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How Germany Views Brexit

Author(s): Clemens Fuest

On June 23, British voters will decide whether the United Kingdom should leave the European Union. For Germany, Europe’s largest economy, the consequences of Brexit could be grave, with the costs far outweighing any benefits.

From Project Syndicate:

On June 23, voters in the United Kingdom will decide whether their country will leave the European Union. They alone will cast ballots, but the political and economic impact of a vote to leave (“Brexit”) would be felt across the EU, if not the world.

For Germany, Europe’s largest economy, the consequences of Brexit could be grave. Public opinion in the country is divided on the issue. Some fear that the EU would become less liberalif the UK left. Others, resentful of the UK’s presumption that it should be allowed à la carte EUmembership, are eager to see the British go. When it comes to the economic impact of Brexit, however, Germany has much to lose and almost nothing to gain.

To begin with, Brexit would change the way multinational companies make investment decisions. The UK could face an exodus of foreign firms, as companies seek to retain a presence in the EU. But there is no reason to believe they would necessarily move to Germany; many US multinationals, for example, would likely relocate to Ireland.

At the same time, the EU as a whole – and Germany in particular – would become less attractive to investors. The UK would be free to loosen regulations and lower taxes in order to attract investments for which a foothold in the EU is not necessary. This, too, could reduce investment in Germany.

Second, while some believe that Brexit would cause Frankfurt to rise in importance as a financial center, that outcome is highly uncertain. Today, London is Europe’s dominant financial center, even though the UK is not a member of the eurozone. This suggests that proximity to the European Central Bank is not an important factor in the success of a financial industry.

To be sure, the EU would come under growing pressure to use regulatory measures to take business away from London, but whether that would work is an open question. Already, Deutsche Börse and the London Stock Exchange have announced that a planned merger will go ahead, regardless of the outcome of the Brexit referendum.

Even if London’s importance as a financial center does decline, some of the business will be picked up by centers outside Europe, such as New York or Hong Kong. And the business that does migrate to the EU could just as easily be snapped up by rivals to Frankfurt, such as Paris.

Third, German exporters are likely to suffer. In 2015, the surplus from trade with the UK topped €50 billion ($57 billion), with German exports totaling roughly €89 billion, or 3% of German GDP. Only France and the United States bought more German goods. Any disruption to bilateral trade would be felt across the country.

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