A Brexit will be an utter disaster for the UK economy, claim campaigners for 'Remain', but major economic drama appears unlikely elsewhere, even for the Central European countries that are amongst the most exposed to the fallout of a UK exit from the EU.
While a Brexit clearly threatens to shake up an already volatile political climate in the Visegrad states, the direct economic impact looks likely to remain limited. That's despite a significant dependence on EU funds and remittances in Czechia, Hungary, Poland and Slovakia.
Corrections have been seen across currency, bond and stock markets in the final fortnight leading up to the June 23 referendum, as investors woke up to the real risk of a leave vote. However, rather than focussing on Visegrad, the damage has been spread across CEE, illustrating that it's mainly the result of a retreat from risk of all shapes and sizes, rather than worry regarding the direct economic consequences of a Brexit on the eastern member states.
Indeed, while Polish and Hungarian yields jumped in response to the rising risk of Brexit in mid-June, there was also movement in Czech bonds – only yields there tightened. Analysts suggest that with the market having previously priced in a vote for the UK to remain in the EU, there is a lot more space for adjustment ahead of June 23, and especially in certain Central European markets.
The ever-enthusiastic Tim Ash at Nomura is not alone in picking out Poland as particularly exposed to financial market nerves. "I am tempted to reduce exposure in EMEA credits with the most trading/remittance links to the UK, plus benefitting from EU convergence flows, e.g. Baltics, Poland, Romania," he wrote in a note on June 15. "Poland looks particularly vulnerable due to tight credit spreads [and] low local bond yields, but also local political/policy uncertainty with the PiS government."
However, as so often, the Czech Republic is playing the role of a safe haven. That strongly suggests that it is largely sentiment – especially linked to political uncertainty - rather than direct economic threats to the region that is the leading cause of financial market jitters.
Indeed, while even the worst-case scenarios suggest limited threats to the real economies in Visegrad, they remain little more than guess work, given the fact that no one knows how a UK exit from the bloc would proceed.
Hungary's economy minister is one of the few that has dared to offer a number amidst a sea of opinion as to what extent, and how quickly, a Brexit would effect Britain's economic relations with EU member states. Mihaly Varga said in mid-June that the potential direct impact of a Brexit could shave 0.3-0.4% from economic growth for his country. However, he was quick to note that "there are certainly factors about which completely precise estimates may not be made".
The basis most analysts take is that "direct economic relations between the UK and Visegrad states are relatively minor, so the impact should be also," Juraj Kotian, head of CEE macro and fixed income research at Erste Group, tells bne IntelliNews.
The gloom and uncertainty a UK exit would cast over the EU in general is the major spillover risk. That would see activity and investment pull back across the bloc, which would likely impact Visegrad as much if not more than most, given the region's strong trade ties to the Eurozone and dependence on FDI.
Yet there are as many potential scenarios as you can shake a stick at. Some analysts, for instance, suggest there could be benefits for many EU states, as investment flows are redirected from the UK. "If the result were Brexit it would cast huge uncertainty on the UK economy," Damien Harrington, head of EMEA research at Colliers International, tells bne IntelliNews. "Other investment destinations throughout Europe would likely benefit."
"In narrow economic terms, the immediate impact of a Brexit on the EU is likely to be small, reflecting the fact that in net terms the impact on exports and imports will largely offset each other," Dr James Nixon, chief European economist at Oxford Economics suggested in a recent note. "We estimate the impact on the rest of the EU is likely to be just 0.2% of GDP."
Nixon is not alone in forecasting the potential spillover from the impact on the wider EU is likely to be small. "Even if a Brexit vote triggered a deep recession in the UK, the impact on EM exports would be relatively small," states Neil Shearing at Capital Economics.
By the same token, the story concerning the direct impact in Visegrad is unlikely to be dramatic either. There are three major potential routes of contagion: trade, EU funds, and remittances. However, trade links are relatively minor, while the risks to EU funding volumes and remittances from Visegrad nationals working in the UK are anything but clear.
Trade links with the UK, while more significant for some Visegrad states than others, remain limited overall. Demand out of Britain accounts for 5.5% of Slovak exports for instance, but that pales in comparison with the 80% of Slovak overseas sales headed to the EU, primarily Germany. Polish exports to Britain constitute a slightly larger ratio of that country's total, but the Polish economy is far less dependent on exports overall.
At the same time, trade with the UK will clearly not come to a sudden and total halt as London launches an exit negotiation that will probably last years. A trade deal with the bloc will be front and centre of those talks.
"Exports to the UK make up 3-6% of the total for Visegrad countries, and it's not clear if trade flows would be affected at all at the moment," points out Kotian at Erste. "There are various potential scenarios."
Foreign direct investment could be a more sensitive route, suggests Gunter Deuber, head of CEE research at Raiffeisen Bank International. "The impact here shouldn't be underestimated," he tells bne IntelliNews. "The UK is still a notable FDI player, while money flows are also routed through London via the European HQs of global companies."
However, while FDI remains vital for growth in Visegrad, it’s not an immediate issue. "We think the region can continue to draw down spare resources to raise output for the next couple of years or so," William Jackson at Capital Economics writes. "But once the region’s economies exhaust these resources, growth will then be determined by the rate at which the supply side of the economy can expand. The key here is that, given the region’s poor demographic prospects, medium-term growth will be driven overwhelmingly by rises in productivity, and this in turn will depend on investment levels."
