I must say that I have found the hysteria around Britain’s decision to leave the EU very amusing. Some of the comments made by persons thousands of miles away (*sideeye* John Kerry, Reuben Abati etc) have been quite comical. First, let me say I voted for Britain to leave and I’ve explained my reasons in another post.
I find it amusing that people, knowledgeable ones at that, used the volatility in the stock and currency markets within the first 48hours post the referendum as their justification and evidence of the economic woe that the Brexiteers did not appreciate would be the outcome of a leave scenario. If we place this initial volatility (markets have since calmed down) in proper context then surely this can hardly be used as evidence to support their doomsday scenario! The financial markets were mainly positioned and expected a ‘remain’ outcome. This is evidenced by the overwhelming support ‘Remainers’ received in London, Europe’s financial centre. With the referendum itself being a binary event, surely the initial volatility recorded in the markets was a rational and inevitable reaction to new information rather than a confirmation of economic doomsday or that the British economy had all of a sudden fallen off an irreversible cliff.
The outcome of the Brexit referendum is such that over the long term a multiplicity of economic scenarios is possible. Britain could lose out with the EU gaining, Europe could lose out with Britain gaining, both Europe and Britain could gain and all of these could happen to various degrees over various time periods. Crucially what will determine or more appropriately influence the likelihood of occurrence of any of these scenarios is the future trade deal that will be agreed between Britain and the EU. This crucial trade agreement of course is currently unknown. So how anyone can make categorical and hysterical statement about the foolishness or wisdom of Britain voting to leave at this point is completely befuddling.
The Brexit vote has political and economic implications. The long term political implication in my opinion is harder to guesstimate. But we can make reasonable assumptions on the economic implication without reaching any final conclusion as we don’t have adequate information to form the basis of any finality.
Assumption 1 – the fact is Britain maintains a trade deficit with the EU. The deficit was £25billion as at end of Q1 2016. According to Destatis, a leading provider of official German economic statistics, Germany’s trade surplus with Britain in 2015 was €50b. What this implies is that Britain is a key export market not just for the EU but for its number one backer Germany. Unless Germany and the EU have lined up other countries or regions to replace Britain as a trading partner, it can’t be in their best interest to take and be unwilling to move from a position that may impact Britain’s economy negatively. So my fluid assumption is that the EU would prefer a trade agreement that at least maintains the current economic status quo and is within the long-term run rate trade balance with Britain.
Assumption 2 – whatever trade agreement is finalised between Britain and the EU will be subject to non-exclusivity. This implies that Britain will be able to agree trade deals with other countries and regions that it had been unable to in the last 43years of EU membership. What this further implies is that other countries will at a minimum be competing for part of Britain’s existing trade relationship with the EU. If Britain can improve its productivity then it may be able to agree trade deals with multiple countries without each separate deal cannibalising the other. My fluid assumption here is that agreeing a mutually beneficial trade deal is in each nation’s best interest – we are not in a cold war environment after all.
Assumption 3 – free movement of people. This is the big one. It is so because it has security, political and economic angles potentially influencing its final outcome. The free movement of people has been a boon to the global economy over the last 30 to 40 years. It is not in Britain’s best interest to be too restrictive on immigration especially when one considers that Britain and the developed West as a whole is an ageing population. This demographic change is going to be an economic headwind for developed countries that governments of developed countries have to deal with. The UK for example is currently behind in its fertility replacement rate at 1.9 (EU – 1.4 but needs 2.1 as do all developed countries). That is, working population is reducing whilst retirees is expanding with higher life expectancy due to improvements in healthcare and technology.
Whilst it’s true that markets, especially the financial one dislike uncertainty and seek to imply this in the price of financial instruments, this can work both ways. The market can force the EU to negotiate a trade deal its European Commission President categorically stated months ago Britain will never get whilst simultaneously also forcing Britain to accept free movement of people that it is loath to accept as mentioned by Brexiteers during the referendum campaign. This is a possibility because economic growth in Europe is still anaemic despite the ECB’s humongous quantitative easing programme and that any unreasonable trade deal with Britain will be as damaging to the EU as it may be to Britain.
Further, Britain remains a full member of the EU with attendant rights, obligations and trade even after it triggers Article 50 and puts a clock on the deadline by which a deal must be agreed with the EU. As this article is yet to be triggered and it may take a while yet, there’s little need for panic or hysteria by all concerned.
London as a financial centre has a lot of positives going for it. It already has the infrastructure to support financial markets and maintaining this moat in a final EU/Britain trade agreement should be one of the easier parts of the negotiation. Britain can simply agree as it already does to always have equivalence legislation with all ESMA regulations. It can also agree to translate ESMA’s directives (note: ESMA Regulations are compulsory but Directives are open to national interpretation) to UK legislation as long as it doesn’t contradict UK law.
I cannot imagine that countries like China, Japan, Singapore, other Asian markets, the US wouldn’t want the opportunity to enter into a trade agreement with the UK. President Obama and more recently John Kerry’s comment about UK being at the back of the queue on trade agreements is quite frankly juvenile. Nations can and have negotiated multiple agreements simultaneously. Besides the economic reasons why a mutually beneficial agreement needs to be encouraged and reached between EU and Britain, there’s also the security angle. Britain’s GCHQ and security services are known to be the best if not one of the best in the world. Britain is one of the few countries that is meeting and committed to maintaining the 2% of GDP expenditure on defence. Cooperation with Britain on terrorism and the various security challenges the world is currently facing is paramount if the world hopes to conquer these challenges.
So keep calm and keep on Brexit.