Brexit Poses Greatest Risk to EU Growth, German Institutes Say

  • Threat of extended uncertainty seen harming mostly U.K.
  • Risk seen outweighing banks, conflict in Mediterranean region

The U.K.’s exit from the European Union poses the biggest risk to the region’s economy as the prospect of an extended breakup process raises uncertainty, according to a forecast prepared for the German government.

Germany and the rest of the EU could suffer economically if negotiations over the terms of Britain’s departure from the 28-member bloc drag on, five economic institutes said in their fall outlook presented on Thursday. Brexit outweighs troubled banking sectors in Italy and Portugal as well as conflicts in the eastern Mediterranean region as a risk factor, they said.

“The U.K. and to a lesser extent the rest of the European Union could face a lengthy phase of investment restraint,” Stefan Ederer of the Austrian Institute of Economic Research, one of the report’s authors, told a news conference in Berlin.

With populist movements strengthening across the EU and Germany and France holding elections next year, any fight over Brexit will add to the region’s woes as it struggles with flagging economic growth. As German Chancellor Angela Merkel weighs whether to run for a fourth term in September 2017, the institutes cut their growth forecast for Europe’s biggest economy to 1.4 percent from 1.5 percent projected in April, citing slowing exports.

“First and foremost, the consequences of Britain’s decision to exit the EU pose a risk,” Ederer said.

Uncertainty about the U.K.’s future access to the 27-nation market may mean “a long phase of investment restraint in Britain and to a lesser degree for the rest of the European Union,” he said. Growth in Europe might grind to a halt if a global slowdown deepened, the institutes said in a summary of the report.

EU governments so far are refusing to grant the U.K. any leeway on the link between trade and immigration, raising the specter of a “hard Brexit” that would disrupt ties.

The Brexit vote is part of “an increasingly negative perception of globalization in many countries,” Ederer said. “Should this lead to further steps toward disintegration in the global economy, that would probably lead to lower growth.”

The report is compiled by for the German government by Munich-based Ifo, Berlin-based DIW, Halle-based IWH, Essen-based RWI and IfW in Kiel.

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