Hard Brexit could lead to the next financial crisis, says Deutsche Bank

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Brexit could be an unlikely cause of the next financial crisis, according to research by Deutsche Bank.

In a paper published this week, researchers at the German lender examined the possible causes of a new economic meltdown, including the bursting of China’s debt bubble, rising populism around the world, a political crisis in Italy and pain caused when central banks eventually end quantitative easing.

Also on that list, albeit lower down, was Britain’s departure from the EU. The German bank said Brexit could trigger a crisis if EU nations fail to cooperate, a scenario which has looked increasingly likely as divorce talks have stalled.

“Through most of history, we tend to think compromise is always the most likely outcome when such differences exist and where there is the chance of mutually assured destruction,” the bank’s note says. 

“The extreme example being World War II when no-one really expected war, weeks and months before it arrived. How spectacularly wrong that assumption was. So it’s worth highlighting how Brexit could go wrong and create a financial crisis.“

Deutsche also issued a warning against a hard Brexit of the kind advocated by some Tory MPs.

The bank said: “The real financial crisis could arise if the UK experiences a dramatic ‘hard’ Brexit with relations completely breaking down with the EU. This would not only have economic implications for the UK and the EU but also on geopolitics.”

Deutsche emphasised that the risk Brexit poses to the global financial system is “almost impossible to model” and added that it was “relatively sanguine about the future relationship between the UK and Europe”.

Despite this, the note said that the decision to leave the EU, “has introduced a major risk to economic activity, the financial architecture of Europe and perhaps more concerning, the geo-politics and security of the region. As such we need to continue to keep this on our radar”.