World Economy

Brexit May Ignite UK Financial Crisis

Brexit May Ignite  UK Financial CrisisBrexit May Ignite  UK Financial Crisis

Britain’s economic forecast for 2016 should be examined with the facts that the United Kingdom’s economy is the fifth-largest economy in the world and the second-largest in Europe at the forefront. If the region votes the wrong way in an upcoming referendum, the UK could be plunged into a recession.

The British government is very serious and adamant on demanding European Union reforms, threatening to run a referendum that could result in the UK leaving the EU altogether by 2016. The current Conservative Prime Minister David Cameron has sent a list of the country’s demands to the EU centered along four main conditions, aiming to ensure a greater degree of autonomy for individual member states and reiterating its independence in monetary and migration affairs, Profit Confidential reported.

The four-point plan to renegotiate Britain’s membership demanded:

1. A reduction in the numbers of EU migrants coming to Britain

2. Greater protections for non-euro members

3. A British opt-out from the EU’s commitment to “an ever closer union”

4. A comprehensive commitment to greater competitiveness within the EU.

Nevertheless, the UK economy is taking a gamble by pushing for an exit from the European Union, referred to as the Brexit, dampening the UK economic outlook for 2016 and beyond.

 Burden of Public Debt

Britain’s financial sector, which is one of the largest in the world, has not yet recovered from the financial crisis of 2008-09. Overall, government measures to recapitalize the banking system have exceeded £110 billion ($167 billion), which has added to the burden of public debt in Britain in no small way.

No British banking group has been spared from having to engage in complex restructuring, refocusing on the domestic market and cutting back on the international scene in a complete reversal of the pre-crisis decade. This has affected the UK’s growth rate and prompted reluctance about trading in the global financial markets.

Weakness in the construction and manufacturing sectors, meanwhile, has weighed down the UK economy. The overall UK growth rate was an annualized 2% in the third quarter, compared to a 2.8% increase in the previous quarter, according to Scotiabank, all in the context of a weak eurozone.

 Brexit & EU Recession

Cameron is threatening Paris, Berlin, Rome, and 24 other European capitals with a referendum over his country’s membership in the European Union. Americans may feel shielded from European events, but Britain’s departure from the EU could cause a tsunami that will promptly reach American shores and Wall Street at the speed of Internet communications.

The latest polls have shown a greater willingness of the British people to leave the European Union compared to some time ago, but should England really leave the EU?

The EU is unlikely to acquiesce to such favorable terms and if the British vote for a Brexit, the effects on the UK could be far more devastating than its effects on the surviving EU countries. A study by Germany’s Bertelsmann Stiftung in collaboration with the IFO Institute in Munich suggests a Brexit could cost British taxpayers about $313 billion, while GDP could drop 14% over a period of 12 years.

The effects on the EU economy would be less severe, but Germany would feel it most. The most affected sectors would be the automotive sector (with losses estimated at around 2%), the electronics industry, the steel industry, and the food industry. In short, the Brexit is a game that will have no winners.

 Threat Persists

The first threat of a potential Brexit is the weakening of the EU, as the British referendum acts as a wedge promoting destabilization. In the past two years, there has been talk of the Brexit and even more talk of a Grexit in relation to the euro crisis prompted by Greek sovereign debt and German rigor. Yet Greece still uses the euro and despite the victory of the euro-skeptical Syriza party, which recently won yet another election, there is no talk in Athens of Greece leaving Europe.

As the skeptics would imply, surely Greece has had all to gain and nothing to lose from its EU membership, but even Britain should consider the advantages membership brings.