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An alarming prospect

Srinivas Mazumdaru
February 15, 2016

While British public opinion seems to be turning in favor of leaving the EU, the business community in both the UK as well as Germany is worried about the negative fallout from such a move, says a new study.

Brexit Symbolbild
Image: picture alliance/Klaus Ohlenschläger

One of the major attractions of membership of the European Union is access to Europe's large, single market. In fact, the pro-EU camp in the UK - which is campaigning for the country to remain in the 28-nation club - has mainly put forward economic arguments and cited the common European market as the main reason for staying in the EU.

Since the UK joined the EU's predecessor, the European Economic Community (EEC), in 1973, the nation's commerce with other countries of the bloc has seen a rapid rise. The EU is now Britain's largest trading partner, with over 51 percent of British exports of goods currently destined for its European partners.

The main concern for those against Brexit - Britain exiting from the EU - revolves around the uncertainty over what would happen to the UK's trade and investment relationship with the EU should the British people vote to leave the bloc in the upcoming in/out referendum promised by Prime Minister David Cameron.

A new survey, released on February 15, now says businesses in the UK are more alarmed about a potential Brexit.

A preference to stay

The study, titled "The Impact of Brexit: Views from the German and British business communities," was commissioned by Bertelsmann Stiftung, a non-profit German foundation, and carried out by Britain's Economist Intelligence Unit.

Consequences of a Brexit

The online survey was conducted in November and December 2015, when researchers asked 782 companies based in the UK and Europe's powerhouse Germany about the potential impact of Brexit on their national economies, specific industries and companies.

For purposes of the survey, Brexit was defined as a UK departure from the EU, while keeping access to the European single market.

The study concluded that businesses in both countries showed a very strong preference for Britain to remain in the EU, with 79 percent of respondents being in favor of the country staying, while 21 percent saying it should leave.

The participants' views, however, were more divided on the question of whether the UK will actually depart from the EU. While roughly half of the respondents - 46 percent - predicted Britain would leave, a similar number - 47 percent - said the country would stay.

More than a half of British and German companies said the greatest benefit of EU membership is access to a large, single market. And in the event of a Brexit, most British businesses view retaining unfettered access to that single market as crucial.

At the same time, nearly a third of all the companies surveyed said they would downsize their UK operations in such a scenario. Many British companies also voiced concerns about the impact of a Brexit on the UK's employment levels in the three years after leaving, with 42 percent seeing a "negative" or "very negative" effect on jobs.

For British businesses, the study noted, the main problems associated with EU membership are complex regulation and uncertainty over the future of the euro. Despite its frustrations with regulations enacted by Brussels, the UK's financial sector remains the most pessimistic about the potential ramifications of a Brexit.

To stay or to leave

Notwithstanding the concerns and warnings of dire consequences, polls show that support for the UK leaving the EU has been growing among the British electorate in recent months.

Campaigners for a Brexit dismiss what they call scaremongering on the part of those who want to keep the UK in the European bloc, insisting that the country would prosper outside the union as it would no longer be constrained by bureaucratic red tape and that it would be better placed to negotiate its own free trade deals.

Supporters also note that the UK would be able to save its 10 billion GBP annual net contribution to the EU budget.

While the pro-EU groups warn a British exit could increase trade costs and shrink the economy by as much as 2 percent over the next couple of years, supporters of leaving the bloc cite estimates that show benefits amounting to several percentage points of GDP.

Moreover, those in favor of leaving say, as trade between Britain and the EU is significant for both sides, Brussels is likely to agree to a deal with London that ensures the UK special access to the common market. They argue that as an alternative to full membership, the UK could negotiate an arrangement similar to those agreed between the EU and non-members such as Switzerland and Norway.

But under this scenario, pro-EU campaigners contend, Britain would have to conform to rules imposed by Brussels but have no influence in setting them.

Uncertainty hikes risk

Still, it is uncertain what sort of agreement British and European officials would be able to hammer out should the UK vote in favor of an exit, and how much it would accommodate both sides' interests.

"Exit from the EU would be negative for the UK economy in the short and possibly medium term. The medium-term economic impact depends crucially on the new trade arrangement

that the UK would be able to negotiate with the EU," said credit ratings agency Moody's in a recent Reuters poll.

"Exit would increase domestic political risk and might reduce the predictability and effectiveness of economic policy-making. We might assign a negative outlook to the rating in case of a vote to exit, to reflect our expectation of lower economic growth and a potentially lengthy period of uncertainty."

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