Wrecks it: An Attempt to Stifle Globalization

Wrecks it: An Attempt to Stifle Globalization

In an unprecedented national referendum, 72% of Britons showed up to decide the future of the Union Jack in the European Union, ultimately with the “Leave” camp edging out the “Remain” camp, 52% to 48%. The controversial move, propelled by cynical voters sympathetic to the far-right movement, has already whiplashed global financial markets and effectively recalled the Prime Minister of the fifth largest economy in the world. Moreover, “Brexit” has nosedived the Pound Sterling to a 30-year low, with some analysts predicting another 10% drop. Eurosceptics claim that the current chaos will smooth over in the long run. However, the political turmoil that is sure to ensue will prevent the “Leave” camp from having their cake and eating it too.

A Fractured Union

Yes, Britain is leaving the European Union – but at what cost to geographical unity? A lot, as the polling shows.  The vote to leave was not won by outstanding margins, after all it was the “Remain” camp who was consistently, but not significantly, shown to have the upper edge in polling. The Brexit referendum was clearly divided among geographic lines. In Scotland and Northern Ireland, both part of the UK, a majority of voters opted to stay in the EU. In fact, every single region of Scotland chose to stay. These statistics have rekindled the idea of independence, which was rejected by voters in a 2014 referendum. Given the clear pro-EU sentiment, Nicola Sturgeon, the first minister of Scotland, called Brexit “democratically unacceptable.” In 2014 the Scots voted 55% to 45% to remain in the UK, however, the shock of Brexit legitimizes the very real capacity that Scotland could do the same. The implications are large as Scotland would control most of the North Sea oil reserves, which provide 67% of the UK’s demand for oil.

British and Global Financial Markets

There is no doubt growth will slow in Britain, the only question is how much. Current estimates by market analysts predict a growth slowdown of 1-2 percent, leaving them in the red given their sub 1 percent growth rate in the status quo. This economic slowdown will also spill over to Europe, as the Economist describes a rule of thumb that whatever the reduction in GDP growth to Britain, Europe’s economy will suffer half the reduction. Furthermore, capital flight will inevitably occur, because UK-based firms will no longer be able to access Europe’s free market. The financial sector already promised pre-Brexit that it would cut tens of thousands of jobs if Britain left, and it seems they will be doing just that. An economic downturn means weaker European currency, which will badly hurt Chinese exports. Businesses in Britain will withhold spending and domestic investment will diminish.

Could QE (quantitative easing) solve the problem? Not really. Although the Bank of England announced its commitment to “take all necessary steps to meet its responsibilities for monetary and financial stability,” Britain’s central bank is limited to providing liquidity to financial markets, which although is good, is not enough. The problem plaguing the EU for years now is growth, and central banks of and within the EU cannot seem to jumpstart it. Overall, the extent of the recession depends largely on whether or not Britain can develop a new trade deal with the EU. Right now, Britain has sacrificed access to Europe’s free markets for control of its borders. If they cannot create a new deal, recession will linger.

The Future for Free Trade

Alliances in the modern era are now being crafted through trade and not through military partnership. The idea entails that war between countries with an extensive trade relationship is a zero-sum game; destroying the financial capabilities of the other nation would only serve to destroy the aggressor’s economy as well. Military alliances, although binding in name, tend to sway over time whereas trade does not. How Ian Bremmer, president and founder of the Eurasia group, connects the new alliances of the modern era to Brexit is through the TPP (Trans-Pacific Partnership). The TPP is essentially a free trade deal between 12 Pacific Rim countries, all of whom combined consist of upwards of a staggering 40% of world GDP. The deal is far large than NAFTA and is the quintessential free trade deal – its success has large implications across the world. Bremmer calls the TPP the “most important alliance in the world since World War 2.” Brexit, by rejecting the free trade of the European Union and promoting protectionist trade policies, has effectively blunted the TPP’s momentum. This is a stun to the proponents of free trade and the liberal world order, and will for sure dampen hopes for future trade deals, and subsequently, economic growth.

How do you think “Brexit” will affect Britain, Europe, or the world? Leave a comment below.

 

  • Nandagopal Polamada

    Very well written Rahul…..seems like the dark clouds will not ‘Leave’ but ‘Remain’ on Britain for a while.

    • Rahul Rokkam

      Haha, wonderfully said. Thank you!

  • Sathyan

    Very well analysed Rahul. As brought out Scotland ptess for Independence and UK will loose its relevence in world affairs. Many economies are alteady affected and as an out come many may loose jobs too

    • Rahul Rokkam

      Thank you. The world is becoming increasingly globalized and as in the UK’s case – it would be unwise to step in the opposite direction.

  • Alex Chiang

    Great Job Rahul! You analysis on the downsides to Brexit are well versed and researched. I’m still wondering though, why would anyone vote for Brexit given the possible economic drawbacks?

    • Rahul Rokkam

      Thanks for the comment Alex. Interestingly, with some help from Google Analytics, we are able to see that “leave” voters have made their choice largely based on immigration. They believe that by reforming immigration, the monetary situation will overall be much healthier in 5-10 years for Britain, and so are not too worried about “short-term” financial losses.