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European Economists Getting Anxious As Brexit Vote Nears

Jun 20, 2016
Originally published on June 24, 2016 9:06 am

The United Kingdom votes Thursday on a proposal to leave the European Union. Last week, voters appeared to favor a Brexit for the first time since polling began on the referendum, but after the murder of MP Jo Cox, “Remain” is on top once again.

Nonetheless, economists are nervous that the move could have ripple effects for economic growth, trade and finance across Europe.

Here & Now‘s Peter O’Dowd discusses the economic implications of Brexit with Marcel Fratzscher, president of The German Institute for Economic Research.

Interview Highlights: Marcel Fratzscher

On Britain’s economic place in the EU:

Britain is an important partner. It’s the second biggest economy in the European Union. It is highly integrated in terms of trade. It is, for instance, the third most important trading partner for Germany. Germany is the biggest economy in the EU, and probably most importantly, London is the most important financial center. In fact the only really global financial center that Europe has. And so from those perspectives there is quite a substantial risk for the economy of the European Union, in particular open economies like Germany, that if the UK were to leave, the rest of Europe would pay a high price for that.

On how closely tied Germany and the UK are:

Germany and the UK are very important economic partners. They trade a lot with each other, and they’re also very important political partners. In terms of trade, as an example, Germany exports to the UK make four percent of Germany’s GDP. We estimate a Brexit could lower those exports by one-eighth. That might not sound very big but that would mean the German economy may grow 0.5 percent less next year, if Brexit occurred. It’s an important trading partner. But it’s also a very important political partner. The UK is very pro-market, it’s very market oriented and it’s pushing very hard to improve, to deepen the single market in Europe, and that’s also very much in Germany’s interest. So UK and Germany are also very important political partners.

One of the big questions is if the UK would be able to renegotiate trade deals with different countries on its own. The U.S. has said that Britain would be at the back of the line when it comes to this. Do you think Germany would be willing to negotiate a new trade deal with Britain?

On how an exit from the EU would affect Britain’s trading prospects:

If the UK leaves, it is out. So there is no way to be out, but at the same time be in on trade. the best deal the UK would get, in my view, if it were to leave, is what Switzerland or Norway have, which are not part of the European Union, which means they can trade. There are no big tariff barriers, but at the same time those countries have no say whatsoever in the legislation, in the setting of standards, in any of the decision making process within the European Union, and the same would hold for the UK. The UK would be isolated, and if it tries to negotiate trade deals globally, with the United States or with Asia, those countries won’t take it very seriously. Taken alone, the UK is just really, really tiny economy from a global perspective.

Supporters of Brexit say there will be economic pain in the U.K. and the EU short term but over the course of time things would improve. Do you agree with that?

No. The economic cost for the UK will not become smaller over time, but rather bigger. You will see that in the financial sector. Probably over the next year, not every bank of the U.K. may say we are closing down and moving somewhere else, but in the long-run a lot of banks will realize the city of London is not the place to be anymore. It’s maybe better to be in New York, Shanghai or maybe Paris. So this will be a slow process, so the biggest impact may still be the short one for the next one or two years, but it will continue to have an impact. And there’s really absolutely nothing the UK is going to gain in terms of economic strength in terms of economic advantage. It may have the weaker pound, but having a weak currency doesn’t help you in the long run either. Companies would invest less in the UK, both UK companies and foreign companies. Innovation would be less, and in the long run, there really is no advantage for the UK economy, neither for highly-skilled trained people nor for people with low incomes. Everyone will pay a very high price for that.

But isn’t there a way in which a marginalized UK economically would benefit countries like Germany, by getting rid of competition?

One mistake many people make in Europe is they see different European countries as competitors. Countries in Europe are first and foremost partners, and you see that in the global value chain. So in other words, if you look at a German export product, a German automobile, that they’re exporting to China, it has a huge input from UK companies, from Spanish companies. So Europe really functions more like one big production network. So there’s not an issue of UK cars cannot compete with Germany cars, so we really need to think of Europe as partners all part of the same production process. It’s either all of Europe succeeds globally in competing with the US, competing with Asia or all fail together.

Guest

Marcel Fratzscher, president of The German Institute for Economic Research (DIW Berlin). He tweets @MFratzscher

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