Brexit - Potential for disaster

The possible departure of the United Kingdom from the European Union, known
as Brexit, is causing widespread concern about Europes future. While the UK
has long been considered a semi-detached partner, on the 23rd June 2016
voters will have the final say on whether Britain is in or out. A vote to leave
will trigger Article 50, giving the EU two years to negotiate a withdrawal
agreement with the UK.
Proponents of Brexit say that Britain is held back by Europe. Brexit, in their view,
will allow the economy to soar, giving the UK the ability to negotiate new trade
agreements on its own, while maintaining a close trading relationship with the
EU. It is unlikely proceedings will play out like this in practice however.
Impacts on the UK
The precise economic impact on EU economies will depend largely on the future
trade agreement between the UK and the rest of the EU, however experts predict
a negative impact regardless. Economists predict that heightened uncertainty
surrounding withdrawal negotiations will harm investment, especially foreign
direct investment for at least the first few years. This is bad news for a country
with a large current account deficit that relies on financing this debt with capital
inflows. Long term projections are not much better with both Citigroup and
Goldman Sachs predicting that growth would shrink following a Brexit. Currently
over 50% of Britains exports go to the EU, which puts a lot at stake compared to
the 10% of EU exports that go to the UK. At best the UK will gain access to the
single market, however they will have to accept the very rules the Eurosceptics
are trying to escape such as free movement of peoples. However, under Article
50, the EU is to determine the withdrawal agreement without input from the UK,
and the EU will have a strong incentive to impose a harsh settlement to
discourage other countries from leaving.

Impacts on the EU
The EU also has reason to worry. While the EU has less at stake than the UK any
Brexit outcome that reduces trade or increases the cost of trade between the UK
and the EU, will harm the EU economies. States which have sizeable trade with
the UK, such as Spain, may face significant disruption and cost. EU companies
with operations or headquarters in the UK, or that have supply chains which
include UK firms, may also face significant costs in terms of relocation if the UK
leaves the single market. Losing the EU would also reduce the EUs foreign-policy
and security-clout.
What about the wider world?
Perhaps the most overlooked impact of Brexit is the impact on Corporate
America. US companies, who have historically used the UK as a strategic
gateway into the EU could face plummeting profits if a Brexit ends in
unfavourable trade terms. Quinlan estimates that the US investment stock in the
UK totaled $588 billion in 2014 which means that a downturn in the UK could
also significantly harm affiliate earnings of US multinationals. For the very
reason of promotion of free-trade it is important that the UK stays in the EU. The
UK is the the EUs biggest proponent of free trade and for countries, such as NZ,
who are looking to negotiate free trade deals with the EU, having UK inside the
EU is important. The US, under the Obama administration feels particularly
strongly, with Michael Froman, threatening to discontinue TTIP negotiations if
the UK withdraws from the EU. With so much at stake, the world will be
watching closely as the 23rd of June draws near.