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El-Erian: EU's troubles far from over even if Brexit doesn't happen

Avoiding Brexit was just a step along the way for the European Union to get its act together, Allianz chief economic advisor Mohamed El-Erian said Monday.

Amid a sharp market rally Monday on belief that the United Kingdom will not exit the 28-member EU, El-Erian took a cautionary tone. The rising swell of European nationalism likely will not fade until after reforms to make the region more stable, he said.

"My hope is for a 'Sputnik moment' — the collective realization that if we don't do something now, something bad is going to happen," El-Erian said during a roundtable chat in New York with business writers. "My hope is we get to a growth and economic Sputnik moment."

The term refers to the commitment the U.S. made to its space program after the Soviet Union launched the Sputnik 1 satellite in 1957. It has come to represent a crisis tipping point that prods a nation into action.

El-Erian's comments followed a poll that showed Britons were leaning against approving an exit from the EU in Thursday's referendum.

Mohamed El-Erian
David Orrell | CNBC
Mohamed El-Erian

In addition to the inherently disruptive effect that the loss of the European Union's second-biggest economy would bring, the idea of Britain leaving the EU sparked worries that other nations might follow. Europe has been beset by a rising tide of nationalism that has included a broad backlash against open immigration policies, as well as anger from debt-laden nations such as Greece that have been forced into strict austerity programs in order to comply with EU bailout mandates.

"If Brexit were to occur … it would add institutional instability to financial and economic instability (and) accelerate the journey to the neck of the T-junction," El-Erian said, using a term he has employed to describe an approaching crossroads for global markets and the economy.

El-Erian said the situation points out the broader problems with an alliance that he likened to a four-legged stool — one leg each for monetary, banking and fiscal union, and one for "true political integration."

"Imagine this chair with 1½ legs," he said. "Monetary union is complete, banking union halfway. We need to complete the regional architecture in Europe, and we need a lot better global policy engine."

In order to push policymakers into fixing the EU's ills specifically and to address similar issues in general, he said, "you need some sort of crisis."

—CNBC.com's Evelyn Cheng contributed to this report.