Making sense of trends and data

Brexiting to the future or back to the past?

Published 6.27.2016
LWRAS cannot claim any particular expertise in British politics, nor in the economics of the European Union (EU), excepts at a superficial level. That being admitted, the so-called "Brexit" or the Britain exiting the EU will clearly play a role in the economic conditions and forecasts for the future. Prior to the vote, The Economist published a reasonable take on both sides, thought the Economist itself was in the "Bremain" camp.

In past forecasts, (written as work for hire for third parties and thus not published on this site) the assumption has been that the EU and by extension the Euro currency will survive despite the continual predictions from certain quarters that it would not. The successful Brexit vote causes reconsideration of that position, for obvious reasons.

Pre-vote, the bias here was for remain with the thinking that the idea of a United Europe was a good one for all the countries of Europe. Reducing the friction between so many small countries and creating a larger market was overall positive for the region. The single currency (Euro ) push and its effects are more complicated. That might have been the step too far. However, there are benefits to that as well. It would be as though there were 50 currencies throughout the US.

Brexit is a self-inflicted wound, and it came as a surprise to both sides. Polling seemed to indicate that Remain or Bremain would narrowly win, instead Leave or Brexit won by the margin predicted for the Remain side, 52% to 48%. There was no requirement to hold this vote, Cameron promised it to win an election. Cameron has ruined his legacy, and possibly destroyed two unions (as Scotland begins to threaten going independence). Once Brexit was confirmed, the predictions for the next country to leave the EU.

But the exit movement might not spread… but the EU will have to change and Germany may have to let up on the austerity. Britain never gave up the pound (this is an impediment to Scotland leaving actually— to do so it’d have to have its own currency) so it’s easier for them to leave. But countries using the Euro will have a harder time.

In the aftermath, the predicted chaos ensues— Cameron resigned, saying he would not implement the Brexit, and Corbyn (Labor leader) faces a coup. But even the leave proponents want to go slow— but that’s because the EU has the chits once the deadline is invoked (2 years). Prior to Article 50, the Brits have at least some of the leverage. Uncertainty means that future international investment in Britain will be delayed— because they don’t know what rules they will be forced to play by. The banking migration can begin quicker, even as English banks technically can still do the deals.

A weaker pound will also lead to higher inflation. Two things can happen in response. Either wages can rise in compensation, in which case business costs will rise and the competitive advantage of devaluation will be eroded. Or wages won’t rise and people's living standards will be eroded. So a Leave campaign fuelled by voter anger over squeezed living standards will result in a further squeeze in those living standards.

But will the pound remain low? Who knows what traders will do. Whatever’s best for their bottom line is the answer, of course. There are whispers that maybe a way will be found to negate the vote’s result. Scotland is the means suggested to force the UK to remain in the end. It’s suggested that Boris Johnson doesn’t really want to leave, and perhaps Cameron quitting had other reasons behind it. If so, his legacy, while tarnished might survive— and may even be continued.

However, in the end, the referendum will need to be absolutely disavowed. Otherwise, it’s a sword held over the rest of Europe’s head and THAT won’t wash. Out means out— unless you change your mind and say that you don’t want out. It would seem that Europe can’t force Article 50 to be invoked, but they can alter the rules to make it as uncomfortable as possible for the Brits to dither.

Not only Cameron resigned. The British EU rep resigned too, and Brits are not being invited to EU policy setting meetings any more. The Labor leader has not resigned, but his shadow cabinet has begun to do so. It was Labor regions that voted heavily leaves, and Corbyn is being roundly criticized for not campaigning hard for Bremain. This is Washington Post's coverage of the same rumor, which is based on an anonymous comment left at the Guardian website. On reflection, the whole notion seems unlikely.

The EU is pushing for a quick exit, but that is designed to put the maximum pressure on the brits and increase the uncertainty in the near term, while claiming to want to minimize the uncertainty. Cameron had said that he’d invoke Article 50 immediately, but then chose to resign and wash his hands of it. He might be responsible for the split, but he won’t actually guide it. Initially it was thought Cameron will be Prime Minister (PM) until October, but later that date was trimmed to September.

European Commission head Jean-Claude Juncker said the EU-UK split was "not an amicable divorce", but nor had they had a "deep love affair". He has also said exit negotiations should begin immediately.

"Britons decided yesterday [Thursday] that they want to leave the European Union, so it doesn't make any sense to wait until October to try to negotiate the terms of their departure," Mr Juncker said in an interview with Germany's ARD television network.

Other Britain based coverage:

  • As for Trump, who was in Scotland to open a golf course, it was all about him. Because everything is all about him.
  • BoJo (as Boris Johnson is referred to in the tabloids) tries to claim that Britain isn’t “turning its back on Europe.” He also walks back the idea that England wants to be shut of Europe. He paints a picture where little changes, but it’s not up to him, really.
  • Companies are announcing hiring freezes until they can see further into the future. Companies in the US did this in 2008 for much the same reason.
  • Labor in turmoil, but no special Brexit budget until the PM in place (or maybe not at all).

    Meanwhile George Osborne has finally come out of hiding this morning after three days of silence while British politics tears itself apart.

    With his boss David Cameron quitting and Leavers still enraged with him, the Chancellor revealed he will NOT force an emergency Brexit budget on Britain this summer despite vowing to during the campaign. And the markets are volatile, with trading in Barclays and RBS shares suspended, the FTSE falling - and Boris declaring everything's fine.

  • There will be no do over of the vote. There is a genuine vacuum in the Brit government at the moment. Europe has decided not to hold casual talks before Article 50 is invoked— at least at this point. Kerry is going to try and smooth the waters. It's really like quite a spectacle.

In the next piece, LWRAS will present notes on the coverage from US news sources.


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