Friday, June 24, 2016

The Brexit Shock

By Roy C. Smith

A year ago it was Greece that everyone thought might leave, or be tossed out of the European Union.  Grexit never happened, but today Brexit did through a 52-48 percent referendum vote (with an amazing 72% turnout) in which only Scotland and the London region supported remaining in the EU.

Pollsters said the sentiment had changed in recent weeks to favor remaining in the EU, and yesterday markets soared as investors treated themselves to an early victory celebration. But the polls were badly wrong. Markets collapsed on the news this morning.

Prime Minister David Cameron will resign sometime soon but no one knows who the next Conservative Party leader will be, as Cameron’s inner circle all supported remaining and are probably not eligible.  Boris Johnson, the maverick former Mayor of London, who broke with the Conservatives to support leaving, said the referendum provided Britain with a “glorious opportunity” to take control of its economy and its borders.

Donald Trump, visiting one of his golf courses in the UK at the time, agreed with Johnson said Britain had done the right thing.

Former Labour Party Prime Minister Tony Blair, who strongly supported remaining, said he though people believed the referendum offered an opportunity for a “protest vote,” when in fact it was instead a very important “decision vote.”  Referendums can be dangerous when voters get things confused.

Nicola Sturgeon, head of the Scottish Nationalist Party that lost a referendum vote in 2014 on leaving the UK, said a new Scottish vote would now be necessary.  The Scot Nats are the third largest political party in the UK.

Right wing politicians in several European countries claimed that referendum votes in their countries would likely follow the British example, causing elected leaders to worry about further defection among the (now) 27 remaining EU members. 

But out is out. Britain will now have to begin a two-year negotiation with the EU, under the never tested Article 50 for an orderly withdrawal. They will argue over future tariffs and market access. The EU doesn’t want to make it too easy, for fear others will follow the UK out the door, but they don’t want to make it too hard either because they still want the British economy linked to theirs.  But to do this the UK has to field a team of true-believing negotiators, and that may require another general election.

The economic argument for Brexit was that cut free of its obligations to the EU (social and economic policies more left than the UK would prefer), the UK could make its own laws and shape its own destiny and be better off.  But, leaving means that UK’s exports to the EU (44% of total exports) would be subject to tariffs and therefore more costly, and new investment in the country (especially by foreign companies) would likely fall off with diminished access to European markets.  A weaker pound (it fell 7.3% on the news) would balance some of this stuff, but whether Britain actually ends up better off will depend on how effectively it can change its own laws to boost its economy as the leavers expect it to do.

This will not be easy. Low growth and fears about job losses have driven economic policy in the UK, the EU and the US (the UK growth rate has averaged 2%, and unemployment 6.5% since 2010, but unemployment is now 5%). Many economists forecast a 3-4% recession as a result of the vote.

Or, as David Brady, a Stanford political scientist has said “no party, country or leader has discovered the path to achieve economic growth while mitigating the ills that go with it. “ It is a difficult time for tough-love market economics that threaten to make things worse in order for them to get better over the longer term.

There is also a lot of uncertainty over how the vote will affect the City of London, the longstanding financial center of the EU. There may be some job shifts to other European cities, but the talent and infrastructure of the London markets is likely to survive, and perhaps be made more competitive by its ability to escape the many EU rules it dislikes.

The politics of the thing, however, ultimately may be the more important issue for Britain. Leaving essentially is a repudiation of its old neighborhood, which clumsily or not has forged a historically unprecedented economic confederation of nations to provide economic prosperity and political security for a region of the world that had little of it for the first 50 years of the 20th Century. Confederations are at best unwieldy and fragile alliances, but the EU, now with a pre-Brexit population of 507 million is the world’s largest economic marketplace (GDP of $18.5 trillion). The UK is Europe’s second largest economy (GDP of $2.9 trillion) and the second largest country by population (64 million).

For the EU to survive it has to strengthen itself as it grows and this requires the skillful attention of national political leaders from the largest countries. The UK has been an important dissenter (along with a few other countries that looked to the UK for leadership on certain issues) that has brought a market-oriented viewpoint to a group that definitely needed, but resisted it.

Now this voice will be absent, Britain’s influential role in Europe will be lost, and Great Britain may slip back to being Little England.     

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