Wharton's Mauro Guillen discusses the potential impacts of a Brexit.

British citizens are just days away from deciding whether England should exit the powerful European Union. The results of the June 23 referendum known as Brexit, an abbreviation for British Exit, will have long-lasting consequences for the United Kingdom and the entire continent as Europe grapples with its changing role in the global economy. In a recent segment on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM Channel 111, Wharton management professor Mauro Guillen, also director of The Lauder Institute at the University of Pennsylvania, discussed the complex issues facing Europe, including a possible recession.

An edited transcript of the conversation appears below.

Knowledge at Wharton: This time last year was a really heady time for Europe. At the end of June 2015, Greek banks had closed and the European Central Bank began to freeze lending. There was talk about the beginning of the end for the eurozone, and things looked very bleak. Give us a recap of what’s been happening in Europe over the last year.

Mauro Guillen: The economies in the south and the east have been going through more problems with economic growth that has not really big enough or fast enough to reduce unemployment, except for in Ireland and in Spain. Even in those two countries, it’s not clear that growth is sustainable. At the same time, we have seen far more assertiveness on the part of the European Central Bank, led by Mario Draghi, in terms of engaging in quantitative easing, that is to say, purchases of not only government bonds but also corporate bonds, much to the dismay of the central European and northern European countries that are also part of the eurozone.

The euro continues to be a viable currency as long as the European Central Bank is willing to do whatever it takes — and remember those are Mario Draghi’s words from about three years ago. But the gap between north and south, the gap between east and west, the unemployment, all of those things continue with no end in sight, so we shall see what the future brings.

Knowledge at Wharton: In the EU now, growth in the first quarter was about 0.5%, so that’s maybe about 2% a year. There was some reaction in the markets that maybe Europe is finally getting liftoff, maybe the economy is starting to rev up. Then you get the first not-so-wonderful numbers for the next quarter, and hopes get drained again. All of those concerns about deflation and inability to grow are still hanging around.

Guillen: The markets, especially these days, are always looking for good excuses to feel optimistic about things. If you look hard enough you can certainly find some good signals. I would say that by far the two most important positive developments of the last year and a half have been that the European Central Bank is now doing what the Federal Reserve did beginning in 2009 and 2010. It’s a little bit too late now, but it’s better than never.

“If there is a crisis of confidence in the European Union that undermines consumer spending and business confidence, then you are going to get into maybe even a third recession.”

The other important development is that German employees have more money in their pockets because wages have been rising in Germany, especially over the last three years. This is good because Germany is the largest economy, and more consumers there with money means that they spend more money. At least part of those purchases of goods and services go to the southern periphery in the European Union. What hasn’t happened yet is that the German government itself would be a little less frugal and would engage in a little bit more spending. But they are very adamant in that they want to have a balanced budget. Although they can borrow money at negative interest rates, they are not willing to do anything.

So here we are, with this interconnected set of economies in which we have essentially three groups — the east, the north and the south — each with very different conditions. But 19 countries in the eurozone, unfortunately, have the same monetary policy with the same scheme in place, so it’s very hard to get anything done in that situation.

Knowledge at Wharton: You hear Mario Draghi sort of pleading in his quiet, diplomatic way for fiscal stimulus and not getting that response, which leaves him with quantitative easing, which has limits. Now we’re heading into the possibility of England leaving the eurozone. The impact of that could be as big or bigger than a hard landing in China.

Guillen: I don’t disagree with that. You made a distinction that may ultimately be an interesting one between the U.K. and England. Technically speaking, the nation state that is a member of the European Union is the United Kingdom, but public opinion is bitterly divided there between those who want to stay and those who don’t. If you go to Scotland, you find that most of the population is in favor of staying. One of the risks of Brexit is that Scotland might want to become independent because it really wants to remain within the European Union, and this would only fuel the independence movement there.

