Damage of a rolling stone - Brexit implications for Europe

The UK referendum on its EU membership and the resulting threat of ‘Brexit’ have already taken their toll on financial markets. If the UK were to vote in favour of Brexit, further turmoil seems guaranteed, with significant negative effects on the British economy. But the European economy will not remain unscathed either.

From our baseline forecast we estimate that the initial hit to Eurozone GDP could be a cumulative 0.3% by end-2017. But the extent of the damage will depend heavily on the political impact, which is likely to be profound. The risk of further fragmentation is high, which suggests that the damage could be greater and longer lasting. However, one cannot entirely exclude the possibility that Brexit might give dramatic impetus to European integration and reform. One thing is for sure: the genie has already left the bottle. The stone is rolling and will do some damage.

In this report, we investigate the potential political and economic implications the British referendum could have for the rest of Europe and, more specifically, the Eurozone. The main findings are:

• By agreeing to a ‘deal’, the rest of Europe has made itself vulnerable to copycats: other countries may also ask for exceptions and national special treatment. It is clear that the European Union and Eurozone are currently at a crossroads, facing further integration or disintegration. The success of ‘muddling through’ has seemingly come to an end. Brexit could be the catalyst or accelerator for one of the two directions. 

• In a Brexit scenario, the rest of Europe would go through a period of financial market, but also political, turmoil. European leaders would have to spend even more time on keeping emerging separatist and populist movements at bay in order to avoid further centrifugal forces.

• While the political impact remains hard to quantify in a Brexit scenario, it seems certain that Europe will face a period of financial market turmoil, with collateral damage through FDIs and bank exposure and weaker trade. In the wake of a friendly divorce, the economy of the Eurozone would likely experience a cumulative loss of 0.3% by end-2017, with Ireland, Malta and the Netherlands taking the biggest hit. But more negative scenarios with greater and longer lasting GDP impacts are not hard to envisage.


Peter Vanden Houte; peter.vandenhoute@ing.be

Carsten Brzeski; carsten.brzeski@ing-diba.de


Where 'we' has been mentioned in this article, the research department of ING is meant.

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