The Bank of England warned today that Britain risks higher borrowing costs and weaker sterling if voters there decide to leave the EU in the upcoming referendum.
“The outlook for financial stability in the United Kingdom has deteriorated,” the Bank of England’s Financial Policy Committee said.
“Domestic risks have been supplemented by risks around the EU referendum,” it added.
The bank said the outlook for financial stability had worsened since its last quarterly report in November.
“Looking ahead, heightened and prolonged uncertainty has the potential to increase risk premia investors require on a wider range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers,” the FPC said.
The British economy is the fifth biggest in the world, behind those of the US, China, Japan and Germany. In recent years, its rate of economic growth has surpassed many with the EU where economic stagnation persists across the eurozone.
Headache for Brussels
Should UK voters choose to leave the EU, it would be a first. Never before has a country left the EU. The legal and administrative exit process would represent a new departure for EU and UK officials and tie up vast resources across the entire legal, political, economic and social landscape.
Risk of fragmentation
An exit decision by the UK could also trigger a nightmare scenario across Europe. Within the UK, it is likely that Scottish nationalists would push for independence, especially if a majority of Scots vote to remain in the EU in the referendum. This would present the Westminster Government with an added layer of complexity as it could potentially have to administer two exit process, an internal one with the Scots and the external one with the EU.
But the UK push for independence and a potential Scottish one in short order could prompt others. Catalonia is likely to increase the pressure on the Madrid Government for greater autonomy and even full independence. The Northern League in Italy may give their autonomous drive a new push also.
Even if all of the independence drives were peaceful, they would be extremely taxing on the existing resources of Governments. This broad redirection of resources would divert much-needed focus on economic development and likely result in sustained economic stagnation across the EU.
The UK referendum is set to take place on June 23rd.