Brexit risks have shot up in the past few weeks. The chance of Britain exiting the European Union by the end of the decade is now probably around 50 percent.
The main factor driving Brexit is the knife-edge referendum on Scottish independence. If the Scots vote next week to quit the United Kingdom, it is highly likely that the rump UK will leave the EU. If the UK doesn’t break up, it is much less likely that it will then part from the EU, but this is still a risk.
Financial markets are finally waking up to the risk of a “Scoxit” for the pound, gilts and the UK economy. They are also worrying about the knock-on effect in Spain, where the Catalan regional government wants to hold its own referendum on independence.
But investors don’t yet seem concerned about two other knock-on effects. One is Brexit. This will be even worse for the British economy than Scoxit. The other is that Brexit would be bad for the rest of the EU, just like Scoxit would be bad for the rest of Britain. On top of the economic hit as trade was disrupted, the EU would risk becoming less market-orientated.
As if that was not enough, both Britain and the EU would lose influence in the event of a combined Scoxit and Brexit. It is hard to put a price on clout. But a diminution of it would be damaging given that Europe’s neighbourhood looks increasingly dangerous and the United States is tiring of its role as global policeman.