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Christian Stensrud: Brexit will not cause a domino effect

Guest Blogger, 23 June 2016

Christian Stensrud

Senior politicians across the EU have warned that Brexit could create a domino effect. George Osborne, Jean Asselborn and Wolfgang Schäuble have all argued that Brexit could encourage other member states to either renegotiate their membership or even leave the EU. Member states leaving en masse could be even more likely if the UK leaves and becomes more prosperous. According to some, it is in the EU’s interest to grant the UK an unfavourable exit agreement to show other members that it is better to stay in. This claim does not stand up to scrutiny.

The idea that Brexit will cause an immediate mass walk out of members from the EU is far-fetched. Under Article 50, the UK and EU have two years to agree on an exit arrangement. This two year period can be extended if there is unanimous support from the departing member state and the European Council. It is likely that any other member state contemplating either exiting or renegotiating its membership will wait to see the result from the Brexit negotiations. This potentially puts at least a two year gap between Brexit and another member state seeking exit from the EU.

After this two year gap, it is extremely unlikely that any of the 19 eurozone nations would leave the EU. Eurozone members have expressed their support for the urgent political and economic integration required to help bolster the eurozone, as expressed in the Five Presidents’ Report. The chances of a euro-member undergoing the economic pain of leaving the eurozone when there is a plan to save it seems far fetched. It is more likely to go the other way, with further political and economic integration. Germany, France, Italy, Belgium, Luxembourg and the Netherlands have stated that they will respond to Brexit with deeper EU integration.

Even if a eurozone member wanted to leave, it would find it much more difficult compared to the UK because it would have to exit the common currency – an extremely painful procedure. Not only will the exiting nation have to change its currency, which is a huge logistical exercise, but the exit could lead to extremely negative economic consequences. Large capital outflows; associated falls in asset prices and increases in bond yields; runs on banks in the country, perhaps causing a banking crisis; and negative effects on consumer and business confidence are all possibilities for the departing nation.

Greece shows how difficult it is to leave the euro. Between 2010 and 2014, GDP fell by 27% and the unemployment rate reached 27%. According to some, leaving the euro would have helped the Greek economy by dramatically boosting exports, tourism and the local economy, whilst discouraging expensive imports. However, the transition period between currencies was deemed too painful by some. The Greek finance minister, Yanis Varoufakis, argued that it would have been ‘suicidal to leave the euro’. A move back to the Drachma would have caused wealth and capital to flee the country, significantly crippling the Greek economy. Other EU members, such as France and Italy, were also against a euro-member leaving because it would have damaged the credibility of the EU.

This leaves seven other nations, excluding the UK and Denmark, which are obligated to adopt the euro at some stage.[1] Brexit will not force the majority of these nations to renegotiate their membership because they already are. In response to the migrant crisis, Hungary will hold a referendum on possible EU migrant quotas later this year. Poland, Hungary and the Czech Republic are also pressing for changes that will loosen their legal obligation to adopt the euro. It is wider EU-level problems, such as the migrant and eurozone crisis, that are forcing EU members to renegotiate their positions and flirt with the idea of an exit, not Brexit.

Brexit will not cause most EU members to leave the EU. As a result, there is little motivation for the EU to offer the UK a bad exit deal. But there is a reason for the EU to offer a good one – it is economically beneficial. Many, such as Varoufakis, have argued that Brexit will have a negative impact on the eurozone. Considering the economic fragility of the EU, it makes economic sense to create an economic relationship that puts it in the strongest possible position. As we have shown in a previous article, the UK is a more important trading partner to 27 EU members than they are to the UK.[2] Because the EU relies heavily on the UK for trade, it makes economic sense for the EU to agree an exit arrangement that makes the UK economy as strong as possible.

The politicians across the EU who believe in the domino effect are wrong. Eurozone members are too tightly integrated in the EU to leave after Brexit, and this leaves no motivation for the EU to offer a poor exit arrangement to the UK. In fact, it is in the EU’s economic interest for the UK economy to be as strong as possible after Brexit. This could be secured by keeping trading relationships as unchanged as possible, possibly via a free trade arrangement. This positive exit arrangement would shelter all economies from an economic shock that could be caused by a dramatic change in trading relationships. 

[1] These seven countries are Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania and Sweden.

[2] The exception is Germany. However both countries still trade heavily together.

Christian Stensrud is an EU Research Fellow at Civitas.

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