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Monday, July 18, 2016

UK’s vote to Quit EU: What next….

Britain, the nation that once colonized countries from different continents by ardently adopting the philosophy of ‘divide and rule’ has finally, ignoring the sane advice, “Divided we fall”, of that venerable newspaper, The Economist, voted itself out of its nearly six decades of relationship with European Union giving not only a wild jolt to the very existence of the EU but also sending its own economy into a tailspin.

And intriguingly, no one appears to be quite aware of how the politicians would handle the difficult negotiations relating to the real exit of Britain from the EU except that as the European Council President, Donald Tusk said, “there is no way of predicting all the political consequences of this event, especially for the UK.” 

The decision of Britain to leave the EU has in the meanwhile sent global markets into a free fall: Pound Sterling spiralled to its lowest levels in three decades witnessing an intraday swing of more than 10% between its high and low points against the dollar; the FTSE 100 was down by 8.7% on opening but steeled at 4.3%, while, of course, bank stocks suffered the worst beating with Lloyds down by 21%, Royal Bank of Scotland by 18%; the Euro Stoxx bank index by 17%; US equities slumped by more than 2%, while its currency posted one of its biggest rallies— simply put,  trillions of dollars have been wiped off the global stock exchanges.

Over it, major credit rating agencies have downgraded Britain’s credit ratings. Importantly, it is feared that thousands of jobs in the financial sector, for which London has grown over the years as the hub of the financial network in Europe, are likely to evaporate, once the financial service firms realize that they can no longer carry out business activities from London in another EU country without attracting additional costs that usually go with the tag of ‘foreign entity’. Which means: London is all set to lose its role as the trading center for euro-denominated assets. Similarly, once London could no longer claim to be a gateway to Europe, it will automatically forego its preferred destination tag for foreign investors. So, where from money will come for UK to manage its current account deficit?

That aside, Britain, has to now negotiate with the EU authorities for tariffs to be imposed on their goods and services to be exported to EU member countries. And it is pretty certain that EU will grant no favor whatsoever to UK, for it will desire to send a strong signal to the remaining member countries that leaving EU will cost them dearly.  Which is why, it is feared that UK’s exports to the continent market will shrink adding further woes to its economy that has already been affected by the depreciating Pound, which if continues to stay low, is certain to raise the cost of imported goods. This fall in Pound could also result in a jump in inflation, of course, in the short run, but is sure to burden the less-privileged of the society more. With all this, businesses that have set up their shops in UK with a view to serving the EU market are sure to reconsider their position. What if, they relocate! What if the fear of younger voters of the Brexit turn true? Will it not affect the older voters?

Now, moving on to the more important aspect of Brexit’s impact on global economy and the international political system, it must be admitted that nothing is yet certain. For, no one knows how Brexit settlement that entails re-imposition of tariffs and restrictions on immigration from EU countries to Great Britain will impact the EU setup. What if the EU, in response to Britain’s impositions and goaded by its absence in EU, moves towards protectionism?

Interestingly, we should remember here one important consequence of such protectionism resorted to by EU: it will be watched with greater attention by the largest Asian economies, particularly, China and Japan, since their manufacturing industries seek easy access to EU markets for their own survival. Will this also lead to protectionism being exhibited elsewhere? Trump, the Republican candidate for the US Presidency, is already advocating protectionism. The world has barely recovered from the financial crisis of 2008 and if protectionism resurfaces everywhere, the global economy is sure to end up yet in another recession.

That aside, Britain’s withdrawal from the EU has another dimension: security concerns. Russia is watching from the side-lines as to how it might gain from the weakening of the EU, for it believes that EU without Britain to be less close to the US. And, for America, Britain’s exit from EU is a real setback for neither Germany nor France did share its basic ideology as much as Britain is. And this shall reflect in the functioning of NATO. To that extent, it heralds western weakness. 

Cumulatively, all these elements of politico-economic instability interacting with each other in the days to come in ways that are not known today, will make predicting the future that much difficult. Nevertheless one thing appears obvious: it is all a potential harbinger of a broader backlash against globalization!


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