The fierce reaction of the world’s financial markets to Britain’s historic referendum decision to leave the European Union, which pummeled the pound to its lowest level since 1985 in the currency bazaars, has given rise to all sorts of predictions of what the historic event presages for business. Wild claims are now being made. Some of those who had hoped the UK would remain an EU member talk of 3 million jobs being lost and warn that deep recession and financial crisis are inevitable. Advocates of the divorce gleefully predict that Britain, free of burdensome EU regulation, no longer having to contribute to the UK budget and setting its own limits on immigration, can expect a potential 25% gain in GDP per person.
Fact is that since the European Union’s founding in 1957 as many as 28 countries have joined and none left (except for Greenland, which is a Danish territory, and Algeria, upon independence from France). This makes the British decision so unique that it is insanity for anyone to claim to be able to predict specifically what the ultimate effects will be. Some observations are worth contemplating, though, and some general trends are beginning to emerge.
- Both the UK and the EU have entered legal and political no-man’s land. Britain, no doubt, will want time for the Tories to choose a new leader who, according to Prime Minister Cameron, should be in place by October. The country will also, internally, want to settle what it wants out of the divorce negotiations before these actually begin. Many European politicians, on the other hand, have indicated that they want Britain out as soon as possible. Legally, it is up to the UK to initiate the process. Under Article 50 of the EU treaties this is supposed to open a two-year window to negotiate a myriad of issues, from single-market access for UK companies to Britain’s sharing of EU security databases in the fight against terrorism. Most of the agreements reached will require approval by no less than than 40 European, national and regional parliaments, so the process will, no doubt, be discouragingly messy and take far longer than two years.
- In the near term, the world’s financial markets will stay deeply unsettled. In the initial reaction, the Dow Jones Industrial Average dropped 610.32 points, the S&P 500 fell 75.91 points, the Stoxx Europe 600 index plunged 7%, its steepest drop since 2008, and Japan’s Nikkei Stock Average declined 7.9%. The rout pushed investors into the safety of gold, government bonds and currencies such as Japan’s yen and the Swiss franc, moves that were accompanied by slumps in the Mexican peso and the South African rand. Banks on both sides of the Atlantic were pummeled out of concern about the risks of big trading losses, slowing economic growth and the prospect of even lower interest rates for longer than had appeared probable. The nervousness in the markets will persist, to the benefit of currencies such as the Japanese yen and the Swiss franc and that of gold, while the euro is likely to weaken as investors question the viability of the single currency and, indeed, the EU as a trading bloc.
- In the UK, much will now depend on the political direction, which will not be clear until Downing Street 10 has a new tenant. Even then, Whitehall will have a devil of a time preparing for the biggest bureaucratic upheaval in a generation as the government is reconfigured and centralized to cope with the new situation. It may have to create a special Ministry or department to manage the divorce, which requires untangling thousands of EU-related laws on UK statute books and well over 12,000 regulations that cease to apply the moment Britain leaves.
- London is likely to lose most euro-related business. Overseas banks that have been using the UK as a base for accessing the EU market employ an estimated 115,000 staff. They are looking closely at their operations and are busy drawing up shortlists of cities where they might relocate part of these, with Frankfurt, Paris, Amsterdam and Dublin being preferred targets. Numerous big companies and banks have already begun to shift personnel abroad to avoid any disruption of their EU business.
- The relief from onerous rules that local enterprises will get as a result of the departure from the EU will likely prove to be not nearly as pronounced as hoped since UK product and labor markets are already among the least regulated of all OECD members and the most intrusive and costly regulations for business have been those imposed at home, not by Brussels.
- There is no denying that inbound investment has gained markedly since Britain joined the EU, and that a large portion of it, especially in financial services and cars, has taken place because of this membership. Uncertainty over future trade agreements is now reducing confidence in sterling and investment is apt to be discouraged. That the United Kingdom is running a current-account balance-of-payments deficit that must be bridged with capital inflows is not helping matters. Nor is the distinct possibility that the UK may lose its top credit rating.
- Escaping EU rules means losing full access to the single market – and the EU has been taking almost half of all British exports. A free-trade deal in goods could be negotiated, but it would not cover services, which make up a growing proportion of what the UK sells abroad. There will, no doubt, be major problems in trying to negotiate a new trade pact with the European Union. If the UK wanted full access to the European single market it would have to observe all the EU’s rules, as non-members Norway and Switzerland are doing (who are also paying into the EU budget, in Norway’s case roughly 90% of Britain’s contribution per head). If Britain opted to go this route, Euro-skeptics who dreamt of reclaiming lost sovereignty would have a very hard time seeking to explain how they advance their aims with an alternative that requires Britain to apply rules it has no say in formulating, and to pay for the privilege.
