The results of Britain’s long-awaited referendum on EU membership are in: Britons have voted to leave, 52% to 48%. Wondering what it all means? ESSA’s Brexit coverage is here. ESSA Unimelb Editors Tom Crowley and Sam O’Connor examine the ramifications for Britain’s economy and its politics. ESSA Unimelb President James Maccarrone outlines what it means for Australia. They are joined for additional analysis and opinion by ESSA Unimelb Publications Director Priyanka Banerjee and writers Vincent Hardy and Michael Xing.
Tom Crowley: Whereto for the British Economy?
With today’s astonishing Brexit, Britain plunges into the dark unknown. Much of what is to come is difficult to predict as the dust settles from Thursday’s remarkable result. One thing, however is clear: Britain’s economy is in substantial trouble.
This is true for several reasons.
Firstly, in the immediate term, it will be punished severely by the markets. The financial sector has been amongst the most ardent advocates for the ‘Remain’ campaign, and has warned of widespread downturn of currency and stock prices should Britain vote to leave. It already looks as if that was more than empty rhetoric; the Pound fell almost instantaneously to its lowest value in thirty years when the result became clear. Market confidence should continue to plunge in the days and weeks ahead.
Why are the markets so pessimistic? Perhaps because Britain’s trade outlook is suddenly (and perhaps irreparably) grim. One of the key benefits of EU membership is free access to the EU common trade zone, one of the largest single markets in the world. So substantial is this market for Britain that it currently comprises 47% of its trade. That is now under threat.
Britain could conceivably maintain its free access from outside the EU; Norway has access, despite never having been an EU member. But Norway has to comply with EU regulations, and so would Britain. That would include the very same immigration and production regulations that made Britons so eager to leave in the first place.
In other words, Britain will either lose access to the single market (or, more precisely, face trade barriers like the rest of the world), or it will have to comply with the same regulations it does now but lose the ability to influence them.
Pro-Leave campaigners have countered that Britain could pivot to the rest of the world, shifting its trade focus off the continent. Some have even suggested using the Commonwealth as a new ‘common trade zone’. This, however, is about as fanciful as it sounds. Equally fanciful is the pro-Leave argument that Britain, unencumbered by tariff-loving Europe, will now be able to negotiate free trade agreements in its own right. The EU now has trade agreements with just about every major economy in the world, and Britain would need to renegotiate them all. Not only would this be time consuming (Barack Obama suggested an agreement with the United States could take 10 years), it may not even be possible. Britain on its own is nowhere near as big as the negotiating bloc of the EU, and its trading partners might be reluctant to enter into a protracted negotiation period for little perceived gain.
The outlook for Britain’s local economy is no rosier. A key reason is immigration. Anyone who has paid even partial attention to the referendum campaign will know that anti-immigration sentiment has been a substantial boon for the Leave campaign. The free movement of people across the EU has resulted in a moderate influx of primarily Eastern European workers to Britain, which has sparked a wave of anti-immigration sentiment. The status of these workers now that Britain has left is uncertain, but it is unlikely that they will be able to continue working in Britain, or will do so under tight restrictions. An exodus of migrant workers, should this occur, can reasonably be expected to adversely affect local business and economies.
The summative result of all this, most experts suggest, is a long, ugly recession for Britain. This, for a country that has yet to adequately recover from its last long, ugly recession (the Global Financial Crisis), should have been enough to scare Britons out of voting to leave. It didn’t.
Why not? In large part, because the anti-immigration sentiment espoused by UK Independence Party Leader Nigel Farage, aided and abetted by Conservatives, including senior Tories Boris Johnson and Michael Gove, worked. A substantial portion of the working and lower middle classes, battered by successive recessions and technological change, has seen fit to blame immigrants and the Establishment for its woes.
This is not an isolated phenomenon. Donald Trump’s stunning rise in the US has its roots in similar middle class dissatisfaction, and is similarly characterised by anti-immigration and anti-establishment thinking. Far-right anti-immigration forces are sweeping to power across the European continent. Australia’s own attitudes towards migrants and the political establishment are more hostile now than at any point in recent memory, despite having avoided recession.
The Brexit is just one manifestation of a concerning trend across the developed world: populations faced with turbulence are turning in on themselves and turning against their establishments. The consequences remain to be felt in full, but the portents are troubling.
Sam O’Connor: Whereto for British politics?
