Some economic experts say officials will work to reassure investors and make it easier for banks to lend money if British voters decide to push the U.K. out of the European Union.
Experts at the Organization for Economic Cooperation and Development, the International Monetary Fund and elsewhere say a so-called Brexit could hurt the economy.
Supporters of the effort to pull the U.K. out of the EU say Britain would thrive outside the bloc and would be liberated from bureaucratic mandates from EU headquarters in Brussels.
An OECD study says leaving the EU would tend to raise British interest rates, cut investor and consumer confidence, and damage trade. Together, these effects could cut the growth rate by more than three percentage points and cost the average British household several thousand dollars.
European Central Bank chief Mario Draghi said the ECB “stands ready” to act if Brexit causes chaos. U.S. Federal Reserve Chair Janet Yellen said Tuesday that a Brexit could have “serious” economic repercussions and is a reason for a cautious economic policy in Washington.
The IMF says Brexit’s economic impact would be “negative” and “substantial,” and says officials would need to take steps to support “stability” and “reduce uncertainty.” Uncertainty worries investors, who might sell British currency and other assets, which could hurt the value of the pound and stocks in the U.K.
Rice University international economist Russell Green said dire economic predictions may be overdone because stock and currency markets have known about a possible Brexit for months and have had time to adjust their holdings. Green was previously a high-ranking official at the U.S. Treasury Department.
He said markets may decline, but probably not in a “catastrophic” fashion. If turmoil does break out in markets, Green said the Bank of England (Britain’s central bank) might take steps to increase the amount of money available for banks to lend.
This increase in “liquidity” could help bolster the economy by making it cheaper for companies to borrow money. He said if the value of the pound drops sharply, BOE could buy the U.K. currency and sell others, which would tend to strengthen the pound.
In the past, central banks have tried to stimulate faltering economies by cutting interest rates. But Duke University political science professor Tim Buthe said that is not an option here because British and EU interest rates are already very low.
Buthe said the overall impact of Brexit could be “stunning” because it increases uncertainty, could greatly complicate trade, and makes London a less attractive place for the financial sector.
According to Buthe, British officials have previously cut bureaucratic obstacles and costs to keep the financial sector, and its highly lucrative jobs in the country. He said the concessions already have attracted political criticisms, making further cuts in red tape difficult.
(Photo: Vaughan Leiberum)