World Economy

'Brexit' could deal major economic, political blow to EU

Will 'Brexit' harm British economic security?
Will 'Brexit' harm British economic security?
Citi's Buiter vs Fed's Bullard on Brexit
Citi's Buiter vs Fed's Bullard on Brexit
How will Brexit affect Ireland?
How will Brexit affect Ireland?

The European Union could lose its second-largest economy if the UK decides to leave, taking a potentially major economic and political blow at a time when the EU already faces slowing economic growth and an ongoing refugee crisis.

The UK is scheduled to hold a referendum on June 23 asking voters whether they want Britain to remain a part of the to the 28-nation economic bloc. If there is a vote in favor of the so-called Brexit, the EU would lose about $3 trillion in GDP. The move would also be unprecedented, since no country has left the EU.

"There would be a very big impact," said Mark Fleming-Williams, economic analyst at Stratfor Global Intelligence, a geopolitical advisory firm. "We've seen the markets' fear come down on the pound. Sterling has been dropping significantly in the last month. I think as the vote gets closer, it will probably extend to the euro."

The British pound has fallen more than 5 percent against the dollar this year, hitting its lowest levels in more than six years. The euro, meanwhile, is down about 3 percent against the dollar in the last 12 months (though it's near flat so far in 2016) as the European Central Bank carries on with its quantitative easing program.

"It will clearly have some adverse effect on the EU," said Howard Archer, chief European and UK economist at IHS Global Insight, a Colorado-based research firm. "Things are pretty fragile right now."

"It will certainly add to uncertainty and concerns over the situation," Archer said.

The EU and the UK have had a long and tumultuous relationship over the years. Britons who favor an exit claim the EU infringes on UK sovereignty. Nonetheless, the UK is heavily dependent on the EU, as 45 percent of UK exports go to European countries, Fleming-Williams said.

Krisztian Bocsi | Bloomberg | Getty Images

The economic partnership works both ways. Countries including Ireland and Germany could take an economic hit from a British exit, Fleming-Williams said.

"The UK is responsible for 32 percent of Ireland's imports," he said. "Germany is obviously very reliant on its exports. The UK is the third-biggest receiver of German exports."

The damage from a UK departure wouldn't be limited to the EU's economy. In fact, "the detriment to the EU is likely to be more political than economic or financial," said Nicholas Dungan, senior fellow of the Future Europe Initiative at the Atlantic Council, a Washington-based think tank. "Depending on the result, Britain has a lot of fences to mend."

A Brexit also could lead to a rise in protectionist policies in the EU, or trade policies that restrict trade between countries through tariffs on imported goods and tax cuts on local businesses, for example. Traditionally, the UK has been a voice within the bloc that favors more liberal trade policies.

"There's quite a good balance between protectionist lobby vs. free trade lobby," Stratfor's Fleming-Williams said. "The UK leaving would shift that balance."

The EU would also lose a "much more outside perspective when global issues are being discussed," Atlantic Council's Dungan said.

What about the US?

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The U.S. and the UK, aside from being closely linked because of their history, are close trading partners. Last year, the UK ranked fifth in U.S. exports, importing $56.35 billion worth of U.S. goods, according to the Commerce Department.

Nonetheless, the impact of a Brexit on the U.S. likely would be limited, said Scott Brown, chief economist at Raymond James. "I wouldn't expect it to be a huge drag on [U.S.] growth, but it certainly isn't helpful."

Atlantic Council's Dungan doesn't expect an adverse effect on the U.S. economy, either.

"There's a tendency to think that the UK plays an intermediate role between the U.S. and the EU. This is simply not true," he said. "One good example of this is GE buying half of Alstom."

General Electric bought the French multinational's power business for approximately $14 billion, after the deal was approved by the EU.