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Britain Must Not Take a Leap In the Dark

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Britain Must Not Take a Leap In the Dark

March 6, 2016

One has to pray that, in the forthcoming June 23 Brexit referendum, the United Kingdom electorate will have the good sense to vote to remain in Europe. Since a vote to leave Europe will not only have profoundly negative consequences for the British, the European, and the global economies. It will also throw into serious question both the survival of the United Kingdom and of the European Union in its present form.

Among the reasons for concern about the forthcoming Brexit referendum is that it will be taking place at a highly inauspicious time for both the United Kingdom and Europe. As Bank of England Governor Mark Carney recently reminded us, the United Kingdom is presently running among the largest external current account deficits in the post-war period. The financing of that deficit makes the United Kingdom uncomfortably dependent on "the kindness of strangers". At the same time, as the UK's last general election underlined, the United Kingdom is still riven by separatist tendencies especially in Scotland, whose electorate overwhelmingly would like to remain in Europe.

Europe is also not in a particularly good position to withstand the blow from a British exit. Its economic recovery is already sputtering at a time that the European economy is yet to regain its pre-2008 peak level of output. At the same time, Europe is now struggling with an immigration crisis that is putting wind in the sails of the populist and separatist movements that are already on the march in major European countries like France, Italy, and the Netherlands.

After recklessly having committed the United Kingdom in 2013 to a Brexit referendum by 2017, Prime Minister David Cameron is now correctly warning that a vote to leave Europe would be to take a leap into the dark. This is not least because of the prolonged period of uncertainty that would inevitably follow during the expected two-year renegotiation of the United Kingdom's all-encompassing relations with Europe that a Brexit vote would trigger under Article 50 of the Lisbon Treaty. Investors must be expected to fear that after having been spurned, Europe is unlikely to grant the United Kingdom favorable terms in those negotiations. This would especially seem to be the case for fear of encouraging other European countries to follow the British example.

In the event that there were to be a Brexit, the United Kingdom should brace itself for a full blown sterling crisis that would seriously cloud the country's economic prospects. In a climate of uncertainty, investors must be expected to balk at financing the country's gaping external current account deficit especially at a time that important parts of the City of London might be relocating to European capitals upon loss of their "passport" to the European market. More serious still, the United Kingdom should brace itself for calls for another Scottish independence referendum that could very well presage the dissolution of the United Kingdom in its present form.

If Brexit would all too likely be calamitous for the United Kingdom economy, it would also be very bad news for the European and global economies. The last thing that a struggling European economy now needs is a big setback to one of its major trade partners or a fresh boost to the strong separatist tendencies that are already all too evident across the continent.

Similarly, the last thing that the global economy now needs is the collapse of one of the world's major currencies. At a time that all too many of the world's economies are seeking to depreciate their currencies for competitive advantage, the collapse of sterling could be the last straw that moves the world to an outright currency war with all of its unintended consequences.

Considering the very large risks to both the United Kingdom and the world economy that a Brexit would pose, David Cameron must be judged to have been highly irresponsible to have given hostages to fortune by committing the United Kingdom to a Brexit referendum some three years ago. However, now that the train has left that station, we have to hope that his luck at the polls holds out and that the British electorate votes decisively to remain in Europe in the forthcoming referendum.

 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

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