OPINION PIECE: By Rowland Brown
Brexit: A storm in a teacup: What you get when you mix two of Britain’s favourite things – poor weather and tea.
On Thursday, Britain voted to leave the European Union, taking markets and many people by surprise, after polls suggested a strong win for the “Bremain” vote was more likely than the “Brexit” vote. Subsequently, emotions have run high. That the vote has been polarizing no doubt can exist, but the reaction thereto has been peculiar, with many British people appearing determined to set aside the democratic outcome of the vote. Nevertheless, it looks like the process of Britain packing its bags will go ahead, despite the current uncertainty as to how, when, and who will take the lead through the process.
Record numbers turned out to vote, with 72% of the voting age population taking part in the democratic process. The young, urban and the relatively more wealthy voted to stay, while the more elderly, rural and disenfranchised voted to go. England and wales voted to go, and Scotland and Northern Ireland voted to stay. Many young voters are now claiming that the elderly sold the young down the river, despite the fact that the youth turnout was the lowest in the country (18-24 with 43% turnout, 25-35 with 54% turnout, compared to an overall turnout of 72% and a 65+ turnout of 78%).
The reason this reaction is peculiar is that there really is no clear reason as to why leaving, or staying, in the European Union is a terrible idea. The fact of the matter is that the decision to leave, and its claimed implications, are unlikely to be nearly as tragic as they are being made out to be, and in honesty, Britain may actually stand to benefit from the decision.
Why I say this is simple: the European Union is a fancy trade agreement, not a panacea to prosperity. Like all trade agreements, it has certain terms and conditions, such as those around standards and worker and human rights within the block. As a result, some laws are shared, and like some other agreements, the EU allows for free movement of labour between member states.
However, many of the arguments as to why the Brexit vote is such a tragedy, are simply peculiar in nature. The idea that Britain will now become a global outcast that no one will want to trade with is blatantly absurd. This appears to have formed much of the foundation of the argument as to why the Brexit vote was a bad idea, however it finds itself unsupported in real evidence. As the 5th largest economy in the world, one of the 20 richest countries in the world (on a GDP per capita basis), a permanent member of the UN Security Council, a nuclear power and the largest contributor to NATO in Europe, there is simply no way that other countries will not want to trade with them. You add to this the commonwealth and the likelihood that Britain will be able to negotiate multi or bi-lateral agreements with commonwealth countries (many of which are large and fast growing), giving it preferential access to their markets (and not have to compete with other European countries in these markets), it becomes incredibly hard to buy the bulk of the Bremain voters trade claims. Moreover, since the vote took place, many nations have already expressed their interest in continuing to trade with Britain on a preferential basis, including a number of countries within the EU.
The same, in reality, applies to the movement of labour within Europe. Many of the doomsayers have taken the position that the Brexit vote will mean that the movement of labour between Britain and Europe will be severely constrained, but once again, this is an absurd assumption. Unless mainland Europe intends to be petty, and cost itself in a manner it cannot afford economically, they will not suddenly block the movement of labour from the UK to the mainland, and neither will the UK do the same for the members of European countries wishing to visit their island. This is currently the situation with Switzerland, also not a meber of the EU (and doing fairly well for or despite it!) and it seems unlikely that the UKs approach will differ materially.
It is perhaps true, however, that immigration and the misguided fear of major inflows of immigrants was a contributor to the Brexit votes success, however, the idea that a crackpot like Nigel Farage is now going to rule the British Isles, is as absurd as the aforementioned claims. 52% of the population voted out of the European Union, they certainly did not vote for Farage. And, most importantly, many of the Brexit voters are highly unlikely to have voted for Brexit based on immigration concerns. This further reinforces the view that the rules around the movement of labour are unlikely to be dramatically altered, but rather lightly adjusted. Britain will simply take more control of its borders, but won’t suddenly become disinterested in the plight of the less fortunate, be they economic or conflict refugees or immigrants.
The reality, in my view, is that much of what Britain benefits from the EU it will manage to hold onto anyway (or substitute for with other trade agreements), while much of what is detrimental to Britain from the EU will be done away with, or at least Britain will have more control over. This is true of trade, true of immigration, and true of legislation.
