Finance industry insiders still don’t think a full Brexit will actually happen.
Only 37 percent of participants in POLITICO’s Economic Caucus, which surveyed an elite group of 63 business and economic leaders, said that Britain will exit the European Union following the June 23 referendum. An overwhelming majority said the U.K. won’t cut its ties altogether — a finding that reflects the finance community’s optimism, delusion or a little of both.
Britain will suffer much more than the rest of the Continent and will fall into recession following the referendum, said the caucus, which includes EU ambassadors, European Commission Vice President Kristalina Georgieva, former Italian Prime Minister Mario Monti, and OECD and European Central Bank economists.
More than three-quarters of those surveyed said the U.K. should brace itself for a major economic slowdown as uncertainty hits “confidence, consumer spending and investment,” whereas they predicted the wider European economy will fare much better.
Britain scored “an astonishingly avoidable own goal,” said one member of the caucus, all of whom spoke on condition their remarks not be individually attributed.
“The uncertainty [while exit negotiations take place] will particularly hit the British services market, which is the strong point of the U.K. economy at the moment,” said one caucus member, adding that “anti-foreigner sentiment, if not kept in check, might persuade many skilled workers to leave the U.K.” Reports of hate crime in London are up by more than 50 percent since Britons voted by a margin of 52-48 percent to leave the EU, police figures show.
Another caucus member said their organization was now in a holding pattern, waiting to see what arrangement Britain forges with the EU before changing their operations.
“If [it’s] not an EEA relationship, then we will look to increase investment elsewhere in Europe,” they said, referring to membership in the European Economic Area, similar to that of Norway, which enjoys the free flow of EU goods, services and labor but must also adopt many EU laws without an official say in how these are made.
“Germany as the economic heart of Europe will stabilize more and more the EU,” said one participant, who was among the 83 percent who said the bloc as a whole would avoid recession in the wake of Brexit.
“The single market is strong enough to avoid a substantial negative shock,” said one.
“If EU enters a recession it will primarily be due to financial trouble in south of Europe rather than Brexit,” another said.
London calling
Despite dire predictions for the U.K. economy, 56 percent of those polled said that, two years from now, London will still be the world’s financial capital.
“That isn’t to say its strength as a financial center won’t diminish,” said one participant. “It simply means that two years probably won’t be enough for London to lose top position.”
“In 10 years time, I expect the balance to have tipped toward Frankfurt or possibly Paris,” said one.
Another predicted fragmentation: “Euro trading to Frankfurt, back and mid offices to Central and Eastern Europe, hedge funds to Dublin or Paris (or Madrid), etc. We will have less concentration in one city.”
Caucus participants were pessimistic about the U.K.’s ability to secure so-called passporting rights that allow banks to operate across the single market from London. Sixty-five percent predicted the U.K. would lose these rights as part of Brexit negotiations.
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Governor of the Bank of England Mark Carney addresses the media last week in London.
“I think this will be top priority for the U.K., and they can achieve it,” said one in the minority. “But only if they soften the rhetoric and lower expectations on free movement restrictions.”
One caucus member also argued the City could use its regulatory distance from the EU to its advantage.
“The EU is important but so is the rest of the world,” they cautioned. “The EU keeps trying to restrict and place obstacles in the way. London will remain attractive.”
The best argument to stay
Asked whether they thought Brexit would mean that the EU would disintegrate — as former UKIP leader Nigel Farage and others have predicted — almost 90 percent of caucus members disagreed, saying the EU would stay much the same or get stronger.
“Brexit will scare the remaining 27 enough to stick together,” said one. And as another put it, “the aftermath of the Brexit vote is the best argument to stay in and to reform the EU.”
Many were hopeful that the fallout from Britain’s EU referendum would push remaining countries to evolve the union rather than sticking with the status quo.
“Europe is at a crossroads. Muddling through is over. That’s the positive thing about Brexit,” said one, as others signaled opportunity now for reforms in foreign policy, defense and border patrols to win over disenchanted citizens.
The stakes are high. “If one more nation leaves, the EU is likely over,” said another.
But the U.K. hasn’t left yet. Austrian Finance Minister Hans Jörg Schelling predicted in an interview earlier this week that five years from now the U.K. would still be in the EU.
“When you look at all of those [companies] who want to move to the EU, it’s a wake-up call for Britain not to leave in the end,” he told German newspaper Handelsblatt.
Only just over a third of caucus members think the U.K. will leave the EU completely, while 25 percent said Scotland would stay in the bloc but the rest of the U.K. would leave.
“I am personally devastated by the result of the referendum,” wrote one. “But whatever my personal views, I think that any future U.K. government will not be able to go against the ‘will of the people.’”
Another said Brexit is irreversible because “there are no clear pro-EU political forces to halt this process.”
However, 27 percent thought Britain would agree to some kind of associate membership with the bloc and 11 percent thought Brexit simply would not happen.
“The new British prime minister will have to trigger Article 50 after receiving some sort of authorization from the parliament,” said one participant. “The British Parliament will not authorize such a decision because I do not think that they will not be able to undertake the risk involved for their country. Just remember that convulsions of irrationality are not privy only of Greek Left and Right governments.”
Internal Conservative Party politics is key. “If a good special deal is not forthcoming the U.K. may stay,” said another, “though the Tory leadership contest may force pledges.”
Many in Brussels have never forgiven David Cameron’s 2013 promise to hold the EU referendum in the first place.
“The costs of exit are too high, and as time goes by the people will realize that fact,” said one.
Another, who believes the U.K. will ultimately stay, said: “It will take time, the body politic will have to change its mercurial mind.”
Associate membership is the “most rational course of action,” one caucus member said. “Leave and remain at the same time.” Though that participant said such an outcome would be “possible only if emotions are brought under control and both the U.K. and the EU focus on making the best out of a very bad situation.”
“Seems that things have to get worse before they can get better,” said one who offered a view of the U.K. as a to a sacrificial lamb that saves the European Union. “Only a Brexit with severe negative effects on the U.K. economy could trigger a stronger EU. However, given that the negotiations will take a long while, these negative effects might show up too late to avoid disintegration.”
This article has been updated to correct the timing of David Cameron’s promise to hold the referendum.
A full list of participants in the POLITICO Economic Caucus is here.
Kaley Johnson contributed to this report.