Unfolding the Brexit

“UK votes to leave EU” – the glaring headline that graced my Facebook news feed on Friday 24 June 2016. The Brexit has happened and chaos follows the financial markets worldwide.

The shocking result stunned the political establishments worldwide. Hysteria took over as the shock reverberated through the financial markets across the global economy. According to Time magazinethe pound sterling slid dramatically against the dollar……lost about 12% of its value against the dollar in the course of 6 hours, marking the steepest plunge on record”

The result has shocked the global economy and many predictions have begun in the wake of UK departure from EU. It is a historic and an unprecedented event. For UK to leave European Union after 43 years is no laughing matter. While the media, analysts, financial and political figures discuss the fallout of the result, it is important to note that in the time of economics crisis, any policy decision in haste has the potential to further complicate a tense situation. In times of economic chaos, it is critical to watch how the financial markets unfold and let the market take its full course. Economies act very differently. During crisis, political, economical and social issues could become a toxic cocktail, which could have  either desirable or disastrous results for all.

What is required at this time is to understand the underlying currents that gave way to the Brexit and the stakes now involved with the result. Some thoughts to consider.

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This is not the first time for European Union to face a crisis. Before European Union was formed with Euro as the currency, the inception of the idea had dealt with hard-core feelings of the member countries’ fearing loss of sovereignty and voice should European integration went ahead. The integration went ahead and benefits realized were larger than the costs. However, the underlying faults (political resentments, different political and economic motives of member states) remained, especially, as Germany was seen the power player in the Eurozone. The nationalistic seeds were always present.

The US financial crisis of late 2008-2009 cracked open the faults within the EU. The Greek financial crisis unraveled and shook the Union at its core as Euro came under threat. Four years ago, I had written a post on Greek crisis and how the future of the Euro zone is bleak. At the time then, the fear of Greece exiting the Euro was very much real as there was a prediction that the exit would be catastrophic as the crisis would spread to weaker economies such as Italy, Spain, Ireland and Portugal and these economies will also think of leaving Eurozone. The very existence of Union was under threat. There was upheaval in the economies as the austerity policies took effect.  The political resentments resurfaced as Germany was reluctant to help out Greece on  such a massive platform. The German population believed that Eurozone will be better off if Greece were to exit. The same sentiment also existed on the British side, although, it was mute. Greece continues to reel not only from the conditions of the bailout, but also, from the policies it has had to take to get its house back in order.

On the other side, the Middle East crisis began to unravel in full force as ISIS took over key cities in Iraq and Syria while Libya and Tunisia continued to be politically unstable. The mass refugee exodus from these countries  due to terrorism became the migrant crisis of Europe. To this day, more and more migrants arrive in Greece and Italy only to find their way and travel to other European member countries for a stable and secure life. Germany, Netherlands, Sweden, France became hosts to refugees and so did Britain. The Eurozone crisis, the migrant crisis and the stand with Russia over Ukraine became a deadly combination.

As the European Union faced these scenarios, Britain faced its own set of problems. Scotland’s independence referendum in 2014, economy facing recession, surging immigration, higher tuition fees and students protests – the bitter cocktail that politicians are now facing. The surging immigration gave way to fears of loss of identity. At the EU level, it was the loss of sovereignty with Brussels seen as the  ultimate power. On the other hand, the austerity economic policies slowed economic growth, causing resentments among the population that faces the challenges of unemployment and higher prices.

Under such circumstances, it is not surprising to see countries taking protectionist measures, whether in the form of limiting trade or immigration. The scenario was similar to what had occurred during the US Financial crisis, where many countries opted for protectionist trade policies. In such times, protecting one’s own interests and national security becomes a critical agenda. Thus, to hold referendum in such a background was only bound to lead to such a result.

So now that Britain has voted to leave EU, what next?

UK Prime Minister David Cameron

Some interesting points to note are:

  • UK Prime Minister David Cameron has resigned and so far, Article 50 of the Lisbon Treaty has not been invoked despite the EU leaders calling for Britain to speed up the process.  The EU leaders want the process of Brexit to begin, but UK will take time. Firstly, the resignation of the David Cameron means there is a political void that needs to be filled, that is, a new prime minister must come in to take the lead on Brexit process. For the new prime minister, this task could be the death of their political career for good.  Secondly, perhaps, but it seems that the opposition had no plan in the line should the Leave campaign win and under the present circumstances, some critical questions must be answered even before Article 50 is invoked for e.g. the status of Britons working in other EU states, new trade deals and the kind of relationship UK will want with EU in the future after the exit. Clearly, UK will take time much to displeasure of EU, to think thoroughly on these matters and needs a “captain that can steer the ship” effectively.

 

  • Currently, it now seems many voters who voted for the exit are backpedaling. The reports that after the vote, there was a spike in the Google search for “What is EU?” is alarming. It places a question mark on the knowledge of the voters on what it actually meant to leave or remain in EU. Secondly, it is widely claimed that it was the older segment of the population that caused the Leave campaign to win, effectively shutting out the voice of the young generation who voted to remain in EU. Thirdly, with key leaders of the Leave campaign backtracking their statements could be indicative that the Leave campaign was based on misinformation and even deception. With these developments, it would be interesting to see if there could be second referendum on Remain or Leave EU again under the circumstances. This is bearing in mind that the pound sterling has slid against the dollar and Moody’s has already downgraded UK economic outlook from stable to negative, indicating that UK not only faces uncertainty, but also, will face negative consequences for its economic growth.

 

  • Then there is Scotland and Ireland with the possibilities of their own referendums on the plate. With Scottish Prime Minister Niclo Sturgeon announcing the plan for second independence referendum (Scotland voted to remain in EU) and with Ireland unification referendum plans, UK stands not only to lose EU, but also, Scotland and Ireland that could potentially alter the economic and regional picture. The possibility that referendums (if credible) could act as deterrent remains to be seen.

 

For the time being, the UK economy will face challenges, but only in the short run. In the long run, there is a possibility that the shock could actually lead the economy towards recovery as such is the nature of economics. Economic theory could point towards one way, but, in reality it could go the other way. On the political end, things could take an ugly turn should the referendums of Scotland and Ireland go ahead and the results are the opposite. That could unleash another wave of shocks to the global economy.

However, the crack within the European Union is wider now. The political discussions around Brexit will not be easy.  Brexit has effectively paved the way for other member states to call on their own referendums (France, Holland, Sweden and The Netherlands have already had a call to hold referendums on remaining or leaving EU). With weaker economies still reeling from the austerity policies effects, such economies will re-think their stand on remaining within the EU, thus putting the whole union and the Euro at stake.

According to American economist Nouriel Roubini,  “Britain’s decision to leave the European Union (EU) could be the beginning of the disintegration of the bloc of countries or the United Kingdom” 

But could it be disintegration for both EU and UK?