Needless to say, the political outcomes are equally troubling. With David Cameron set to resign as Prime Minister, and hence also as leader of the Conservative Party, a Tory leadership election is set to be held before the party’s annual conference in October. There is a chance that the new PM may decide to call an early election to win a majority in their own right (despite the fact that, as in Australia, the Prime Minister is not directly elected) Naturally, as one of the leaders of the Leave campaign and one of Britain’s most well-known politicians, Boris Johnson has to be seen as the frontrunner, with fellow Eurosceptic (and senior Cabinet member) Michael Gove another less likely possibility. Chancellor of the Exchequer and Remain advocate George Osborne, once seen as Cameron’s heir apparent, is likely to also be forced out as a new, more right-wing Cabinet takes over government. On the Labour side of the fence, further questions will be raised about Jeremy Corbyn’s leadership, given that Labour’s traditional voting base turned against the party on this issue.
Cameron’s humiliating failure to convince the British people to stay in Europe will undoubtedly besmirch whatever legacy he had hoped to leave behind after departing Number 10 Downing Street. The forward-looking, modernised, “Big Society” Conservatism that marked his ascendancy to the party leadership in 2005 has thoroughly vanished in the wake of his government’s austerity measures and the aforementioned growth of anti-immigration sentiment in the UK, ultimately culminating in this referendum. Cameron had hoped to finally vanquish the UKIP and Tory Eurosceptic thorns in his side with a mandate to remain in Europe. However, this has tragically backfired on him and his government in the most dramatic way.
Truth be told, no one, no matter how connected or informed, has any idea just how this will transform Westminster politics. Will Nigel Farage’s UKIP fade away with their principal goal now realised? Will the Labour Party be forced to adapt a more anti-immigration stance to win back its working-class base, especially in the North? Will the UK’s poisoned and divided politics, manifested so horrifically in the murder of West Yorkshire MP Jo Cox, recover from this episode?
Most pertinently of all, the very status of the Union now seems to be in dire straits. In 2014, Scotland voted No to independence from the United Kingdom, with one of the ‘Better Together’ campaign’s strongest arguments being the economic strength of the UK. In the wake of a successful vote for Leave, this argument no longer applies in a UK forced to re-negotiate its trade deals and without access to the Common Market. Scotland voted 62% to 38% in favour of Remain. Former Scottish First Minister Alex Salmond, a fierce advocate for independence, has already declared that a second referendum on independence is now likely.
Northern Ireland also voted for Remain 56 to 44%, prompting Sinn Fein MPs to call for reunification with the Republic of Ireland, a member of the EU. It is obviously far too early to declare that the breakup of a Union which has stood for centuries might be caused by a referendum on Europe, but this nevertheless represents the beginning of a new era in British politics.
As clichéd as it is, the phrase “political earthquake” is really the only way of describing what has unfolded in Blighty today. Pollsters were left scratching their heads once more, and the status quo was thrown out the window in a most un-British of fashions. The road ahead is winding and unknown. We can only hope that the outcome will prove less disastrous than early signs suggest.
James Maccarrone: What does this mean for Australia?
Leaving the geopolitical impact and pre-post mortems of the British economy to others, it is worth considering potential impacts on Australia.
Unfortunately, there is no upside.
At best, there would be no discernible change in Australia’s economic performance. At worst, being dragged into another global downturn – this time without the benefit of a mining boom, nor the same degree of fiscal and monetary wiggle-room.
Financial markets have reacted violently to the news. This represents the most-likely way that Australia could get dragged into this sorry episode. Notably, equity markets nosedived, with the ASX wiping-off 3.2% of its value. Who cares? Firstly anyone who holds stocks. As of 20121, 6.7 million Australians directly held shares in the Australian market. This does not include those who hold shares as part of their superannuation. Approximately 44% of superannuation assets are held as listed shares. They should care because this represents a decrease in their wealth. This means they have to consume less i.e. save more to just restore their previous level of wealth. Businesses should also care – specifically those looking to raise equity in an environment of fear and uncertainty may be in receipt of less equity capital than they otherwise would be. If fears are about the UK-economic performance prove to be well-founded, this could result in a protracted punishment of shares associated with the UK, making for a permanent negative wealth effect – which could ricochet around world markets if the global growth story similarly hits a pot-hole.
For debt markets, any increase in sourcing funds for the operation of our own financial system would unambiguously be transmitted to business and consumers in Australia.
Foreign exchange markets have featured prominently in Brexit-related reporting. The flight to relatively ‘safer’ currencies such as the Yen and US Dollar saw Australia’s depreciate by 2.5% against the USD. Whilst welcome for an Australian currency inflated by sugary mining boom, in the medium- run, the AUD may be kept higher against the USD, with the Federal Reserve indicating that Brexit meant it delayed anticipated interest rate rises. This represented a blow to the RBA’s AUD-depreciation cause. This makes an RBA rate cut extremely likely – approximately 90% probability – bringing the cash rate to potentially dangerously low levels of 1.50%.
