Brexit Threat Has Euro Outsider Denmark Preparing for Worst

  • Polls no guide for EU governments ahead of vote, minister says
  • ‘Leave’ vote will reduce GDP, with risks to downside: minister

The risk of a British exit from the European Union has the government in Denmark, an EU member that hasn’t adopted the euro, preparing for the worst.

While most polls suggest U.K. voters probably won’t back a so-called Brexit, the June 23 referendum on whether to stay or go still threatens to cause disruption on a scale that is forcing European governments to react. Danish Finance Minister Claus Hjort Fredriksen says there’s no way of knowing what will happen.

“It could be a resounding ‘no’ or a ‘yes,’ or a very narrow decision,” he said in an interview in Copenhagen on Friday. “There’s a whole range of possible outcomes.” For that reason, his ministry is preparing for a “worse” result than estimates indicate will come about.

A Bloomberg poll of polls on Friday put the “leave” camp at 45 percent, with the “remain” side at 44 percent. A probability score based on the polls calculates there’s an 81 percent likelihood Britain will stay inside the EU.

AAA Allure

Danish banks are already warning that the appeal of safe-haven markets will soar in the event of a Brexit. That would drive investors into AAA-rated krone assets and put pressure on the country’s euro peg. And with Danish interest rates already well below zero, the central bank would have less ammunition with which to fight a speculative assault than it did last year, when Switzerland’s decision to abandon its euro ties sent currency markets into turmoil.

Another concern is trade-related, with a Brexit leading to considerable uncertainty on what sort of deals would allow the flow of imports and exports to continue. For Denmark, a British departure from the EU would shave about 0.25 percentage point off gross domestic product growth already in 2016, with that effect doubling next year, the Finance Ministry estimates.

“It will take a very long time to settle the exit, so we’ll have a long period of uncertainty,” Frederiksen said.

The U.K. is Denmark’s fourth-largest export market, measured in goods.
The U.K. is Denmark’s fourth-largest export market, measured in goods.

Yet another fear is the potential domino effect of a Brexit. David Charter, author of “Au Revoir, Europe: What If Britain Left The EU?”, says growing skepticism toward the union in Denmark and elsewhere means some countries may wonder whether they should follow Britain if it leaves. “The Scandinavians could be next in line," he said. After Britain, Denmark is the EU’s least integrated member, having negotiated several opt-outs from the bloc’s acquis.

Jens Tholstrup, a Danish-born director of the Oxford Economics consultancy, says that while the economic impact of a Brexit on the rest of the world is likely to be "relatively modest," there are "potentially greater risks from financial instability.” What’s more, pro-market voices like Denmark’s would lose a key ally in Brussels, he says.

Anders Fogh Rasmussen, a former Danish prime minister and Nato secretary general, also warns that the security fallout of a Brexit will be considerable.

“While the U.K. leaving the EU won’t have any direct implications for its Nato membership, it will no doubt be considered a weakening of the West,” Rasmussen said by phone on Saturday. “No one will be as happy and cheerful over a Brexit as the Russians.”

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