The European Union is the largest economy in the world. It’s not as rich as the U.S., but it is bigger in terms of gross domestic product if you combine those 28 countries. If there is a crisis of confidence that undermines consumer spending and business confidence, then you are going to get into maybe even a third recession. That would be devastating for Europe itself, but it would be really bad for everybody else in the world that has business with Europe, including the United States. Exporters to Europe and American companies that have investments in Europe are going to suffer. Companies such as GE or GM or Boeing, 20% to 30% of their business is in Europe, so it could have a large impact

If there is a Brexit, the pound sterling would lose value. The euro would also lose value because there would be such an erosion of confidence. These days, although the dollar is increasingly not that strong, it is perceived as being the only safe haven. What we would be witnessing then is a strengthening of the dollar, and that would also make it harder for American companies that export to do so, and that is going to have a negative impact on the United States. All of these chains of events that I have described are quite likely if there is a Brexit.

I don’t want to doubt Prime Minister David Cameron’s motives as to why he is organizing this Brexit referendum. He does want to put this question to rest within his party. He is playing with the future of Europe for the sake of settling a problem within his party, which is a pretty risky way of doing it. The U.K. has been in the European Union since 1973. It has always had doubts about it. If you remember, we went through several re-negotiations of the relationship between the U.K. and the European Union, especially under Margaret Thatcher. From the point of view of the U.K., if I were a voter over there, I would think at the end of the day I am getting a few things that I really want, which is access to that big market. I am also more influential as a country because I get to go to the meetings and exercise not only a vote but also an opinion. The U.K. is one of the three largest economies in Europe, so they have some influence.

Knowledge at Wharton: It is interesting to see how all of this is playing out. There is no leaning right now one way or the other, and we’re closing in on this vote coming up at the end of the month.

Guillen: The divisions run deep, but they are somewhat predictable. The Greater London area, which is much more cosmopolitan, where there are more people who have connections to the rest of Europe, which is the financial center, they are pretty much in favor [of remaining in the EU]. If you go to smaller towns throughout England, then you get more people opposed. You cross the border into Scotland, then most people are fiercely in favor of staying within the European Union because they believe in European policy making, they believe in the welfare state, they believe in all of these things.

“Every single analysis that I have seen concludes that it would be harmful for the U.K. to exit.”

This is the problem with Europe, that 10 years ago before the crisis, it may have been somewhat divided or there were differences of opinion about this or that. The single most important effect of the crisis in Europe has been that whatever divisions existed have become much, much, much bigger, so these gaps in terms of the different perspectives that people have in different parts of Europe have become much, much wider. All of this has been fueled by a number of issues: the sovereign debt crisis, the problems with the euro and the more recent migration crisis.

Knowledge at Wharton: Recently, the leaders of Germany, the Netherlands, Spain and Ireland all came out pretty strongly against Brexit, saying it’s a bad idea. Is that predictable or is that a strong statement?

Guillen: I don’t think that there is any political leader in Continental Europe right now who would be in favor of a Brexit.

Knowledge at Wharton: But they’re stepping into a local political issue in a way.

Guillen: Yes and no, because again this is the way in which David Cameron framed it. Some people accuse him of implicitly framing it as a problem within the Conservative Party, which is pretty strong in England. The Labor Party is not doing well at the present time. But whether you want it or not it is a European-level issue, absolutely.

Of course, every country is sovereign and can organize whatever referendums they want to organize about any issue, including this one. But for a country that has done so much in terms of contributing to European integration over the last 40-plus years to now decide “been there, done that, on to something else” is kind of strange. The English Channel separates the U.K. from the rest of Continental Europe, but the U.K. is a European country, nonetheless. It may want to preserve a certain element of independence or autonomy in terms of foreign policy, but when you think about their interests, every single analysis that I have seen concludes that it would be harmful for the U.K. to exit. It would have very negative effects, so I’m hoping that appealing to that kind of an argument would turn the undecided voters in the direction of remaining within the EU.

Knowledge at Wharton: According to the Organization for Economic Cooperation and Development, Ireland would lose 1.25 percentage points off of its GDP as an immediate consequence.

Guillen: Ireland would be devastated by this for two reasons. One is that its economy is very much driven by two things: its close relationship to the U.K., which is of a historical nature, and that Ireland has become a hub for doing business in the rest of Europe. A lot of American firms started their operations there. Google is going to be hiring 10,000 employees outside of Dublin. Ireland plays a very important role from that respect. If the U.K. gets out, that is going to mess up Ireland’s strategic position in the world.

