This year’s transatlantic electoral surprise: A Brexit-fueled recession

As British voters appear more willing to leave EU, markets everywhere brace for a fall — and give Hillary Clinton another reason to worry about her chances.

Voters in the United Kingdom could deliver a sharp jolt to the global economy and the 2016 U.S. presidential race next week.

Recent polls show strong momentum in Great Britain in favor of abandoning membership in the European Union when the nation votes in a referendum next Thursday, an event that could send global markets plunging, damage the fragile U.S. economy, presage the demise of the EU itself and present a fresh headache for Hillary Clinton in her effort to keep the White House in Democratic hands.

“If the U.K. chooses to leave next week there will be a lot of immediate volatility in markets,” said Megan E. Greene, chief economist at Manulife in Boston. “But you could also end up having an existential threat to the European Union and then the impact on the United States would be even bigger and the market dislocations that follows would be much larger.”

None of this would be welcome news for the Hillary Clinton campaign, which is already facing one destabilizing event in the Orlando massacre and could soon be faced with a second shock.

Clinton is counting on a strengthening U.S. economy to help her defeat presumptive Republican nominee Donald Trump in the fall. But a vote in favor of the U.K. leaving the EU, especially if it’s followed by similar movements in Italy, France and other EU nations, could damage a U.S. economy that grew at just a 0.8 percent rate in the first quarter by driving stock prices lower, pushing the dollar higher, sapping investor and consumer confidence and damaging critical U.S. trading partners.

“The big question here is to what extent this fuels a much bigger phenomenon in anti-establishment movements across Europe, that’s where the real uncertainty is,” said Mohamed A. El-Erian, chief economic adviser at Allianz. “Brexit itself could knock a little bit off of U.S. GDP. For a bigger impact, you would need big recessions all across Europe.”

Global markets are already trembling at the prospect of Britain leaving the EU.

Bond yields in Germany on Tuesday dipped into negative territory for the first time in history, meaning investors have to pay for the safety of owning the nation’s debt. Yields on U.S. Treasury bonds also fell to four-months lows on Tuesday as stock prices dropped around the world.

Volatility in the British pound is now at the highest level in 20 years, spiking beyond levels seen during the 2008 financial crisis. Both the European Central Bank and the Bank of England indicated that they would step in to help prop up European banks in the event the “Leave” side wins the referendum next week, a move reminiscent of what the U.S. Federal Reserve did during the financial crisis. And the Fed is viewed as unlikely to hike interest rates on Wednesday in large part out of fear of doing so before the Brexit vote.

“Markets right now are re-pricing the risk of Britain leaving and this could intensify over the next few days,” said David Kotok, chief investment officer at Cumberland Advisors. “If there is no second initiative anywhere else and this is a limited one-off event, the impact on the U.S. will be small and containable. If there a pile on after a Leave vote then the risk of a dismembered EU will intensify. We have many questions, little history to guide us and, hence, no answers.”

The mood in the City of London, the U.K.’s version of Wall Street, and in Brussels’ corridors of powers has changed from deeply optimistic of a Remain vote to increasingly worried about a ruinous Brexit.

Among London’s financial titans, who are overwhelmingly in favor of Remain for business and personal reasons, there is a palpable sense of unease at the recent surge in the polls by the pro-Brexit camp. “I am very, very worried,” said one on Tuesday. “People know that the economic consequences of an exit would be bad but they are saying they don’t care. They want to focus on their fears about immigration.”

In Brussels, European officials feels equally impotent. Not only have they been told by U.K. diplomats not to wade into the domestic debate for fear of exacerbating Britons’ fear of “being told what to do” by foreigners but also they are at a loss to offer more concrete concessions to sway British public opinion.

Jonathan Hill, the British-born commissioner for financial services at the EU, has done most of the talking both in Brussels and back home. His argument, exposed in an interview with POLITICO this week: a Brexit would be a lose-lose proposition for both Europe, which would be deprived of the U.K.’s expertise in financial services and economic matters, and the U.K., which would miss out on Europe’s vast single market.

Despite the growing fear, a vote in favor of Brexit is hardly assured.

For months, most polls and betting market sites suggested a relatively easy win for the Remain side. The numbers began to tighten in recent days despite repeated warnings from the International Monetary Fund and many politicians, including U.S. President Barack Obama, that leaving the EU could drive Britain into recession and reduce its global influence.

But beginning last weekend, polls began to show the Leave side either tied or ahead by as many as ten points. Tuesday’s Times of London headline screamed: “Britain on course for Brexit after poll surge.”

The U.K.’s largest circulation daily newspaper, The Sun, owned by Rupert Murdoch, ran a front-page editorial on Tuesday headlined “BeLEAVE in Britain,” urging a vote in favor of exiting the EU. Bloomberg’s aggregation of polls shows the Leave side at 45.9 percent and Remain at 45.5 percent.

Some analysts believe these polls may be overstating support for the Leave effort. Surveys also tightened ahead of a Scottish independence vote in 2014 and the “No” side wound up winning comfortably, 55 percent to 45 percent. The conclusion was that when it came time to actually vote, Scots decided the risks of leaving were simply too great. That could happen again next week.

In the last week, however, online and phone polls in the U.K., which had been showing much different outcomes, began to converge. Traders once took solace in the fact that phone polls, believed to be more accurate, showed the Remain side with a solid lead while online polls showed the opposite.

Not anymore.

“What has happened recently is the alignment of all these polls,” said El-Erian. “That, I think, is what has shaken people, that these indicators are now showing a much closer outcome than people expected.”

A vote in favor of Brexit could also highlight the global power of an anti-immigrant, isolationist sentiment that has driven Trump to the cusp of winning the GOP nomination for president. Supporters of the Leave campaign have invoked the Orlando shooting, saying cutting ties to the EU could help prevent further Muslim immigration into the U.K. and thus reduce the likelihood of terrorist attacks.

Trump himself has spoken favorably of Brexit, saying last month that the U.K. would be “better off” outside the EU. “I think the migration has been a horrible thing for Europe,” Trump told Fox News in May. “A lot of that was pushed by the EU. I would say that they’re better off without it, personally, but I’m not making that as a recommendation. Just my feeling.”

The big question, now, is what both camps, and the European elite, will do in the last few days of campaigning. The pro-Brexit camp is trying to press home its advantage by reminding voters of the perils of the EU and its liberal immigration policy.

The Remain camp, on the other hand, needs to reboot and reboot fast. Insiders there say they can “relaunch” their campaign by enlisting more figures, including the opposition Labour party and celebrities who appeal to a younger audience, such as the actress Keira Knightley who on Tuesday released a 30-second video urging Britons to participate in next Thursday’s EU referendum in order to “stop others f—ing with your future.”

White reported from New York. Guerrera reported from London.

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