No Brexit Spoils for the EU

MILAN – Until very recently, Europeans paid little attention to the British referendum on its European Union membership. Now that the potential for “Brexit” has become real, they are increasingly consumed by its implications. But rather than seriously considering the risks, many are behaving like members of a large family that is about to lose a wealthy relative, mentally dividing up their inheritance even before the will is read.

This is certainly the case in Italy, where many expect a windfall from Brexit, with the strongly pro-EU Prime Minister Matteo Renzi leading the way toward a more integrated Europe, with a prosperous Appenine Peninsula at its center. But such expectations significantly overestimate the benefits of Brexit for the rest of the EU, while vastly underestimating the risks.

For starters, higher costs of trading with the United Kingdom, a significant importer of Italian goods, would hurt Italy’s exporters, at a time when the country is struggling to escape its worst recession since World War II. The popular expectation that neither the UK nor the EU will impose trade restrictions on the other seems unconvincing, at best, given the protectionist tendencies that have helped spur British Euroskepticism and the possibility that European policymakers will attempt to deter other member states from following the UK’s lead.

Brexit would also spur significant financial-market turmoil. Again, many are downplaying this risk, claiming that the turbulence will be short-lived. Some Italian economists, such as Bocconi University’s Francesco Giavazzi, even expect substantial financial-sector benefits, with London’s demise as the main center for euro transactions giving continental financial centers like Milan a big boost. But this assessment is at odds with the experience of financial and real economic collapse following Lehman Brothers’ bankruptcy in 2008.