Man counts money near currency exchange in Kiev [file].
(photo credit: REUTERS)
On June 23, Britons will go to the polls to decide whether to stay in the 28-member European Union. A vote to leave could send economic shock waves throughout Europe and the broader global economy, and could drag down Israel’s own growth. A “no” vote would also open up a lengthy and uncertain process whereby the UK would have to renegotiate its trade relationship with the EU and 53 states (including Israel) with whom it trades within the current framework as an EU member state.
“The argument is that the UK would be able to renegotiate a better trade agreement,” said Keith Wade, chief economist of UK-based asset management firm Schroders, on a recent visit to Israel.
“But it can’t be as good as what we have at the moment, otherwise everyone would leave. The EU, in its own interest, would be tough.”
A recent YouGov survey found that those in favor of a British exit, or Brexit, have opened up a seven-point lead, making economists jittery.
According to an OECD forecast earlier this month, a decision to leave could cause a sharp 1.4 percent decline in the UK’s GDP by 2018, and scale back overall EU growth by 1 percentage point. Credit Ratings agency Standard and Poor’s predicted that a “no” vote would “spell the end of the UK’s AAA rating,” and that by 2030, Britain’s GDP could be 5% behind where it would have otherwise been.
“If you’re British, you have a reason to be worried,” said Ofer Klein, head of the economics and research department at Harel Insurance and Finance. “If you’re not, there’s less of a reason to worry. I think our exposure is medium to low, less than Germany, but probably higher than Hungary.”
For Israel, the main causes of concern are disruptions among its major trade partners.
Europe, as a region, is Israel’s largest trading block.
By country, the UK is Israel’s second-largest export market (not including diamonds) behind the US.
The shock of uncertainty that a pro-Brexit vote would cause, economists say, would lead to a sharp decline in the value of the pound sterling, as well as a decline in the Eurodollar’s value.
“The view is that it would reduce the value of the British pound, which would have an impact on the Israeli trade with the UK, and a weaker pound would, to some extent, make Israeli products more expensive,” explained Zvi Ekstein, head of Aaron Economic Policy Institute at the IDC in Herzliya. He estimates that the pound would be devalued by 12%-16%.
Israel has already been facing tough economic challenges from a drop in exports, which led the economy to stall at 0.8% growth in the first quarter of the year. Commodity exports dropped 16.5% from March to May, partly because of lackluster global economic growth, and partly because the shekel is relatively strong.
Brexit would exacerbate both those problems.
If the UK votes for Brexit, there’s a good chance that Prime Minister David Cameron – who has led the “remain” campaign – will step down, and that anti-EU sentiment elsewhere in the bloc will flare up. If more countries leave the EU, Klein notes, that could leave Israel in a tough political position. Within the EU, he explains, Israel has some powerful friends, such as Germany.
Staking out new economic and political ties with countries that split off may leave Israel in the dust.
“Israel has very good trade ties with Europe as a bloc,” Klein said. Renegotiating ties with less pro-Israel countries would be risky. “Some countries will sign a deal with us.
Others will prefer to sign a deal with Iran instead.”
So why are Britons so fired up about leaving the EU, despite dire economic predictions, despite OECD Secretary General Ángel Gurría saying it would be “equivalent to missing out on one month’s income within four years,” and European Council president Donald Tusk declaring, rather hyperbolically, that it “could be the beginning of the destruction of not only the EU but also Western political civilization in its entirety”? Here’s how Klein explains it: “The European Union functions like a kibbutz. Every state pays according to its ability, and receives according to its need. The British feel like they’re getting a bad deal.”
As is so often the case with major economic events – such as the 2008 financial crisis or the recent string of events pushing Greece to the brink of leaving the euro zone – Israel must watch from the sidelines and hope it does not get swept up like an umbrella in a cyclone.