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Brexit Delivers a Blow to Global Economic Confidence



The surprise 52-48 percent majority of the British electorate voting to leave the European Union, in a high turnout election of 71.9 percent, eliminates any doubt about the democratic legitimacy of the result, as well as any prospects for another referendum on Brexit in the future. As President Obama said, “The people of the United Kingdom have spoken, and we respect their decision.”

The result will have far-reaching, unpredictable consequences for Europe, the United States, and other economies and political landscapes. For Britain itself, the vote opens cleavages that will be difficult to close, raising the prospect of a breakup of the no longer united UK.

The English public’s decision to leave the European Union is a frontal assault on the idea of deep political and economic integration and collaboration among countries—in other words, on globalization itself. Political risk will rise across Europe and arguably beyond, making it even harder to convince private businesses to make new long-term investments in a more uncertain world. This severe confidence shock will dampen long-term economic growth prospects and could lead to broader repricing of global asset prices, as a flight to safety ensues. In a fragile, slowing global economy with limited monetary and fiscal policy space, this is a very damaging development—one that could have additional negative political and economic consequences around the world.

Beyond the British Isles, a potentially weakening global economy will be an additional headache for President Obama and former Secretary of State Hillary Clinton in their fight against Donald Trump, who like European populists will be emboldened by the UK decision to leave the European Union. The negotiations over a Transatlantic Trade and Investment Partnership (TTIP) between the United States and Europe, and EU-Japan free trade negotiations, will be put on hold. Additional uncertainty and a rising yen will also cause further problems for both the Bank of Japan and Prime Minister Shinzo Abe’s efforts to revise the Japanese economy.

Within the European Union, the vote ushers in political turmoil. European leaders are deeply shaken by the public appeal of the deceptively simplistic core argument of the “Leave” advocates, which can be summed up as: “High immigration is bad, it is the European Union’s fault, we have to leave the European Union to reduce immigration.”  Populist, anti-establishment, and anti-immigration parties across Europe can easily repeat that argument. Marine Le Pen of France’s Front Nationale, Geert Wilders of the Dutch Freedom Party, and Germany’s Alternative for Germany (AfD) have already declared that they favor similar referenda in their countries, and they would undoubtedly relish the fight. Because anti-immigration sentiments in many EU countries is even stronger than it is in the United Kingdom, such copy-cat referenda have a good chance of success. In addition, in-or-out referenda in any EU or euro area member would likely command significant public, financial market, and media interest across Europe and the world, aggravating the negative market reactions underway in the wake of the Brexit vote.

How EU leaders will try to counter such centrifugal forces is an open question, but pushing for more integration would appear to be a risky strategy. Such an approach might fuel the public pressure for more referenda. Instead, the dominant defensive strategy would seem to be for the European Union to make it as hard as possible for the United Kingdom to leave, in order to show voters elsewhere the consequences of exiting. This strategy would not, however, fully remove the increased political risks to European integration raised by the immigration-driven Brexit. A new semi-permanent “exit through anti-immigration themed referendum” risk becomes attached to EU assets, equivalent to the so-called “redenomination risk” that plagued the euro area periphery until the European Central Bank (ECB) introduced a financing lifeline under the Open Monetary Transaction (OMT) program. Unfortunately, there is nothing the central bank’s president, Mario Draghi, or the ECB itself can do about this type of political risk, as only EU politicians can affect it. And unlike in the United Kingdom, euro area members at least will not benefit from any positive exchange rate effect.

For Britain, the vote has reopened old wounds, aggravated regional antagonisms, and introduced fissiparous tendencies. The regional breakdown is especially revealing, as 62 percent of Scots and every constituency in Scotland voted to remain, just at 56 percent and 11 out of 18 constituencies did in Northern Ireland. Yet in both Scotland and Northern Ireland, participation was lower than expected at just 67 and 63 percent respectively. Wales voted 52-48 to leave with a 72 percent turnout. The enormous upset came in England, where a referendum record 72.8 percent of voters turned out and remarkably every region voted to leave with the exception of London, which went 60-40 for remain.

The political reality is that Scotland is being dragged out of the European Union despite the wishes of a large majority of Scots. As a result, the Scottish National Party (SNP) has already announced that it would consider a new drive for independence from the United Kingdom. The 62-38 percent margin for remain in Scotland—the largest in any region of the United Kingdom—may speed such a plan.  In Northern Ireland, where all majority Catholic and border constituencies voted for remain, the political fallout is less clear. Were border controls to be reinstated, Irish political party Sinn Fein and others could declare the premises of the Good Friday peace accord broken and seek reunification with the rest of Ireland inside the European Union. Given the strength of unionist support for staying in the United Kingdom, such moves would appear futile in the short to medium term, but not to be ruled out in the long run. Overall, the outcome of this referendum will raise significant questions about the long-term territorial integrity of the United Kingdom itself.

The large majority support for remain in London, in the face of EU rejection almost everywhere else in England outside areas with high-skilled residents like Oxford or Cambridge, dramatically illustrates the socioeconomic cleavages in England, especially because the most economically challenged northern part of England swung decisively for leave. This voting pattern also suggests the strategy of the remain camp—to focus on the bad economic consequences of leaving the European Union—clearly failed in areas struggling economically. On the other hand, an economically buoyant London may now increasingly see itself as a world apart from the rest of the country, fueling political demands for more political power for its mayor.

Prime Minister David Cameron has done what he had to do and resigned, his departure taking effect when a new anti-EU leader of the Conservative Party is chosen by October. For now, however, the Conservatives are likely to focus more on their internal political battles than on forging a new relationship with the rest of Europe.  Cameron refrained from immediately launching the Lisbon Treaty's Article 50 process to leave the European Union. The delay deepens and extends the uncertainty over the United Kingdom’s long-term relationship with the rest of the European Union, especially as there is a high risk that any newly elected Conservative leader would want to fight an early general election to secure a fresh democratic mandate for the EU negotiations (and likely defeat a rudderless Labour party deeply split over immigration and Jeremy Corbyn’s leadership). It remains to be seen whether the other EU members will wait for the Conservative Party to sort itself out, however. As the UK economy weakens, so will the negotiating hand of the next British prime minister, and the rest of the European Union will try to quell the risk of political referenda across Europe by pushing for an early initiation of the leave process.

Ultimately, as a result of this referendum, the Conservative Party will likely move to the right by electing a new leader from the Leave campaign. The deep schism revealed by the referendum inside the Labour Party—which like other center-left parties across Europe in recent years lost most of its traditional core blue-collar supporters to the anti-immigration platform of the Leave Campaign—could also easily result in the ousting of Corbyn. Many in the Labour party will blame him for the outcome and particularly his rejection of any limit to immigration. In the end, Britain’s two major parties may both lose their leaders over this result.

All told, the effects of the UK vote will be felt across a now more unstable and uncertain world.

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