How would 'Brexit' affect the US economy?
As the largest investor in Britain, the US is bracing for a vote outcome that could rattle this country and global markets.
As British voters ready to make one of the most important decisions of the last half century on Thursday – whether to leave the European Union (EU) – the United States is bracing for the ramifications of a vote in favor of an exit.
The prevailing view among the American business community is that a ‘Brexit,’ or a British exit from the EU, is going to hurt business. The US has deep ties with the United Kingdom, worth trillions in investments flowing both ways. An economic downturn in one market will inevitably spread to the other side of the Atlantic, economists say.
“We should view a vote on a British exit of the European Union with caution, and root for them to stay,” Aaron Klein, a fellow, and D.J. Nordquist, chief of staff in Economic Studies at the Washington, DC-based think tank Brookings Institution, wrote in a column last week. “Our economy does not need additional global headwinds. Global weakness and financial market uncertainty is not the recipe for stronger economic growth. A change like a Brexit could have ripple effects on us,” they wrote.
A survey by BritishAmerican Business, a transatlantic business development organization that represents companies in New York and London, found that 70 percent of its members thought a Brexit would damage their operations or future investments, according to The Washington Post.
"Nobody knows at this point how the world would look like with the U.K. out of the E.U.," Emanuel Adam, head of policy and trade for BritishAmerican Business, told the Post. "This alone creates an uncertainty that businesses don't wish to see."
The EU is an economic and political coalition first established in the mid-20th century to encourage collaboration among European countries in a time of war. Now made up of 28 countries, the EU has a population of 508 million and generates nearly $17 trillion in GDP, according to the World Bank.
Many analysts predict breaking away from the EU would send the UK into a recession. That could rattle the rest of Europe, which is still reeling from financial crises that have gripped Greece, Italy and other countries. This, plus the unrest from the influx of refugees from the Middle East makes for a precarious combination, they say.
Anti-immigration sentiment, both illegal and legal, is one of the major catalysts fueling the Brexit camp, as The Christian Science Monitor has reported.
“It would be better for the UK to stay in the EU,” Robert J.Samuelson writes in the Washington Post. “It would also be better for the EU, because Britain provides political and intellectual balance. Finally, it would be better for the United States, which doesn’t need a major ally — Britain — to go delusional.”
Nearly half of Britain’s exports go to the EU. If Britain leaves the union, it would have to negotiate new trade deals with EU member countries and potentially suffer barriers to the unrestricted trade it (and as a result, American companies) now enjoys. Should this happen, as Mr. Samuelson explains, Britain would become a less attractive destination for production investment and potentially lose its position as the global financial capital.
In the short term, the latter implication could actually benefit Wall Street, as Mrs. Klein and Nordquistat Brookings point out. But overall, they predict, Brexit would lead to a global fall in equity prices, with investors worried about the vote’s impact on the UK's economy.
“If Britain leaves, it raises the chances of another crisis in Europe which could spread to our shores. It is simply not in our interests to watch the UK walk away from the EU,” they write.
Already, the global markets are reacting. As the Post reported on June 18:
Britain's currency has fluctuated wildly, while London's major stock index plunged nearly 6 percent in less than two weeks and flirted with its lowest level in four months. Skittish investors piled into the safe haven of government debt, and high demand pushed yields on the 10-year German bond into negative territory last week for the first time in history. In the United States, yields on comparable Treasury notes dropped to near-record lows not seen since 2012.
A Brexit could lead to a 6 percent drop in UK's GDP, a measure of economic activity, by 2020, according to The Economist Intelligence Unit. Leaving the EU could also lead to a sharp drop in the value of the British pound, estimated by some to be 10 percent or more. That would make imports significantly more expensive, as Brookings points out.