The other way in which the Republic of Ireland is going to be affected is because of Northern Ireland. If the U.K. were to get out, there will again be border between Northern Ireland and the Republic of Ireland. If we were to go back to having a border, that could re-ignite some of the conflict, some of the tension, some of the friction. I’m not concerned that they wouldn’t be able to reach an agreement. What I’m concerned about is that now we have an arrangement that seems to work. There’s no violence.

Knowledge at Wharton: Why mess it up?

Guillen: Exactly. Brexit would essentially mean, hey we have to go back to the table and talk. At the present time, people can move freely across that border. But if the U.K. were to exit, that border would exist again.

Knowledge at Wharton: Another interesting thing about that is economic conditions have reversed. Belfast in Northern Ireland used to be the economic powerhouse of that island for years and years. That has completely reversed, their economy has shrunk, their population has shrunk, and Southern Ireland has blossomed for all of the reasons that we are talking about.

Guillen: The southern part of Ireland is doing quite well thanks to some initiatives that they have set into motion, including Shannon Airport and some hubs for high-tech industry. But yes, it is very clear that the Republic of Ireland has done quite well over the last 30 years. They did have a problem with real estate bubble and their banks eight years ago, but they have put those problems behind them. Now it is growing really quickly.

Knowledge at Wharton: Another important thing in Europe is this rise of right-wing politicians and right-wing movements. Poor economic conditions and the immigrant crisis are fueling it. But even before that, this trend was happening. What’s your take on that?

Guillen: This is also very worrisome. It is very difficult to generalize because in each of these countries, the origins and the drivers of these right-wing extremist parties are different. Some people in the last few days have been blaming Mario Draghi for the rise of these parties. I think that is totally wrong, because I think there are very, very distinct historical patterns.

These parties existed before the current migration crisis, but the crisis has exacerbated the problem in the minds of some of these people. Whenever you have a crisis such as that one, there is always the potential for opportunistic politicians to take advantage of them. This problem is now apparently in many of these European countries, although not in Italy or in Spain or in Portugal. But there is enough of a critical mass of voters who are true believers in bringing immigration down to zero, closing the borders and re-writing some of the rules so that there are restrictions on what minorities can do throughout the continent.

“I think most people are realizing that the old policy, the old approach of trying to integrate everything in Europe is a self-defeating exercise.”

If there is a crisis, if the economy is not performing well, then you have a whole bunch of other people who are desperate or near desperate, who also vote for those parties. But they are not really true believers. I think if you asked them, “Do you really believe that we should get rid of all of the Muslims in France?” They would say, “No, no, of course not. I have many friends who are Muslim.” So, the people who vote for these parties come in two types. One is the true believers, and those are the really dangerous ones, the unconditional supporters. And then you have the other ones who, depending on the circumstances, vote for these parties or not. The problem is right now for the second group, there are plenty of reasons to think that those conventional parties don’t have the solutions to these problems. There is a lot of anxiety.

Knowledge at Wharton: Regardless of Brexit, you talked about the possibility of recession in Europe again.

Guillen: If you want to put it in those terms as to whether in 20 or 50 years from now, some of the topics that we are discussing will be just a footnote in a history book or the title of a chapter, I think they are going to be footnotes because Europe is facing so much more fundamental challenges than any of these things.

Europe is facing a huge challenge with population and aging. In many countries across Europe now, each woman is having 1.2, 1.3 children over her lifetime. This is the current fertility rate in Europe. There is no way you can run those economies with that kind of a demography unless you have some kind of an orderly policy for bring in immigrants with a variety of skills that would help you continue having a dynamic economy.

This is one problem. The other issue is Europe’s own diminishing importance in the world, which is from many points of view just something to be expected because other parts of the world are growing much faster. So, it’s the decline of Europe, which has been brewing for a very long time. On top of all of that, we have the divisiveness and the frictions among all of these different countries. It’s not just two blocks, like the frugal countries and the spendthrifts. No, we have multiple different kinds of countries there. It is a mosaic, and what I think most people are realizing is that the old policy, the old approach of trying to integrate everything in Europe, to try to bring everything under one common standard, is a self-defeating exercise. Unless you are very careful as to how you build the institutions, how you lay the foundations for that integration, you are likely to intensify the tensions and the frictions as opposed to reduce them, which is what I think has happened over the last decade or so.