April 14, 2016
Economics Group
Special Commentary
Jay H. Bryson, Global Economist
[email protected] ● (704) 410-3274
Erik Nelson, Economic Analyst
[email protected] ● (704) 410-3267
How Would EU Countries Be Affected by Brexit?
Executive Summary
In the second of two reports on potential implications of British exit from the European Union
(a.k.a., Brexit), we focus on the effects of Brexit on the EU economy. Given the size of the EU
economy vis-à-vis the U.K. economy, we find that the direct effects of Brexit likely would be
manageable for most of the 27 non-British countries (EU-27) that comprise the rest of the
European Union. That said, there are some individual economies in the EU-27 which are more
closely bound to the U.K. economy. For these countries, the fallout of Brexit could be more
meaningful.
Furthermore, Brexit would impart two sources of uncertainty on the EU-27. First, the future
trading relationship between the United Kingdom and the EU-27 as well as the legal status of
EU-27 citizens who reside in the United Kingdom would need to be negotiated. Second, Brexit
could set a precedent and it could raise questions about the future of the European Union itself.
In the meantime, spending decisions in the EU-27 could be negatively affected until some of the
uncertainty dissipated. In short, the only certain outcome of Brexit for the EU-27 would be
uncertainty.
What Would Happen to EU-UK Trade?
On June 23, voters in the United Kingdom will head to the polls to decide whether the country
will remain a member of the European Union. We have already discussed the potential
implications of Brexit on the U.K. economy in a recent report.1 In this report, we focus on the
implications of a potential Brexit on the EU economy.
Let us start with international trade. EU membership entails free trade in goods and services with
other member countries, but the United Kingdom would no longer be automatically eligible for
that benefit if Brexit were to occur. In that event, the United Kingdom and the European Union
would have two years to negotiate the terms of a new trading relationship. 2 That new relationship
could take the form of the Norwegian-EU relationship—Norway is not a member of the European
Union—whereby there is free movement of goods and services as well as people between Norway
and the individual countries of the European Union. If the United Kingdom entered into a similar
arrangement, then nothing would fundamentally change, at least in terms of trade in goods and
services, between the United Kingdom and the EU-27.
Free trade may not be the outcome of the negotiations, however. Moving down the trading
spectrum, the United Kingdom could become similar to, say, the United States, whereby trade in
goods and services between the European Union and the United States is not completely free nor
is there free movement of individuals. There are a number of potential outcomes, but the precise
1
See “Brexit, Stage Left: What Is at Stake?” (March 2, 2016) which is available upon request.
According to Article 50 of the Lisbon Treaty, the treaties of the European Union would cease to be
applicable to a withdrawing country after two years from withdrawal unless that country and the
European Council agree to an extension.
2
This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
A new trading
relationship
would need to be
negotiated.
How Would EU Countries Be Affected by Brexit?
April 14, 2016
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
terms of the new trading relationship between the United Kingdom and the European Union
would be a matter of negotiation.
The United
Kingdom
accounts for
only 7 percent of
total exports
from the EU-27.
As we discussed in our previous report, the EU-27 takes in roughly one-half of Britain’s exports
and sends the United Kingdom about one-half of her imports. What about the other way round?
Figure 1 shows that the United Kingdom accounts for only 7 percent of total exports from the
EU-27, while the EU-27 gets less than 5 percent of its total imports from the United Kingdom
(Figure 2). The lower trade ratios for the EU-27 make sense when seen in the context of the
relative sizes of the economies. That is, the aggregate GDP of EU-27 totals more than $13 trillion.
The size of the U.K. economy is about $3 trillion.
Figure 1
Figure 2
Exports to the United Kingdom
Imports from the United Kingdom
As a Percent of Total Exports, 2014
As a Percent of Total Imports, 2014
40%
40%
40%
40%
35%
35%
35%
35%
30%
30%
30%
30%
25%
25%
25%
25%
20%
20%
20%
20%
15%
15%
15%
15%
10%
10%
10%
10%
5%
0%
IRE
NLD
BEL
DNK
SWE
FRA
SPA
GER
EU
Avg.
