David Brown

Macroscope | Europe is in deep trouble whichever way the UK’s Brexit vote turns out

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The survival of European unity, the single market and the euro is on the line, giving investors good cause to be alarmed

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German car manufacturer Audi at the Frankfurt Motor Show. Europe is split between the economic haves, such as Germany, and have nots, including Greece and Spain. Photo: Reuters

David Brown

Published: 11:46am, 20 Jun 2016Updated: 3:34pm, 20 Jun 2016

Europe is in deep trouble whichever way the UK’s Brexit vote turns out

This Thursday’s British EU referendum is the big risk event global markets are dreading. It could be a nightmare scenario, threatening to trigger a chain reaction that could plunge markets back into a new global catastrophe. The real worry is that the world is already slipping back into a black hole of uncertainty whichever way the vote goes. This time there may be no easy way back.

No wonder world policymakers are panicked. While European Council President Donald Tusk over-exaggerated by warning Brexit could mean the end of Western civilisation, both the IMF and OECD are deeply concerned about the consequences for the world economy and financial markets.

The major central banks are already drawing up contingency plans and getting ready to intervene if the UK votes to leave the EU and markets descend into chaos. It is hard to see what they can do. Global currency, credit and equity markets are already highly agitated.

Europe should be especially worried. Whatever happens in this week’s Brexit vote Europe will feel deep shockwaves. It is a “no win situation”, with Europe standing to lose whichever way the vote goes. Europe is not long out of the 2009-2013 euro zone crisis and it has taken huge stabilisation efforts from EU governments and the European Central Bank to stop European monetary union and the euro from falling apart. It would not take much to open up old wounds and set Europe lurching off into a new economic and financial crisis.

Farmers demonstrate outside the Greek parliament. Anti-austerity protests and political extremism are on the rise, leading to deepening antipathy towards Brussels and the EU. Photo: AFP

A “leave” vote would have an immediate impact. Capital flight out of the UK, a sterling currency crisis and the threat of economic ruination would hit British markets especially hard. Europe would not be spared and market speculators would quickly home in on contagion risks spilling over into the euro zone. Economic and financial stability would be knocked off its perch. The bears would scent blood and begin the hunt for “who goes next”.

Even if the UK votes to “remain”, the barn door has been opened far too wide on European disintegration risks. Despite all the healing balm thrown into the ring from the ECB’s monetary super-stimulus in the last seven years, the same old problems persist.