Who knew the Brits would willy-nilly want to help the European Union (EU) solve its own dilemma? The simple fact is that the EU needed Britain far more than the Brits needed the EU. With its ‘Brexit’ vote to leave the EU, the UK may well be the ‘disruptor’ that Europe needs to finally take serious actions to rekindle sustained growth. Sooner or later the population of an EU member would reach a tipping point and vote with their feet about the failings of Europe’s increasingly hodgepodge single market political economy ‘experiment’. Indeed, it really should be little surprise that a centralized governance regime comprised of 28 separate countries, many of whom, especially the more recent ascendants, have greater fundamental differences among them than they have in common, would prove to be unstable.
What is surprising is that it took so long. And even more of a surprise that it was such a big fish like the UK – currently the fifth largest economy in the world – that would do so. Fretting over the exit of Greece – currently the forty-seventh largest economy – now looks like child’s play.
What started in 1957 as a group of just 6 countries with the aim of providing for the free movement of people, goods, services, and capital; common policies on international trade; and uniform policies toward regional development and related matters, 60 years later has become an entity in which 24 languages are officially recognized and overseen by a bloated bureaucracy headquartered in Brussels that at the member state level is widely perceived – whether accurate or not-as operating anonymously with more than a touch of arrogance.
It is hardly a secret that the polling data-such as they increasingly are virtually anywhere in the world where there is unfettered voting-made the outcome of the Brexit referendum on June 23 notoriously difficult to predict. Indeed, the win, while decisive, was not by a landslide margin. Still, most observers did not anticipate what transpired.
In retrospect it is clear why: there was insufficient attention paid to a classic difference in the tactics pursued by each camp.
The supporters for leaving the EU-the ‘leavers’ – had a fundamental advantage. They were effective in crystalizing a perceived upside, namely regulating immigration to enhance the island’s national and economic security and regaining local control of the UK economy.
The ‘remainers’ fell flat-footed in not only an inability to formulate concisely a tangible reason for voting their way, but also in articulating an affirmative case for why staying in the EU would be beneficial for the UK. Instead their campaign focused abstractly on what would be the costs to the UK if it were to pull out of the EU. Scaring voters-especially if done vaguely without showing impacts at the personal level – is rarely an effective campaign approach no matter what issue is on the table.
So what’s in the offing now?
For starters, a lengthy period of economic-and political-uncertainty. In the near term all eyes will be on who Britain chooses in October 2016 to succeed David Cameron as Prime Minister, who resigned immediately in the wake of the vote tally. That will provide little solace.
Axiomatically there is nothing that investors, businesses and markets dislike more than the absence of a clear policy roadmap-let alone one where the destination is unknown. One only need to look at the severe reaction in currency and stock markets around the world literally minutes after the release of the vote count.
But markets always overreact-especially in the short-run. The reality is that the parties have a two-year window in which to negotiate the terms of the UK’s exit from the EU. While there will surely be volatility over the negotiation period, whether it proves to take the full two years or is completed more quickly, it’s in neither the UK’s or the EU’s interest-let alone that of the rest of the world’s economic leaders-to act in such a way to further muddy the waters.
Yes, we are in uncharted territory and a tightening of the seat belt would be a good idea. But look for overtures by the EU to make nice with the UK. If the Brits are smart they’ll realize they’re the ones sitting in the proverbial catbird seat. It would not be a surprise if what emerges is some form of a new stand-alone free-trade agreement between the two, that is, a UK-EU FTA, and a variant of a bilateral investment treaty (BIT).
Second, apart from the direct effects on economic growth from elevated uncertainty, it is widely believed that Brexit will engender further downward pressure on global economic prospects. It is true that as the value of the Euro and the Pound change-perhaps a marked decline in the short-run-other currencies, most notably the US Dollar and the Yen, will likely appreciate. All other things equal this will make US and Japanese exports more expensive, thus having a potential dampening effect on those countries’ economic growth.
Because oil is globally priced in US Dollars, there also could be deleterious economic effects on oil importing nations, especially in emerging markets like China and those on the African continent; conversely, and OPEC members could gain.
At the same time, however, a weaker Euro and Pound make the purchase of EU and UK assets from companies to real estate-more attractive to foreign investors, not only from the US and other advanced economies but also China and India. For the EU and the UK this will be a source of growth, but predictably also a time for angst.
Finally, Brexit doubtlessly will usher in a period of ferment among the remaining EU member states about the benefits and costs of the EU as currently structured and governed. In time years not months-the result may well be a trimmed down (and possibly a more homogeneous) EU.
To this end, in the aftermath of the UK vote, attention has gravitated toward Sweden and the prospects for a “Swexit”. It will likely also turn to Greece (“Grexit”). But the two have significant differences.
Like the Brits, the Swedes were prescient about joining the EU from the get-go. Both did not opt in for additional membership in the Eurozone, a subset of 19 of today’s EU member states who surrendered their local currency to be able to use the Euro; that is, to not only be a participant in a single market structure but also in a single currency union.
The Greeks, however, became a member of the Eurozone, where fiscal policy is still made at the national-level but monetary policy is the province solely of the European Central Bank in Frankfurt. This permutation of macroeconomic management has, not surprisingly, proven to be an untenable policy straightjacket among the strikingly heterogeneous group of countries that are in the Eurozone. It’s like boxing with one hand tied behind your back and has been a far more dubious governance regime than the EU ever was.
To be sure, while a Swexit will not be trivial matter-but as the 23rd largest economy it would be nothing like Brexit-unwinding Greece from the additional Eurozone layer will be messier. Still, there’s a good chance that Brexit will embolden Greece to finally bite the bullet something Athens has been too fearful of doing even though it is in its best interest.
Ironically, to date Brussels‘ statements following the Brexit vote are likely to actually hasten such changes. Rather than adopt a contemplative, supportive approach with respect to the remaining 27 EU countries, instead pronouncements have been issued by the bureaucracy warning member states to not even think about following the UK’s example or risk being penalized.
This Mafia-like tactic will, if anything, backfire for Brussels. And, who knows, maybe the remaining EU members will end up offering thanks to the Brits for taking action in the first place.