5%
5%
0%
0%
U.S.
5%
0%
IRE
NLD
SWE
BEL
DNK
EU
Avg.
SPA
GER
FRA
U.S.
Source: IHS Global Insight and Wells Fargo Securities, LLC
Regardless of the outcome of the negotiations, trade in goods and services between the European
Union and the United Kingdom will not cease. Therefore, the economic effects on the European
Union should be manageable. That said, Figures 1 and 2 make clear that there are some individual
economies, most notably Ireland, which have extensive trade ties with the United Kingdom.
Indeed, Ireland sends 15 percent of its exports to the United Kingdom and receives nearly
40 percent of her imports from her neighbor across the Irish Sea. An end to the free trade
relationship with the United Kingdom that resulted from Brexit would be manageable for most
individual economies in the European Union, but it could be more meaningful for Ireland.
What Would Happen to EU Workers in the UK?
There are 3
million people
who were born
in the EU-27 but
who currently
reside in the
United
Kingdom.
As noted above, EU membership entails free movement of people among member countries.
There are about 3 million people who were born in the EU-27 but who currently reside in the
United Kingdom, and roughly 2 million of these individuals are currently employed there. In the
event of Brexit, negotiations would need to take place between the United Kingdom and the
EU-27 to determine the legal status of those foreign-born workers in the former. In the most
extreme scenario, EU-27 individuals who are employed in the United Kingdom may need to
return to their country of birth. In that event, the U.K. economy could face a significant economic
shock as it would lose 2 million workers, which is equivalent to about 6 percent of British payrolls.
The population of the EU-27 currently exceeds 440 million individuals. An influx of 3 million
people may seem tiny as it would be equivalent to less than 1 percent of the current population of
the EU-27. However, Europe is clearly struggling to handle the 1 million refugees that fled there in
2015 from war-torn countries in the Middle East and Africa. Most foreign-born residents who
may need to leave the United Kingdom following Brexit (under the most extreme scenario) likely
would be able to return to their families in their home countries, so EU-27 countries may be able
to adjust more easily than they have during the current refugee crisis. That said, an influx of
3 million individuals into the EU-27 would not be an insignificant undertaking.
2
How Would EU Countries Be Affected by Brexit?
April 14, 2016
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Some individual countries within the EU-27 could come under significant strain. For example,
there are 1.2 million individuals of Polish birth who currently reside in the United Kingdom. If all
of these individuals were forced to return home, the population of Poland would jump by
3 percent. The ranks of the unemployed and the strain on social services in Poland likely would
rise, at least in the short run. Ireland likely would be even more negatively impacted than Poland.
There are nearly 500,000 individuals of Irish birth residing in the United Kingdom at present.
The Irish population would experience a 10 percent surge if all of these individuals were forced
back to the Emerald Isle from their current residence in the United Kingdom.
We do not mean to imply that the United Kingdom would deport all current residents who were
born in the EU-27. That would be an admittedly extreme scenario. However, the legal status of
these residents in the United Kingdom would become uncertain in the event of Brexit and would
need to be negotiated.
Figure 3
Figure 4
Foreign-Born Population of the United Kingdom
Bank Exposure to United Kingdom
By Country of Citizenship, Thousands of Persons, 2013
Claims on the UK as a Percent of Total Bank Assets, Q3 2015
1,400
1,400
18%
18%
1,200
1,200
16%
16%
14%
14%
12%
12%
10%
10%
1,000
800
1,000
800
600
600
400
200
0
8%
8%
400
6%
6%
200
4%
4%
2%
2%
0
0%
0%
SPA
IRE
SWZ GER SWE EU-27 NLD
Avg.
FRA
USA GRC
BEL
AUT
ITL
Source: Oxford University Migration Observatory, Bank for International Settlements and
Wells Fargo Securities, LLC
How Much Exposure Do EU Banks Have to the United Kingdom?
