Opinion The Brits Have Chosen Out and Must Face the Consequences

The economic consequences of a Britain's departure from the European Union are manageable - but only if Europe's leaders handle Brexit properly.
Europe woke up Friday to a big Brexit hangover. Will the fallout worsen?

Europe woke up Friday to a big Brexit hangover. Will the fallout worsen?

Foto: TOBY MELVILLE/ REUTERS

They've really done it, despite all the dire warnings. Rarely have economic experts been so united as they have in the case of Britain's departure from the European Union. The (nearly) unanimous consensus fears Brexit will have serious consequences for Europe's economy, but that there will be even greater negative repercussions for the British.

Up till now, Britain has benefited immensely from its EU membership. Companies from around the world were happy to invest in a country offering them a liberal labor market and unlimited access to the European single market. This was the only reason so many international manufacturers located their businesses in the UK after the decline of the British auto industry. It's a similar story with London's financial sector, which is able to offer its products to customers throughout Europe. As a result, the British capital became the world's most important financial center.

Of course, the other EU members have also benefited from this relationship, especially a prime exporting nation like Germany. Britain is our third-largest trading partner. In 2015, for example, half of all newly registered cars on the island were German made.

This will not remain the case if Britain leaves the single market as a result of Brexit. Then trade tariffs will make products more expensive, direct investment will become less attractive, and manufacturing and business will decrease, which will force the full or partial shift of factories and offices abroad. BMW, to name just one example, will have to decide whether it still makes sense to supply the European continent with Minis built at its plant in Oxford, when a 10-percent duty is charged to import them into the EU. The other option, of course, would be simply to expand its production at a Mini factory in the Netherlands.

But all of this will be manageable. After the initial shock, even the financial markets will get back to business, as soon as it becomes clear that the EU economy is not collapsing and instead only sees a slight decline in annual growth.

This requires, however, that the current situation and how things will proceed are quickly clarified -- to prevent any illusions from arising. The modalities of the exit need to be addressed first, followed by the issue of which framework will apply to future EU-UK trade. Many Britons apparently still believe that not much will change now that they have decided to leave, because the European Union also has an interest in maintaining the free movement of goods. The proponents of this theory point to Norway and Switzerland, which are also not EU members and yet have free access to the single market.

Little Incentive to Make Things Easy

But those who proffer this argument fail to recognize two things: First, the Swiss and the Norwegians have to accept the EU rules that the British have just renounced. Second, the EU cannot have an interest in making the withdrawal that easy for Britain. Otherwise it would only heighten the risk that other countries would soon follow the Brits out the door.

Populist euroskeptics across the continent are already gathering steam, benefiting from the impression that the British economy could survive the departure from a united Europe largely unscathed. But if Brexit leads to the threat of a Frexit or an Auxit, the European Union would be finished, as would the euro.

Merely the speculation over such a development would rekindle the euro crisis. Then the European Central Bank's OMT program to purchase government bonds, which was just rubber-stamped by the German Constitutional Court this week, would truly be put to the test. As would ECB President Mario Draghi's promise to do "whatever it takes" to avoid a financial meltdown in the event of an emergency.

This is why it is so important that European politicians now do everything possible to avoid such a conflagration. They must ensure that Brexit remains an isolated event. But this requires that they conduct their negotiations according to the motto of German Finance Minister Wolfgang Schäuble: "In is in and out is out." The British have chosen out, and now they must face the consequences. Otherwise the economic aftermath of their departure could in fact become uncontrollable.

Translated from the German by Christopher Sultan
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