The Brexit Alarm

BERKELEY – I have no special expertise on the question of whether Britain should leave (or “Brexit”) the European Union. True, I did live in the United Kingdom until a bit less than a year ago. And here in California, we have our own Brexit-like debate, with a movement to place a proposal to secede from the United States on the November ballot. But while the idea of California independence might seem comical, the Brexit referendum on June 23 is no laughing matter.

Most obviously, Brexit would damage Britain’s export competitiveness. To be sure, ties with the EU would not be severed immediately, and the UK government would have a couple of years to negotiate a trade agreement with the European Single Market, which accounts for nearly half of British exports. The authorities could cut a bilateral deal like Switzerland’s, which guarantees access to the Single Market for specific industries and sectors. Or they could follow Norway’s example and access the Single Market through membership in the European Free Trade Association.

But Britain needs the EU market more than the EU needs Britain’s, so the bargaining would be asymmetric. And EU officials would most likely drive a hard bargain indeed, in order to deter other countries from contemplating exits of their own. The UK would have to accept EU product standards and regulations lock, stock and barrel, with no say in their design – and would be in a far weaker position when negotiating market-access agreements with non-EU partners like China.

In addition, Brexit would undermine London’s position as Europe’s financial center. It is quite extraordinary that the principal center for euro-denominated financial transactions is outside the eurozone. This attests to the strength of EU regulations prohibiting discrimination within the Single Market. But in a post-Brexit world, Frankfurt and Paris would no longer be prevented from imposing measures that favored their banks and exchanges over London’s.