The latest polls show a dead heat between British citizens who want to stay in the Eurozone and those who want to leave. While a great deal will happen before the formal referendum is held by the end of 2017, the trends show growing momentum behind leaving as concerns surrounding immigration and terrorism on the continent are increasingly conflated with EU membership.
Firms that think their trade will be unaffected by all this should think twice, however. They may find Europe a much less palatable place to do business after a Brexit changes the economic, political and security outlook of the EU – an outcome explored in A.T. Kearney’s recent EU@30 report.
Should the United Kingdom exit the European Union on January 1, 2018, the EU would find its overall GDP reduced by 15% overnight. The loss of London as a financial centre would result in EU households losing liquidity and a spike in the cost of financial services. European banks, which have an estimated exposure to the United Kingdom greater than $1.7 trillion (£1.2tn), would face high costs as efforts were made to relocate wholesale banking activity away from London. Uncertainty would skyrocket as questions would arise on how to decouple the highly integrated UK-European financial system.
Brexit would also shake up foreign direct investment. EU businesses are the largest source of FDI in the United Kingdom, with an estimated $452 billion invested in the country. A Brexit would force EU businesses to reevaluate these investments as policy interests, supply chain dynamics, the cost of finance, and commercial logic are reshaped. The cost of making these adjustments would be felt acutely by leading European investors in key industries, with energy, retail and wholesale trade, transportation and manufacturing chief among them. Furthermore, the United Kingdom might seek to undercut the EU on taxation and other business policies to lure away existing FDI on the continent, compounding the cost of Brexit for the EU economy.
More broadly, European Union businesses would suffer from the loss of the United Kingdom’s orientation toward greater economic liberalization and entrepreneurship in the European Council. This has the potential to shift the balance of power in the EC on economic policy in a way that could challenge businesses on the continent and weaken competition policies. A divergence in competition standards between the EU and UK would create additional hurdles and costs. For example, mergers and acquisitions would have to be reviewed separately by both UK and EU authorities and businesses would have to foot the bill.
Of course, a Brexit would hurt the UK economy as well. Looser collaboration with the EU in areas such as research and education will negatively impact UK innovation. For many foreign investors, the UK will be less attractive as it would no longer represent a gateway into the European continent. The potential for divestment should not be underestimated.
Without a replacement free trade agreement between the UK and EU upon Brexit, the UK runs serious risk of decreased exports and more expensive imports. Financing costs would also rise as UK-based banks would find it more difficult to secure competitive funding from the ECB. London may even risk losing its preeminence as a financial center, should major European banks opt to return to the continent, as leading players like Deutsche Bank have openly discussed.
For all of these economic and business concerns, perhaps the greatest danger of Brexit for all involved is the uncertainty that it would cause. Brexit risks ungluing the rest of the EU and fueling momentum for anti-EU parties on the continent and for a rollback of cross-border cooperation. A collapse of the Schengen area, for example, impacts not only the free movement of people, but also of goods and services.
The overall potential macroeconomic impact of Brexit is impossible to fully quantify, but there is no question as to its implications for European unity during a time of crisis. As Europe continues to face increased economic and security threats, extracting its second largest economy and removing the UK’s foreign and security capabilities poses many risks. Staying in the European Union makes good business sense for the United Kingdom – and the EU.
Paul Laudicina is Chairman Emeritus and Partner of A.T. Kearney and chairman of its Global Business Policy Council.