Potential disruptions to EU fund flows and remittances represent perhaps the biggest potential threat to the Visegrad economies from a Brexit.
EU-based investment banks including Commerzbank and Raiffeisen moved early to play it safe on that score. Already in April - when a remain vote continued to be the overwhelming bet - the German bank downgraded Polish and Hungarian bonds due to the risk.
The UK is the third largest net contributor to the EU budget, hence there is concern that a Brexit could cut future budgets, and therefore the funds available to run public projects in Central Europe. "Brexit would reduce the UK's contribution to the EU budget (a net €7.1bn in 2014 after rebates), potentially to zero," suggests Fitch Ratings. "This would imply that other net contributors would have to increase payments, or net recipients accept lower EU expenditure."
If Slovakia, Poland and Hungary could potentially receive less EU funds in the next budget round if Britain exits, the Czech Republic could even become a net contributor, according to an internal Czech foreign ministry report, two sources close to the ministry have told bne IntelliNews.
The potential impact of lowered development financing from the bloc has already been witnessed in the first quarter of 2016. GDP growth was pinned back across the region by a sharp fall in flows as Brussels' new 2014-20 budgetary window came into force.
The 0.8% q/q GDP dive in Hungary was enough to provoke an immediate effort by the government to fill the temporary void. Poland is the biggest net recipient of any EU state in the 2014-20 budgetary window. A total of €115bn has been earmarked for Warsaw during those six years.
However, the threat is limited. As Fitch hints, there is no certainty that the UK would halt all contributions to the EU budget, while it would presumably continue to pay until it finally negotiates an exit. Most estimates, meanwhile, suggest that even should the UK pull out of all contributions, Hungary and Poland would lose no more than €1bn.
Kotian estimates that overall structural funds constitute just 2% of GDP for Visegrad countries. Meanwhile, the sharp slowdown in first quarter GDP across the region reflects the sudden rush in 2015 to grab unclaimed funds from the 2007-13 budget window – the result of the terrible track record amongst Visegrad states for actually using earmarked funds.
Remittances have been identified as another major threat for Visegrad from a Brexit, but again, data suggests the risk may be overstated, while the likely scenarios are also unclear.
Poland and Hungary stick out as the most reliant on wages being sent home from those working abroad. But despite the claims of Brexit campaigners that the UK is being over-run by migrants from the east of the EU, the bulk comes from elsewhere.
Money sent from the UK makes up just 16% of remittances sent to Poland and 9% for Hungary, according to the World Bank. According to EU statistics office Eurostat, remittance flows from the UK to Central & Eastern Europe stood at a maximum of 0.3% of GDP in 2014.
There are about 1mn migrant workers from CEE in the UK, but again it's unclear what will happen. "Would the UK halt the free movement of labour? There are plenty of UK nationals living and working in the EU," Kotian points out.
"While a Brexit vote would probably result in stricter UK immigration controls on EU citizens, those currently exercising their right to work in the UK seem likely to be permitted to continue doing so," Capital Economics asserts. "The current level of remittance flows to CEE from the UK is unlikely to fall.
"The most challenging aspect would be if free movement of labour is cut," Kotian continues. "What if the bulk of Poles and Hungarians now in the UK returned to their home countries? The effect on the local labour markets could be significant."
Indeed, the vibrant growth in Visegrad and poor demographic trends have the local labour markets tightening rapidly. Analysts, companies and business lobbies across the region are warning that is becoming a risk to growth and investment. The return of workers from the UK could in fact prove a potential bonus.
Polish broadsheet Rzeczpospolita suggest 400,000 Poles could leave the UK in the event of a Brexit, and subsequent tightening of immigration. That "could be a counterbalance to the demographic crisis in Poland,” it adds.
One additional defence for Visegrad is its banks. A common worry voiced in the lead up to the referendum is that London's role as a global financial and banking centre is under threat. That risks an interruption to global capital flows and therefore lending.
However, banking in Central Europe is dominated by Austrian and Italian lenders, who are not heavily plugged in to that system. "Societe Generale is the only large lender in the region with strong links to the UK and global money flows," Deuber points out. The French bank owns major banks in the Czech Republic and Romania.
Yet despite the hopes that direct economic impact will remain limited, Visegrad is hugely exposed to a Brexit via other avenues. The biggest threat is a rise in political uncertainty, which is already blighting the region.
A UK exit from the EU would only encourage the growing populist and authoritarian push in Visegrad. That would certainly have the potential to make both strategic and financial market investors think twice.
"Fiscal slippage would be very likely in Visegrad; it's already happening anyway and Brexit would definitely risk more," says Deuber. "Political fragmentation is also more developed in the region than in Western Europe." By way of contrast, he suggests a vote to remain would likely lift market sentiment.
Kotian points out that the loss of the biggest voice outside the Eurozone would hit Visegrad – which apart from Slovakia also remains oblivious to the charms of the single currency – and its clout in the bloc. That again would likely have economic implications down the line.
"The Central European states would move towards becoming a 'second tier' group within the EU," suggests Kotian. "The euro core would gain more influence."
That risks stirring the growing euro-skepticism in the region, and building on the populism and nationalism that Czech Prime Minister Bohuslav Sobotka calls the biggest threat facing his region today.