With the Brexit coming up this month, City National Bank’s Foreign Exchange Manager, David Atkinson, and Foreign Exchange Analyst Andrew Kositkun explain what the vote means, why this is such a big deal for international markets and how the outcome could hurt the U.S. economy.

Q: What is the Brexit?

A: The Brexit, a mash-up of “Britain” and “exit,” is a referendum scheduled for June 23 in which voters will determine whether Britain will remain part of the European Union. If Britain decides to leave – something that has been dubbed “the mother of all divorces” – there would be profound economic implications for the country and the region.

Q: Why is this vote being called the most significant development in the region since the fall of the Berlin Wall in 1989?

A: A decision to pull back from its place as a major player in the European Union, a 28-nation economic powerhouse formed in 1993, has profound implications for Britain in terms of free trade, exchange rates and labor issues. It will also determine the future of London’s place as a global financial center that now rivals New York City.

If Brexit proponents are successful, British Treasury research forecasts a year-long recession followed by up to a 6.2 percent reduction in the country’s gross domestic product by 2030. The referendum itself is already hurting business owners, with reports of long-term contracts being put on hold due to the uncertainty surrounding the vote. 

It is critical to remember that a Brexit could trigger referendums in other countries and potentially lead to multiple countries exiting the EU. This has the potential to make a bad situation worse. Some have even predicted the possible beginning of the end for European unity.

Q: Why is this referendum being held?

A: Proponents of a split with the EU have said the dire economic forecasts are exaggerated attempts to fear-monger. They believe that shrugging off red tape and economic controls from Brussels would free up Britain to flourish as it expands trade with China and the rest of the world.

The referendum has also raised issues of British identity, security from terrorists, the effects of globalization and controlling Great Britain’s ability to curb the recent influx of migrants that has been flowing into the rest of Europe from war-torn countries such as Syria.

Q: Recent polls show that British voters are leaning toward staying in the EU by a small margin, but the vote looks to be close. If there’s a Brexit, what are the possible impacts for Britain and the U.S.?

A: Polls on whether the UK will vote to stay or leave have been fluctuating. A natural comparison is the 2014 Scottish independence vote where polls suddenly tightened up and indicated a potential departure after a lengthy period of market complacency. While public opinion polls tend to show the “remain” camp ahead, the reliability of polls is very much in question.

Without real precedents, gauging the impact of a Brexit is tricky, but unwinding membership that has lasted decades is no small matter. If the UK votes to leave, these are some possible impacts:

  • In the U.S., the Brexit risk may delay a possible Federal Reserve interest rate hike this summer. Because Europe and the U.S. are such strong trading partners, our economy is also expected to be negatively impacted. 
  • In Britain, rising uncertainty could hurt gross domestic product and cause a short-term recession.
  • Longer-term impacts to Britain could include economic drag from lower-quality trade relationships with the rest of the EU. Currently, 44 percent of UK exports go to the EU, so new trading relationships would have to be established. The terms and the length of time needed to negotiate new trade terms will play a key role in determining the economic impact of a Brexit. In general, a Brexit could be accompanied by GDP loss of 1 to 3 percent and a weakening of the British pound by about 10 percent, accompanied by a sharp equity drop in the UK and Europe.  

How is Brexit polling moving global markets? Watch Global Perspectives to find out. 

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.