​The last few months have confirmed that the risk of Brexit – or perceptions of it - is already affecting the British economy.
In the UK, portfolio investments from abroad suffered. We estimate that anxiety surrounding a possible British exit from the European Union accounts for 40% of the recent fall, i.e. -GBP34bn out of -GBP85bn.
But the big question is “what if”.
If Britons vote on the June 23 referendum to leave the EU what will be the impact on the UK, Eurozone, and other economies?
A new report titled “Brexit: What does it mean for Europe?” aims to answer these questions exactly. As noted earlier in this blog when it comes to a possible British exit from the EU, emotions run high. This study, we hope, might help cool minds prevail.
Or at least be better informed.
And here’s what the analysis suggests:

• In a soft leave scenario, the UK's real GDP growth could be cut by -2.8pp between 2017 and 2019 and 1,500 additional bankruptcies are expected. In a hard leave scenario, the aggregate impact could reach -4.3pp of real GDP growth and 1,700 insolvencies. The peak is expected in 2019.

• Eurozone real GDP growth could fall by -0.4pp by 2019 in a soft leave scenario, where a Free Trade Agreement with the EU is in place. Cumulative export losses would be EUR17.4bn for goods and services, EUR18.2bn for Foreign Direct Investments (FDIs) i.e. 1.9% of total and +1.0pp in business insolvencies growth.
In a hard leave scenario, the impact will be higher: -0.6pp of real GDP growth, EUR23.5bn for exports (i.e. 0.5% of total), EUR29.7bn for FDIs (i.e. 3.1% of total) and +1.5pp in business insolvencies growth.

• The Netherlands, Ireland, and Belgium would be the most affected through their exports and cross-investment positions.
Belgium and the Netherlands are major European trade hubs and have a high exposure to the UK market. For the Netherlands in particular, the overall impact of Brexit will be high: -1.5pp of GDP growth in a soft leave scenario and +2pp for business insolvencies growth. Most of the impact would come from important financial linkages (holding structures) but also from lower exports of chemicals, agri-food, and electronics.
In Ireland’s case, the UK is the second biggest market for exporters, with a high concentration of oil and higher value added products (electronics, chemicals, machinery, and equipment). The impact is estimated at -0.9pp for GDP growth and will trigger an increase in business insolvencies by +1.5pp in the soft leave scenario. In the hard leave scenario, the fall in GDP growth will be bigger (-1.4pp) and will be a higher drag on business insolvencies (+2.0pp).

• Germany, France, and the United States would also see a significant impact. Biggest losses will be concentrated in sectors such as financial services, automotive, machinery and equipment, chemicals and agri-food.
The UK imports mostly intermediate goods from Germany, notably vehicle components and machinery. In a hard leave scenario, we expect a loss of –EUR2.0bn for German automotive exporters and of –EUR1.0bn for machinery exporters. The German chemical sector is also relatively exposed to the UK and we expect a loss of -EUR1.1bn by 2019 in a hard leave scenario. Overall, the impact on real GDP growth by 2019 is expected to range between -0.2pp and -0.4pp; the impact on business insolvencies growth could be as much as +1.2pp. France will be impacted in a similar way as Germany, although to a lesser extent. The sectors that are likely to suffer the most are machinery, agri-food, and chemicals that are expected to lose -EUR0.5bn each by 2019 in a hard leave scenario.

Outside Europe, the United States appears to be one of the most impacted countries, notably given its investments in the UK as a gateway to Europe. The interconnection between the US and the UK markets for financial services is significant: 26% of total UK exports of financial services go to the US and 30% of total UK’s imports come from the US in this sector. In total, we expect a loss of -EUR13.5bn of FDIs in the case of a soft leave scenario and up to -EUR22bn in a hard leave scenario. The UK is the US’s fifth trade partner for goods. We estimated cumulative losses to reach –EUR2.2 in a soft leave scenario and –EUR2.9bn if no FTA is in place by 2019. Biggest losses will affect machinery and equipment (-EUR0.7bn), and chemicals (-EUR0.4bn). In total, -0.1pp of GDP growth should be lost in a soft leave scenario vs. -0.2pp in the hard leave.

Ludovic Subran
Chief Economist
Euler Hermes
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