- EU countries will drive hard bargains as they are certainly not eager to reward the UK. With the rest of the world, Britain will have to replace all of the EU’s 53 trade pacts, which will be the harder to do as Britain has lost the clout of being part of the world’s single biggest market. Also, some big countries (the US, China and India among them) are in the process of negotiating new deals with the EU, from which the UK will be excluded. Relying on the WTO alone would not remove non-tariff barriers, nor even tariffs on many products (such as cars). The WTO also omits most services, including financial ones, which make up Britain’s biggest exports to the EU.
- From a broader perspective: Britain, having renounced its most important international relationship, lost a Prime Minister and seen the value of sterling collapse, has revived the prospect of a near-term breakup of the country. Since the outcome of the referendum was so close, the UK is a deeply polarized nation. Nearly half the voters, who wanted to stay in the EU, are now thoroughly disappointed and angry with the rest. What is more, Scotland, as a region, voted overwhelmingly for remaining an EU member and Scottish nationalists have made it quite clear that if Britain were to withdraw they would press for another plebiscite on Scottish independence, which now they may well win. Sinn Fein, Ireland’s second-largest party, has also renewed calls for a vote there on leaving the UK and joining the Republic of Ireland.
- Fears that the European Union will disintegrate as other countries follow Britain’s example is, for now, surely exaggerated. Members which are part of the Eurozone know they would face enormous difficulties ditching the euro and reintroducing their own currency. As for Central-European states, while it is true that Poland, Hungary and Slovakia have become troublemakers within the EU, these countries still receive billions in development funds and being part of the European Club is a strong motivating factor for nations just recently freed from Soviet imperialism, especially in light of Ukraine’s troubles.
- But the elements of instability – in Europe, in the UK and globally – will interact with each other in the coming months in unpredictable ways, making it extremely difficult for businesses and politicians to plan for the future. Critical in this context is that the sentiments which propelled the advocates of Brexit – not by coincidence somewhat similar to those that have been driving the political rise of Donald Trump – are widespread.
- This includes the notion that the EU is run by an unelected supranational elite totally out of tune with the people it aims to govern, that there is a mushrooming administration in Brussels which imposes its one-size-fits-all rules despite the wishes of national governments, that these rules are forged in corridors crawling with lobbyists for big companies, big banks and big environmental pressure groups, and that Brussels bureaucrats are living high on the hog at the expense of ordinary people who for years now have had to deal with slow or no growth in incomes, fewer permanent full-time jobs, and pressure on public services.
- When people feel that economically they are doing badly they want someone to blame. In this case it has been the EU and unfettered immigration. It gave the Brexit campaign the advantage of simple slogans – “control our borders,” “let us make our own laws,” and “get our money back from Brussels.” By contrast, the case for remaining in the EU was much more difficult to make and the campaign obviously could not overcome a stark repudiation of the postwar consensus in favor of ever deeper global integration.
- Growing protectionism and anti-immigrant sentiment drive political populism. They have helped push to prominence what used to be fringe groups such as the 5-star movement in Italy, the Alternative fuer Deutschland, the National Front in France, and Podemos in Spain. They have made it possible for populist parties to actually take power in Hungary and Poland. In the foreseeable future they are not likely to tear the European Union apart. But populists must be expected to continue to take advantage of the extent to which the bloc is being weakened by Britain’s departure.
- The EU has already found it very difficult to fashion a united response to Russia’s annexation of Crimea and has been AWOL as an effective actor in the Middle East. Maintaining European unity will be even more problematic in the post-Brexit era. With the globe’s fifth-or sixth-biggest economy, a growing population, nuclear weapons and veto authority on the UN Security Council Britain has been one of Europe’s most important powers in diplomacy and defense, the only one next to France, by the way, that has a sizeable expeditionary force.
- Internally, the departure of Britain will deprive Germany of a powerful ally in many deliberations and transforms the bloc’s balance of power. This is happening at a bad time for a continent already struggling with economic weakness, debt problems, mass migration and growing geopolitical instability to its South and East. Both the EU and UK governments will now be preoccupied with their divorce, when they should be focusing all their attention on their economies. This raises the risk that important decisions are unduly delayed or not made at all. And in the long run, it has to be said, the very survival of the EU is no longer guaranteed. There are strong anti-EU undercurrents on the Continent as well as in Britain, as the latest public opinion polls show. Unfavorable views run at 46% in Holland, 48% in Germany, 49% in Spain and 61% in France...