Markets
The one argument against leaving the European Union that does hold water, in my view, is that we are in for a period of increased uncertainty. It appears that both the markets and the Brexit campaigners were caught unprepared for the outcome of Thursday’s vote. The fall in the GBP seen at the close on Friday was a 6+ sigma event, and it doesn’t look likely that this selloff is quite over yet.
Financial markets, much like many individuals and institutions, seemed to panic on Friday. However, markets are notoriously good at overreacting, and after a brutal sell-off on the open, the UKs FTSE 100 index ended up closing down just over 3%, back to a level it was at just three days before. Despite the supposed turmoil, it actually closed up for the week. How long this will last, however, remains to be seen.
Given that fundamentally I do not believe the vote will have a long-term negative impact for Britain, but that we will see uncertainty through the restructuring period and sentiment may drive some economic challenges, I find it hard to believe that the financial market reaction will be long lasting. However, this position may change quickly should the process of Brexit be poorly managed, or should the likes of Scotland decide to try and remain in the EU. Nevertheless, heightened volatility over the next few months is inevitable, a recession in 2017 in the UK is possible, but beyond that, the economy is unlikely to collapse, and may actually see improved growth long term (a weaker exchange rate has a funny habit of improving productivity and export competitiveness).
Europe
As much as I believe Britain will not be negatively affected by this move in the long term (but may be short term), I think the EU will lose, and may lose big. The EU has been likened to a three legged table (UK, France and Germany) holding up the other member states through direct and indirect fiscal and political support. With Britain, one of the net contributors to the EU, bowing out, a greater burden will be placed on France and Germany, and added to this, many of the smaller nations will likely stand to suffer as a result. Thus, those that remain will all stand to lose. It is possible, but as of yet uncertain, that Britain’s exit may well spell a further unwinding of the EU, and potentially, the Eurozone. While most will disagree on this, my view is that this would be a positive development for the world long term (although tragic and challenging short term). I have been a Euro skeptic since day one (monetary union without fiscal union is not possible), and I think that the sooner Europe realizes this and either integrates completely or disintegrates, the better for the world (short/medium term pain, but I believe for long term gain). Obviously this is the Euro and not the EU, but the two are clearly not completely mutually exclusive. Perhaps the demise of one will spell the demise of the other.
Scotland
All of this said, should Scotland now vote to remain in the EU, I think the whole Brexit vote will be net negative for Britain and the remainder of the EU, and of course, Scotland. While it is a phenomenally bad idea for Scotland to vote this way (leaving a trade agreement and leaving a fiscal and monetary union are very different prospects), the SNP appears to have a growing legacy of backing the losing horse. As I believe Europe will be weaker for the Brexit vote and Britain will be stronger for it, Scotland will be shooting themselves in the foot, and they would likely take the remainder of Britain down with them.
Southern Africa
For Southern Africa, we are unlikely to be unscathed. Already, the largest market in the region was on the receiving end of the same hiding that was dished out to all world markets on Friday. We may see changes to our trade agreements with Britain, and possibly with the EU (unlikely). We may see abnormal currency volatility (but we are use to high volatility), and this may result in increased inflation. At the same time we may see lower global interest rates, which may drive fund inflows to EM and lower inflation. We may see increased growth, or more likely, we may see external demand decreasing as sentiment drives more cautious consumer behavior in advanced economies. The bottom line is that we will definitely see increased uncertainty, and increased volatility, but the world will not stop, and the global economy will not collapse.
Final thoughts
British voters made a selfish decision to move away from a (fancy) trade agreement that wasn’t working for them. They did not decide to shun the economic system as we know it, or appoint Nigel Farage as their leader in chief, head of national morale or king. This decision will likely provide us with short term/medium term challenges, and heightened volatility, but it may also stand a chance of improving our long term outlook from the current picture of ever slowing global growth and ever heightened uncertainty. For now, everybody needs to calm down, and follow the facts as they develop, hope Scotland doesn’t mess it all up, and not assume Britain is suddenly going to build a wall. Let’s leave that to America.
Never before has the term “a storm in a teacup”, seemed more fitting.
