
Voter disaffection has been rising and the region’s political capital and policy-making capacity have both been run down after years in crisis-management mode: the scope to sustain a strategy of muddle-through is not limitless. A UK vote to leave would be a major setback for the bloc and would revive existential questions about the region’s supranational institutions.
While the direct economic impact would be limited in most countries, one possible exception is Ireland, which for historical reasons is closely integrated with the UK economy. However, the indirect economic impact on the EU of Brexit is likely to be more severe, mainly because it would be transmitted across the bloc and would exacerbate weaknesses that have been holding back the region’s recovery in recent years.
In the immediate aftermath of the vote, we would expect significant financial market volatility, characterised by a sharp decline in European stock markets, a depreciation of the euro against the dollar, and an increase in bond yields across part of the European periphery. A deterioration in consumer and business confidence would stem from heightened concerns about the viability of the EU project.
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Moreover, EU leaders would be forced to divert attention away from domestic issues to negotiation efforts with the UK as well as the threat of an EU crisis, undermining government effectiveness and weighing on the region’s prospects for economic recovery. We expect a UK decision to leave the EU to reduce the annual pace of real GDP growth by around 0.2 percentage points between 2016 and 2020. To put this in context, the equivalent hit to the UK’s real GDP growth rate would average 1.2 percentage points over the same period.
The political dislocation unleashed by a vote to leave could be profound. The UK would be plunged into political and constitutional turmoil. Across the region, there would be a marked increase in the popularity of anti-establishment and anti-EU parties. The possibility of exit would now be a live political option in other countries.
Brexit would invite fundamental questions about the viability of the European project, opening the door to eurosceptic politicians to ask their electorates to consider their prospects outside the EU. Given the depth of voter disaffection at the moment, over the medium term we would expect a number of countries to emulate the UK by holding a referendum. The most likely include: the Netherlands, Denmark, Sweden, Finland and the Czech Republic. Two of these countries – the Netherlands and Finland – are euro members too, increasing the risk of rising anti-EU sentiment reigniting the Eurozone crisis.
But it would not take further EU referendums or exits to undermine the smooth functioning of the EU. For one thing, a UK vote to leave would lead to a years-long process of negotiation which would preoccupy the region. There has never been an EU exit before: they would be making it up as they went along, second-guessing the potential unforeseen consequences of each step they take. All the time and energy devoted to this process would detract from the numerous pressing political and economic challenges that the bloc is already facing.
It would entrench a pattern of crisis-mode policy-making that has dominated Europe since the onset of the financial crisis in 2008. Losing the UK would also disrupt the EU’s finely balanced policy-making framework, shifting the balance of influence away from the EU’s more liberal, centrist member states in favour of those with more statist preferences, including France and much of southern Europe.
The effects of a UK vote to leave would also be felt in states neighbouring the EU that aspire to join the bloc. The prospect of further enlargement has receded into the distance since the onset of the global and Eurozone crises. A UK departure would confirm the view of many in the western Balkans that EU membership is a chimera. If EU membership is not a realistic proposition in a reasonable time scale, the risk of a return to violence should not be ruled out.
Finally, there has been a lot of speculation about the likely response from Russia to a UK vote to leave. Despite suggestions to the contrary, we would not expect any significant changes in the policy stances taken by Vladimir Putin.