Then there is trade. Australia exported a total of $A 8.8 billion of goods and services to the UK in 2015. A depreciation of the pound against the AUD makes Australian products relatively more expensive. This would be expected to hit exports. Other potential negative effects are via a general worsening in global economic conditions further sinking exports, and/or commodity prices.
If this event has a domino-effect, depressing confidence – individuals and businesses may be reluctant to invest and further depress economic circumstances – and Australia may not be as immune in its current fiscal and monetary-state as it was in the GFC. Unemployment would be an anticipated result of this result, as well as a further worsening budgetary position.
The large caveat for those seeking to look into the crystal ball is that we do not really know what will happen. As Keynes clarified about uncertainty – the type which the consequences of Brexit faces – ‘there is no scientific basis on which to form any calculable probability whatever. We simply do not know.’
This is bad for two reasons. Firstly because uncertainty represents a real cost via financial markets. Secondly the eventual outcome could be even worse than even considered.
It certainly will not be better.
ESSA Writers Respond
Brexit marks the first concrete victory for the far right populist movement that gained traction in Europe and is now evident elsewhere, including the US. We have seen some other close calls like regional victories by Front National in France, and the almost-victory of far-right extremist Norbert Hofer in Austria. Yet nothing has fully eventuated as much as the win of the ‘Leave’ campaign in Britain’s EU referendum. It closes the toxic and divisive rhetoric and debate only to equally validate the xenophobia that underpinned the result. And make no mistake, it is the isolationist and frankly, racist, attitudes upon which the ‘Leave’ campaign and UKIP have capitalised. There is no economic or social benefit here to be gained by the British. Financial markets have plunged, the British pound is spiralling and the fiscal outlook is fragile at best. For all the language around wanting to seize back control and regaining a sense of national sovereignty, the visuals employed by pro-Brexit campaigners almost exclusively centred on long lines of so-called economic migrants to Britain, not very unlike the more extreme politicisation that we see closer to home about asylum seekers. A unified Europe was a key element of post-WWII stability. It is a veritable shame that Britain would seek to willingly surrender its economic advantages gained from free trade in the Eurozone and its prime position as an English-speaking European headquarters for many multinationals, for a pitiful and unsustainable sense of superiority and an anachronistic rebuttal against a more unified and globalised world.
The exit of the UK from the European Union is not entirely surprising to students of European Politics. First entering the precusor to the European Union in 1973, after two prior attempts were blocked by the De Gaulle French Government, the UK has long possessed a different agenda to the EU bureaucrats in Brussels. Where the UK entered the EU primarily as a vehicle to liberalise trade and take advantage of the Single Internal Market, many EU leaders drove the institution as a tool of social and political rather than economic integration. The outcome of the Brexit referendum shows that the social and political integration was clearly too great for the UK, and economic dislocation would seem to be the price of severing these ties. While the leaders of the Leave camp may cite Norway or Switzerland as the model for the post-Brexit UK, neither of these states have so deliberately spurned the EU. While the EU may have provisionally lost a member, it endures on the other side of the Channel, and what happens next to the UK is as much in the hands of the EU as it has ever been.
What can be considered of greatest concern is the implications this event has for globalisation. Brexit may mark a turning point in the world economy away from an integrated global society, regressing towards isolationism founded on fear and misunderstanding. It highlights the great challenge of linking the global economy, as it is the same things which have been bringing the world together – trade and immigration – which are now driving it apart. As such, we need people committed to helping overcome these challenges, moving forward. This means discussion on how regional groupings like the EU should be reformed so that the rewards of globalisation come across more clearly to the worlds people. For Australia, Brexit signifies the need to move some of our eggs from the West towards Asia, where globalisation in structures such as ASEAN is still on a healthy trajectory.
Josh Brown (writing from Denmark)
Brexit is a turning point. That much is clear. It is, in my opinion, a mistake to see this, frankly shocking, victory as one underpinned purely by racism and xenophobia however. Make no mistake, there were a lot of racist and isolationist angles coming from the ‘leave’ camp, and perhaps Mr. Farage believes this is what got them through. But I doubt it is. Instead, I believe it is the growing inequality that has been beggaring the country for the last 30 odd years – inequality that has been exacerbated by political and economic hubris from both sides of the political spectrum. It comes as no surprise that those areas which voted most strongly for leaving are also the areas most afflicted by the negative effects of todays particular form of neoliberal globalisation held as sacred by most in the political and economic elite. The tragedy of it all though is that brexit will likely have little to no directly positive effects for these people, and may even make things worse as labour and consumer restrictions are loosened and the real political culprits escape relatively unscathed. Nonetheless, all they can do now is hold on and hope for the best. Although the immediate economic future looks tumultuous for the UK, they may well achieve prosperity outside the EU in the long run – but as we economists all know, we will all be dead by then.