Brexit Countdown: Faculty Perspectives

SMITH BRAIN TRUST — “Divorces are tough,” says economist Peter Morici at the University of Maryland’s Robert H. Smith School of Business. But Britain nonetheless should break from the “shackles” of its union to a Europe economy locked in ruinous cycles of debt crises and high unemployment. “The EU suffers from chronic slow growth thanks to a smothering bureaucracy and single currency that fits the needs of the continental economy like stilettos on a ballerina,” Morici writes in a recent ‘UK should leave the EU’ op-ed.

Aside from the June 23, 2016, Brexit referendum, “U.K. growth is expected to remain a solid 2.5 percent in 2016 compared to 2.4 percent in 2015,” while “European growth forecast has declined to 1.5 percent in 2016,” writes Smith School Center for Financial Policy Executive-in-Residence William Longbrake in his monthly Longbrake Letter (pages 50-51).

Roadblocks, Blowback

Britain could go with the Swiss model and negotiate “on 100 different issues” with individual countries and “function in many ways like an EU member, while going its own way on a few matters,” according to Smith School finance professor Albert “Pete” Kyle  in a recent ‘Will Britain Say Farewell to The EU?’ Smith Brain Trust piece. Alternatively, a “Norwegian model” would give blanket access to the EU market as a European Economic Area member, Kyle adds. But the EU could block either route by opting “to set an example, so that no one else wants to leave the EU." Denmark could be next.

Additionally, “Germany might make a big play for the EU banking market, to try to force it to Frankfurt,” Kyle says. “The EU, in a punitive mood, could grease the path toward this outcome by imposing new taxes and capital requirements on EU banks that do business in the UK.”

Punishment Backfire

Longbrake, in his May newsletter, also writes that “European political dysfunction, populism and nationalism will continue to worsen gradually,” and “countries to watch closely include Greece, Spain, Italy and Portugal.”

Echoing this projection, Morici says “anti-E.U. sentiment in Spain and elsewhere would fire up if the German impulse to punish the UK prevailed in Brussels.” He adds: “Among former Eastern Bloc states, the blow of losing the UK market and Brussels’ ear turned deaf by Berlin would make them more vulnerable to Moscow’s power and influence.”

America’s Stake

President Obama, notes Morici, “has warned the UK it would have to wait until after a pending free trade agreement with the EU is completed to negotiate with the United States." However, the United States has “a strong security interest in a united and prosperous UK,” Morici adds. “A policy to cut it out of trans-Atlantic free trade discussions would encourage nationalism in Scotland and weaken the UK economy, its capacity to sustain its military and support Washington, for example, in the Middle East.”

“London’s financial sector has reinvented itself before — notably after the demise of the British Empire following World War II,” Morici says in concluding a pro-Brexit case. “Going forward, its real opportunities and competitors are in Asia and New York.”