As we argued in our previous report, Brexit could have a negative effect on the British economy as
uncertainties could cause investment spending and perhaps consumer spending in the United
Kingdom to slump, at least in the short-run. Any weakening in U.K. economic growth that was
triggered by Brexit could lead to some losses among banks with exposure to British households
and businesses.
U.K. banks would bear the brunt of any losses related to economic weakness that was caused by
Brexit. That said, foreign banks would not be completely immune from the fallout. As highlighted
by the light blue bar in Figure 4, the aggregate exposure of banks in the EU-27 to British
households, businesses and government represents about 5 percent of banking system assets in
those 27 countries. It is highly unlikely that Brexit would cause all of those assets to become nonperforming, so Brexit probably would not bring the European banking system to its collective
knees.
Brexit probably
would not bring
the European
banking system
to its collective
knees.
That said, there are some individual EU countries, most notably Spain, that have significantly
more bank exposure to the United Kingdom. Claims on British households, businesses and the
government represent 16 percent of the assets of the Spanish banking system. Spanish banks were
weakened by the collapse of the Spanish real estate bubble a few years ago and by the subsequent
sovereign debt crisis and recession in 2011-2013. They can ill afford more potential losses that
were associated with Brexit. Banking systems in Ireland (8 percent) and Germany (6 percent) also
have exposures to the United Kingdom which are above the EU-27 average of 5 percent.
3
How Would EU Countries Be Affected by Brexit?
April 14, 2016
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
Would Brexit Set a Precedent?
The extreme Brexit assumptions resemble the following: all trade ties between the United
Kingdom and the EU-27 would be severed, the British government would deport all individuals
who were born in the EU-27, and banks in the EU-27 would experience 100 percent losses on
their exposure to the United Kingdom. Admittedly, these assumptions are not very realistic.
Under more realistic assumptions, the direct macroeconomic and financial effects of Brexit on the
EU-27 likely would be manageable, although the fallout on individual economies (e.g., Ireland)
could be more serious.
Brexit would
increase
uncertainty for
the EU-27.
As we noted in our previous report, Brexit would increase uncertainty, not only for the U.K.
economy but also for the EU-27. Because the United Kingdom is currently a member of the
European Union, there currently is free trade in goods and services as well as free movement of
people between it and the EU-27. Brexit would mean that these relationships would need to be renegotiated between the United Kingdom and the EU-27, and uncertainty would reign until the
negotiations were finalized.
Not only would Brexit produce uncertainty regarding the future of the UK-EU economic
relationship, but it could also produce uncertainty vis-à-vis the future of the EU itself. The United
Kingdom is not the only country in the European Union in which “Euroskepticism” has found
fertile ground recently. Would Brexit embolden some politicians in some EU-27 countries to push
for the exits of their own countries? Would Brexit eventually lead to the disintegration of the
European Union? Uncertainty could affect some spending decisions in the EU-27 until answers to
some of these questions would be more forthcoming.
Conclusion
The United Kingdom is just one of 28 countries in the European Union, so it seems reasonable
that any economic and financial fallout from Brexit would be more meaningful for the British
economy than it would be for the economies of individual EU-27 members. That said, Brexit
would raise two sources of uncertainty for the EU-27. First, the future trading relationship
between the United Kingdom and the EU-27 as well as the legal status of EU-27 citizens who
reside in the United Kingdom would need to be negotiated.
Second, Brexit could set a precedent and it could raise questions about the future of the European
Union itself. In the meantime, spending decisions in the EU-27 could be negatively affected until
some of the uncertainty dissipated. In short, the only certain outcome of Brexit for the EU-27
would be uncertainty.
4
Wells Fargo Securities, LLC Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
(704) 410-1801
(212) 214-5070
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John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
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Mark Vitner
Senior Economist
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Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
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Senior Economist
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Erik Nelson
Economic Analyst
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