Brexit would mean double blow for CEE: shock then EU break-up threat
GlobalMarkets, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Emerging Markets

Brexit would mean double blow for CEE: shock then EU break-up threat

brexit-250.jpg

If the UK votes to leave the EU in June, its effects will be felt right across Europe and the surrounding region. Volatility and an economic drag are likely — worse would be a fragmenting of Europe

Financial specialists are struggling to quantify how badly the rest of Europe, especially central and eastern Europe, will be hit if UK voters make the shock decision to leave the EU in the June 23 referendum. But the much bigger threat is that a UK exit could shake the European Union so badly that other states start losing faith in it or even leaving.

“If there is a Brexit, it’s a lose-lose choice — both sides will lose,” said Alberto Gallo, head of macro strategies at Algebris Investments in London. “For the UK, because it’s a services economy — it relies on services being located here from Europe.

“For Europe, we are in an environment where the US and China have huge economies of scale and bargaining power. Europe has tried to create some cohesion over the past 40 years, and going backwards is not a good idea.”

A Brexit might fuel rising populist eurosceptic parties around Europe, such as those in Finland, Spain, Austria, France and Hungary.

“I’m estimating the chance of Brexit at 35%,” said Holger Schmieding, chief economist at Berenberg. “In the case of a Brexit, there might be a 40% chance of significant political ramifications that are bad enough to worry about. This is the big danger. Somebody like Austria, the Netherlands or Italy might also have a referendum.”

How the UK’s vote will go is so hard to call that senior policymakers believe the result could be swung even by some unexpected domestic political event, or by how many people turn out to vote.

The insouciance with which many in the UK consider the prospect of Brexit is completely absent from the EBRD’s meetings this week.

Financial experts from all over the continent are taking the risk seriously, and see it as a potential threat for Europe as a whole — even if the direct economic effects may be limited for many countries.

“What we can say with certainty is about the direction — it’s negative,” said Boris Vujcic, governor of the Croatian National Bank. “But for Croatia and most of CEE, direct trade links with the UK are not large. CEE is mostly connected toward central Europe and Germany. But second round effects, both in the EU organisation, on EU funds, and also the second round effects on financial markets might be more substantial.”

All agree a Brexit would cause short term volatility in financial and currency markets, which could require central banks to take action. Hans Peter Lankes, acting chief economist of the EBRD, said both the Bank of England and European Central Bank might have to tighten monetary policy if their currencies fell — and that would compel countries further east to do likewise. Others think monetary easing would be a more likely response.

Looking further ahead, Alexander Lehmann, lead economist for central Europe and the Baltics at the EBRD, said: “The impact on emerging Europe would be through the reconfiguration of European institutions, rather than direct linkages with the UK. If you move to a framework where certain countries enjoy lesser privileges in the single market, that could, given current political trends in emerging Europe, become an option for some countries. That would undermine their growth potential, because they are highly dependent on free flow of capital and exports, and most importantly, of labour.”

Sarah Hewin, chief economist, Europe at Standard Chartered Bank in London, said she thought it was unlikely a Brexit would directly put off new countries from wanting to join the EU. "Applicants are seeking benefits from free access to the single market and access to other EU labour markets, as well as additional funding that comes with EU membership, so it is unlikely that membership applications would be withdrawn," she said.

But if the UK left it could have unpredictable results for existing EU members. "There are clearly strains within other EU countries, and it is possible that Eurosceptic parties could demand referenda on continuing EU membership," Hewin said. "That said, if the outcome for the UK is poor, the UK example might be taken as a warning about downside risks of exiting the EU."


RUSSIA WOULD WELCOME BREXIT

One player, however, could be expected to welcome Brexit — Russia. “There are other parties that prefer to have a divided Europe, and Russia is one of them,” said Gallo. “Russia has been campaigning against Nato membership from east European countries, including Sweden, which is now considering it. It would definitely be happy to see Brexit happen here. The energy policy of the EU is very important. It doesn’t have a common defence policy, but it might one day, and these are things that worry destabilising powers like Russia.”



Gift this article