A Brexit 'yes' vote would impact US elections
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Next week's "Brexit" referendum will be of monumental significance for the United Kingdom's economic and political outlook. It will also be of significance for the U.S. presidential election this fall, since a vote in favor of leaving Europe is bound to send shock waves through global financial markets that could adversely impact the U.S. economic recovery in the run-up to November. Such a vote could also be unsettling for the US economy in that it would remind us that there are occasions when voters choose to vote with their hearts rather than with their heads.


The reason for fearing a particularly adverse economic fallout from a vote in favor of Brexit is that the referendum is taking place at a highly inauspicious time for Britain, the world's fifth largest economy. Indeed, it is occurring at a time that the U.K. has an external current account deficit of 7 percent of gross domestic product (GDP), which is the largest such deficit in the U.K.'s post-war history. It is also occurring at a time when the British banking system has grown to be among the largest in the world as a multiple of the country's GDP.

Financing a very large current account deficit and maintaining the U.K.'s large foreign deposit base in its banks depends crucially on maintaining domestic and foreign investor confidence in the economy. Yet a Brexit vote is bound to inject considerable uncertainty for a number of years in the British economy as the new terms for its complex trade relations with Europe are negotiated. This is particularly the case considering that the U.K.'s European partners will have little incentive to give it favorable terms for fear of encouraging other member of the European Union to emulate Britain and head for the European door.

A further factor all too likely to cause capital to leave the U.K. in the wake of a vote in favor of Brexit would be the relocation of parts of the all-important U.K. financial system to Europe. This would occur as banks based in London would lose the "financial passport" that they currently enjoy, which allows them to operate freely in Europe without being subject to additional European regulation.

The likely fall of Prime Minister David Cameron's Conservative Party government and the likely calls for a new referendum on Scottish independence in the wake of a Brexit vote will also hardly help calm investors' nerves about the U.K.'s future economic and political direction.

An important way in which a Brexit vote will ripple beyond the U.K. will be though an abrupt and steep decline in sterling as the U.K. struggles to finance its gaping current account deficit. This is bound to unsettle global financial markets, particularly at a time when other central banks like the European Central Bank and the Bank of Japan are trying to cheapen their currencies.

A further way in which a vote in favor of Brexit could unsettle global financial markets would be through the impact that such a vote might have on the populist tide all too evident across Europe. A recent Pew survey of European attitudes underlined that tide as it found that barely 50 percent of Europeans now think that the European project is a good idea. Were there to be a vote in favor of Brexit, one has to expect calls for similar referendums in countries like France, Italy and the Netherlands. Such referendums would be bound to undermine investor confidence and rekindle the European sovereign debt crisis.

In the event of a vote in favor of Brexit, it would be a big mistake to think that economic and political difficulties would be confined to the United Kingdom and Europe. Rather, one must expect that, much in the same way as global financial markets were unsettled in the wake of the 2008 U.S. Lehman Brothers crisis, so too would they be unsettled by troubles in the U.K. and Europe. It will also not help calm U.S. markets to have an example in the run-up to the November elections of how successful an anti-immigrant and populist election campaign can be.

As we go into next week's Brexit vote, the polls remain too close to call that referendum. For the sake of the U.K. and the world economy, one has to pray that in the end, cooler heads prevail and that Britian votes to remain in Europe and does not take a mistaken leap into the dark, which might send unwelcome global financial troubles our way.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.