“The European project would be damaged by Great Britain’s exit”

The Brits vote on 23 June on whether the United Kingdom will remain in the EU. Chief GDV Economist Klaus Wiener about the potential consequences of a Brexit for Europe, London as a financial centre and the insurance industry.

Mr. Wiener, what would be the consequences of a Brexit for German insurers?
Klaus Wiener: An exit by the Brits would be a clear setback for European integration. It would jeopardize the close economic ties of Great Britain to the rest of the EU. A solid 50 percent of Great Britain’s exports are to the EU. A reduced share of exports to the EU would thus hit the British economy hard. Naturally, this would also have consequences for European exports, though to a much lesser degree, as the share of EU exports to Great Britain is only somewhat more than 10 percent. The German insurance industry would be indirectly affected through the potential turbulence on the financial markets.

What do you mean exactly by the “indirect consequences” of a Brexit?
Wiener: The insurance industry is a giant investor. We can assume that the uncertainty on the markets would increase in the case of a Brexit. The risk premiums of fixed income securities in Great Britain would also increase. The British pound is likely to come under depreciation pressure, as would equities on the Isle. These effects would also be felt here. The flight to “safe havens” would place already record low yields in Germany under further pressure. Equity prices would moreover suffer under the dampened economic perspectives. This would negatively impact the solvency requirements to be calculated in accordance with Solvency II. However, this effect should prove to be temporary, because after an initial phase of great uncertainty, the financial markets on the continent should stabilize.

How much do German insurers have invested in Great Britain?
Wiener: About three percent of the total investments of German primary insurers is concerned. These investments would be exposed to potential losses. This primarily concerns bonds, which make up about 85 percent of this portfolio.

What consequences would a Brexit have for Great Britain and the insurers there?
Wiener: The rating agency Moody’s is assuming significant, though manageable, effects on the British insurance industry, above all because British insurers generate most of their revenue on the Isle. British insurers themselves speak of a substantial number of jobs that would be left hanging in the balance in Great Britain in the case of a Brexit. Finally, it is hard to say how great the impact would be on the growth and prosperity of the British economy. Nearly certain, however, is that the consequences would be grave. A study by the International Monetary Fund reckons with a decrease in gross domestic product of 0.5 percent. I personally hold this to be highly optimistic. Think about investor uncertainty. The loss of free movement alone would likely lead to a massive slowdown in investment. Moreover, it could be that London would have to be cut out of European supervisory systems within the financial system as well.

Can this lead to distortions of competition?
Wiener: Naturally. We are, after all, a highly regulated industry. This also applies particularly to Europe. The Solvency II supervisory regime has only been in force for a few months. We need a Europe with uniform competitive conditions. Even if Great Britain remains in the EU, which I hope, we must ensure that this prerequisite is fulfilled and remains so. Otherwise, an exit of Great Britain from the EU would be detrimental for British insurers, who want to remain active on the continent. They would thus be subject to a supervisory regime, over which they no longer had any control whatsoever. Great Britain contributed very strongly to the development and design of Solvency II. Consider the capital adequacy requirements for real estate, for example. These were based on the development of prices and volatility for real estate in the greater metropolitan area of London. Were Great Britain to exit, this would certainly no longer be the case in the future.

Many startup companies are based in London. Fintechs are becoming more and more interesting for insurers. Would a Brexit worsen the framework conditions for entrepreneurs in Great Britain?
Wiener: London is the Mecca for fintechs. These companies naturally depend on sound customer relations in the European Union and likewise on a market operating with the free movement of workers in order to recruit young talent. Startups require easy access to venture capital. All this would be impeded by a Brexit. By definition, these companies are positioned flexibly and agilely, and could therefore change their locations with relatively ease.

What would a Brexit mean for Europe’s economy?
Wiener: The European project would be damaged by Great Britain’s exit, the euro as well likely taking a sharp cut in value. In the short term, this might even be desirable due to the improved price competitiveness of exports and the upward pressure on import prices (keyword: aversion of inflation). In the medium term, however, a weak currency is always a disadvantage for an economy—and a sign of economic weakness.

Finally, your personal opinion: Are you for or against a Brexit?
Wiener: I am of course against it. Europe is currently weakened: The debate on integration in light of the massive inflow of refugees and the sovereign debt crisis has still not yet completely ended. The varying economic performance within the unitary currency zone can only be harmonized through structural reforms. We have to revive faith in the European Project at this juncture. To do so, we also need the input of a country like Great Britain, which traditionally has stood for a flexible economy, minimal bureaucracy and a policy framework supportive of free enterprise.