Five Reasons to Fear a Brexit

February 25, 2016 1:45 PM

The fight over a potential British exit from the European Union is gaining momentum and so are warnings against it from economists and business leaders about the potential damage to trade, confidence, and growth.

In an interview this week, Adam Posen, president of the Peterson Institute for International Economics and a former member of the Bank of England’s Monetary Policy Committee, elaborated on some of the sentiments driving the push for a “Brexit.” He also discussed the extensive negative consequences such a break, still seen as the less likely outcome of an upcoming referendum, would have on the United Kingdom’s economy.

Here are some notable excerpts from that conversation:

Negative market impact  

“We should think about it as a self-induced financial crisis, a self-inflicted wound. What’s going to happen is, and you already see this in the interest rate spreads and currency markets—there are all kinds of people who are going to say, maybe money in the United Kingdom is riskier than it once was.”

The Bank of England would have to raise rates

“When countries opt out of integration, what you usually get is a run up in volatility, a weakening of the currency, and as a result the central bank has no choice but to raise interest rates hugely.”

There goes the recovery

“At a minimum you would expect this to induce a lot of uncertainty and financial volatility ahead of the Brexit. And if it occurred, you’d probably see very high interest rates, a fall in the currency, a lot of inflation, and a recession. And whatever you think the benefits of a Brexit are going to be, the costs of that recession are going to way outweigh them.”

Anti-Europe, anti-immigrant sentiment misguided

“The concern lately has been that low-wage workers from other parts of Europe can come into the United Kingdom, collect benefits, and so on. Now, this is completely wrong on its head. It’s sort of similar to the United States when everybody says it’s red tape in Washington that’s killing the US economy. The fact is in the European Union, productivity growth in the United Kingdom has been much lower than many other European economies including Spain and Germany and Ireland, all of which are more constrained by the European Union than the United Kingdom, which has lots of opt-outs.”

“Similarly, on the migration issue. They miss the point. Part of the strength of the UK economy over the last 15 years has been lots of immigrants coming from Europe, and not just poor Europe—there are 700,000 French people working in the United Kingdom, some in hospitality, some in financial services. There have been Polish people, all kinds of people. This has added on net to UK growth and helped balance the UK budget.”

Heightened UK political risk

“Whether it’s British or foreigners, they’re going to say, maybe Tata or Toyota or whoever, is going to be less likely to keep their investment here instead of Ireland or Spain, because they are not part of the European Union. Maybe there’s going to be more volatility because the UK government would be untethered and could do all kinds of strange things.”

Watch the full interview below.