Britain's Prime Minister David Cameron speaks at the Commonwealth Games Business Conference in Glasgow, Scotland, July 23, 2014. REUTERS/Suzanne Plunkett (BRITAIN - Tags: BUSINESS POLITICS SPORT)
(Reuters/Suzanne Plunkett)

Are you tired of portmanteaus about Europe's nervous breakdown and potential breakup? Well, I've got some bad news for you then. There's a new one called "Brexit," and you're going to be hearing a lot about it between now and June.

That's when Britain heads to the polls to decide whether or not to leave the European Union—get it, Brexit, as in British exit?—after 43 years as part of the now-28-nation bloc. In the best case, doing so would hurt their economy for the next 5 to 10 years, and leave them no better off after that. And in the worst, it would send political shockwaves through Europe that would dwarf the economic ones hitting Britain. Indeed, people are already talking about Brexit leading to Czexit and who knows how many others as Europe wakes up from its dream of an "ever closer union" to the reality of a new nationalism.

But let's back up a minute. What would Brexit mean, and why would anyone want it? Let's go through it step-by-step.

What exactly would Britain be leaving?

The most important thing here is to keep our portmanteaus straight. Brexit would be nothing like Grexit. That's because Britain doesn't use the euro like Greece does. In the latter case, we were talking about a country potentially changing all the money in its economy from euros that were worth a lot to drachmas that wouldn't have been—which is why people tried to turn their bank deposits that were at risk into cash that wasn't. The possibility alone was enough to set off a slow-motion financial crisis.

Brexit, by comparison, doesn't seem like it would be that bad. They'd have the pound today, and still have the pound tomorrow. Which is to say that there wouldn't be any kind of bank run. No, this would "just" mean getting rid of Britain's free trade agreement with the rest of Europe, along with all the obligations that go with it. What are those? Well, adopting all the regulations the European Union decides on, allowing the free movement of people within the bloc and paying into the joint budget.

But it sounds a lot worse when I put it like this: Britain would be scrapping a free trade deal with its largest trading partner. About 45 percent of all British exports go to Europe. So while it's hard to say just how much being a part of the European Union has helped Britain, the answer is probably quite a bit. Professor Nick Crafts of the University of Warwick told the Financial Times that he thinks Britain's economy is 10 percent bigger than it would have been if it'd never joined.

Okay, but couldn't Britain just agree to a new free trade deal with Europe if it left the European Union?

Sure, it could. But that's not the kind of thing you can do in a day or a month or a year or even two or three. Britain's Cabinet Office thinks it could take as long as 10 years to renegotiate a trade deal with Europe and all the countries that Europe had trade deals with that Britain doesn't. Why would it take so long? Part of it is that's just the nature of trade deals nowadays. They aren't about getting rid of tariffs anymore—those are already gone for the most part—but rather agreeing about which parts of your service sector will be open to international competition and which parts won't. And that takes time.

The other part is that Europe wouldn't want to give Britain a better deal than it's getting right now, and might even insist on a worse one to try to discourage others from following it out the door. Want unfettered access to Europe's single market? You'd have to—stop me if you've heard this before— adopt all the regulations the European Union decides on, allow the free movement of people within the bloc and pay into the joint budget. That, after all, is what Norway has had to do to get the European Union to agree to a trade deal with it without being a part of the European Union itself.

So, even if everything goes according to plan, leaving the European Union would be somewhere between useless and pointless. Britain would still have to do a lot of what Brussels says, but would lose any input over what that is.

This still doesn't sound like that big a deal, though. It just means Britain's exports might get hurt for a few years, right?

Wrong. The problem is that a Britain that really did decide to leave the European Union is a Britain that might not be willing to do the necessary things to negotiate a new deal. And who knows how long it'd take for that to change? The uncertainty about it all would make any export-oriented company that was thinking of investing in the country keep their money out, and any individual investors move their money out. Add those up, and that's a lot of people trying to sell their pounds and not a lot of people trying to buy them—which means that the currency would fall. Now, up to a point, that'd kind of be good news since a weaker pound would push up Britain's too-low inflation, but not beyond that. If the pound dropped too much, the Bank of England would have to raise rates more than it otherwise would have to keep prices in check.

And the bad news, as you can see below, is that this has already made the pound fall almost 5 percent since the start of the year to what's nearly a post-crisis low against the dollar.


Source: Bloomberg

But the bigger question isn't how Britain would get along without Europe. It's whether Europe could get along at all without Britain. The last 60 years, you see, have been all about making the horrors of the twentieth century impossible in the twenty-first by binding Europe together in an "ever closer union." That's the short version. The slightly longer one is that this has actually turned into a two-tiered system. There are the 19 European Union member states that use the euro, and then there are the 9 that don't. Now, technically, the ones that have held on to their own currencies are supposed to be getting ready to give them up, but in reality Britain, Sweden and Denmark have carved out exceptions for themselves. They—correctly!—thought that sharing a monetary policy with other countries without also sharing a fiscal policy would only end with some of them getting stuck in inflationary booms and the others in deflationary busts. In other words, they didn't want to integrate for the sake of doing so, but only as far as it actually made sense. And now Britain is wondering whether any of it does anymore.

If Britain decides it doesn't, it could be the beginning of the end of the United Kingdom and the European Union. Why both? Well, Scotland might not want to be part of the United Kingdom if the United Kingdom isn't part of the European Union. The Scots, after all, are much more europhilic than their neighbors to the south, and, as we saw 18 months ago, almost half of them already want independence—at least of a sort. That just means that Scotland wouldn't want to be entirely on its own. It'd probably want to, yes, join the European Union instead—just as everyone else was having second thoughts about it.

Now, the European Union could work without Britain, but it wouldn't work as well. The balance of power between France and Germany, between pro-government and pro-market policies, between people who want to centralize more power in Brussels and the ones who don't, would be broken. It'd be a European Union whose benefits might not seem so worth the costs—especially if Britain showed that you could do better without it. The countries that don't use the euro would be the first to leave, but the ones who do might eventually leave, as well. People are bored talking about it, but the fact remains that the euro crisis hasn't really been fixed; it's just in remission. If you're Greece, this might make taking a chance on life outside the European Union look at least a little less crazy when your only alternative is a never-ending depression.

This is how the dream of a United States of Europe ends: not with a bang, but a bad portmanteau.

Brexit seems like it'd be all pain, no gain. Why does anyone support it?

There's a short and a long answer here. The long one is all about sovereignty. Anti-immigrant groups think that ditching the European Union is the only way they can get back "control over our borders"—basically Trumpism in a super-classy English accent—and keep, say, cheap labor from eastern Europe out. And pro-business people think that it's the only way to keep Brussels from over-regulating the British economy to death (no matter that there's no evidence that's the problem). Brexit, the story goes, would let the country decide for itself which rules to follow and how many people to let in, and—this is the key assumption—without any economic costs. Heck, it might even help.

Britain, in other words, can have free trade and eat it too.

The only problem is that this is no more true of trade deals than it is of cake. If Britain doesn't want to listen to the European Union, then it's not going to be able to trade as much with the European Union. That's the, well, trade-off. You can pretend it doesn't exist—which is a pretty good description of what they're doing—but that doesn't make it stop existing.

And that brings us to the short answer: There's no good reason to support Brexit.

British Prime Minister David Cameron said he's negotiated a deal to give Britain "special status in the EU" and will recommend it to his cabinet. (Reuters)