LONDON (MarketWatch) — Every cloud has a silver lining.
Emmanuel Macron, the ambitious French finance minister, has already started preparing the red carpet for the world’s bankers and financiers to quickly flee London for Paris if the U.K. votes to leave the European Union on June 23. HSBC
looks likely to take him up on the offer, with reports that it might move 1,000 of its senior staff out of the British capital if that is the outcome. While losing its second largest economy might, on the surface, look like a blow for the EU, there may at least be some modest upside.
The trouble is, that is probably where the good news ends. True, there will be an opportunity to poach some jobs and investment from the UK , but if Britain leaves the EU that will be a huge blow for the rest of the continent.
Why? Because the debt crisis will blow up again, there will be stresses in the banking system, specific countries and regions will be at risk of a severe slump, and labor markets will be in turmoil. While the markets have been focusing on the risks of Brexit on British assets, it may well be the rest of Europe that is in a lot more danger.
It remains to be seen what happens in the final few weeks of campaigning, but right now the vote looks too close to call. Tracking polls indicate that 46% will vote to remain in the EU, while 41% will vote to leave, with 14% still to make up their minds. But, in truth, it is anyone’s guess. The actual result will depend on how those who have yet to make up their minds vote on the day.
More significantly, the pollsters have so little experience of a referendum of this sort that they may be even more out than usual. Come June 24, it is more than possible that Britain will have decided to leave the EU, and possibly by a significant margin.
Until now, the attention has focussed on what will happen to British assets if that is the outcome. There are plenty of dire forecasts about how sterling
will crash, the London stock market
will get hammered, and how the trade deficit may be impossible to finance as foreign capital flees the country. We will see.
But there is something else that very few people are taking into account, so far. A Brexit will be far more than just a British event. If the world’s fifth largest economy leaves the world’s largest trade bloc, that will ripple out across the rest of Europe, and indeed the world, in all kinds of unexpected ways. Like how?
Here are four trends to watch.
First, expect the eurozone debt crisis to erupt all over again. It is hard to be the first country to leave the EU, but it will be a lot easier to be the second or third. While Britain was never part of the single currency
, if it gets out of the EU that will embolden populist politicians in Greece, Spain, Portugal and Italy that want escape from the whole project.
And it would be hard to blame them. After all, it is not as if they are exactly thriving as members of the EU. The Italian economy, extraordinarily, is now smaller than it was all the way back in 1999. The Greek economy has shrunk by more than a quarter since the euro crisis began, and it is still getting relentlessly smaller. It is increasingly hard to argue that the EU or the euro works for them.
If a Brexit starts to increase support for getting out, then bond yields will start to creep up, and very soon we could be back to the crisis of 2011.
Second, there will be a lot of pressure on Europe’s banking system. The U.K. is such a major economy that all the continent’s banks have a lot of exposure to it. For example, the Spanish banks have 16% of their loan exposure to Britain. For Ireland, the figure is 8%. Neither of those banking systems have yet to fully recover from the last crash. Nor are any of the banks in Europe looking in great shape right now. A Brexit will create financial turbulence across the continent, and the banks will be in the front line of that.
Thirdly, there will be a slump in specific countries and industries. Fifteen percent of Irish exports go to the U.K., and so do 10% of Dutch and Belgium exports. If there is any kind of trade friction between the U.K. and the rest of Europe, they will suffer a lot.
The U.K. is the biggest market for German cars, accounting for 20% of the total for what remains that country’s biggest industry. There will be some anxious moments at BMW
while a trade deal is worked out — and shareholders in those companies will be very quick to notice that.
Finally, labor markets will be in turmoil. Britain has been a magnate for foreign workers. It is now home to more than 500,000 Poles. There an estimated 2 million Eastern European workers in the U.K., and an increasing numbers of young Spaniards and Italians as well, fed up with not being able to find jobs at home.
If they find it harder to come to Britain, or even worse if they have to go home, that will massively increase the supply of labor in their own countries. That in turn will depress wages — or else they will end up going to Germany instead and depressing wages there. Either way, it will have a huge impact.
Paradoxically, the impact of a Brexit might not be that great in the U.K. For all the speculation, there will be some gains and some losses, and net-net it may not make much difference. But it could have some huge knock-on effects elsewhere. So far the markets have hardly even begun to think about that — but as the vote draws closer they certainly will.