Thursday, 28 May 2020

Brexit Good or Bad

Updated: July 14, 2016 12:59 pm

The 51.9 per cent Britons have done the final rites of, the epicentre of the great British Empire on which Sun never set, and which is now a tiny island, where Sun seldom rises. How economic forces work will depend on how badly the European Union has taken Britain’s decision to part company with it.

Next year, Britain would have got the Presidency of EU, during which it could have worked out many things to its advantage. Why did then David Cameron schedule referendum now? He must have been very confident that ‘Remain’ will win.

Two questions arise immediately, one is Brexit really irrational? Two, have the votaries of Brexit, like Boris Johnson who was hopping across the island in a chartered plane,  any plans to recover from the effects of the already crashed world’s financial markets? It was possibly one of the reasons for British Prime Minister David Cameron to resign.

There is little chance that London will continue as financial capital of the world for long. The Greek shipping companies and the Chinese from Hong Kong would be among the first to move out. It is learnt that the young voted to ‘Remain’ but the elders went for Bretix. Why this attack of xenophobia, in the elders, most of whom have seen the sudden fall in quality of life after the Empire was lost. The problem with them is that they think Brits  are the best.

The reality is that in rural Britain changes have been taking place, like farms have been getting more mechanized, the village shops are closed, many locals have shifted because rents are going up, and for all this EU is being blamed. The fact is it’s the effect of globalisation and mechanisation.

So, was the vote for Brexit driven by irrational xenophobia? Britain’s vote to leave the European Union sent new shockwaves through financial markets, with the pound falling, after 31 years, despite the country’s leaders’ attempts to ease the political and economic turmoil it has unleashed.

Finance Minister George Osborne said British economy was strong enough to cope with the volatility caused by referendum, the biggest blow since the World War Two.  But his words failed to stop sterling sinking to its lowest level against the U.S. currency for 31 years, continuing the slide that began last week when Britons confounded investors’ expectations by voting to end 43 years of EU membership —  $2.8 trillion was wiped off the value of world stocks, the biggest daily loss ever.

European bank shares had their worst two-day fall on record and world stocks, as measured by MSCI,  which tracked for their worst two-day fall since the aftermath of the collapse of Lehman Brothers in late 2008.

One wonders if Johnson and others of his ilk had foreseen the political chaos pro-Brexist. The ruling Conservatives are looking for a new leader after Prime Minister David Cameron’s resignation while lawmakers from the opposition Labour Party have stepped up a rebellion against their leader.

So,  in the immediate aftermath of Brexit , the country has sunk deeper into political and economic chaos. “There’s no political leadership in the UK right when markets need the reassurance of direction,” Luke Hickmore of Aberdeen Asset Management was quoted as saying. He was expressing the view of many in the City of London financial centre.

Many economists have cut economic growth forecasts for Britain, with Goldman Sachs expecting a mild recession within a year. The risks affect economies far beyond Britain. Britain could go into recession as the world economies are in a fragile state. But Cameron’s refusal to start formal moves to pull the country out of the EU has prompted many European leaders to demand quicker action by Britain, the EU’s second largest economy after Germany, to leave the 28-country bloc.

“It should be implemented quickly. We cannot remain in an uncertain and indefinite situation,” French Finance Minister Michel Sapin said on France 2 television. Guenther Oettinger, a German member of the EU’s executive European Commission, said delay would hurt Europe as well as Britain. “Every day of uncertainty prevents investors from putting their funds into Britain, and also other European markets,” he told Deutschlandfunk radio.

17-07-2016The shockwaves have been felt in Brussels as well. The leaders of France, Germany and Italy met in Berlin to plan their next moves and said Europe needed to respond to its people’s concerns by setting clear goals to improve security, the economy and prospects for jobs.

Cameron’s hesitation for early withdrawal may be due to the anxiety to continue access to EU’s single market without the free immigration from EU. This may not be easy. One suggestion was that Britain would not have to accept free movement of workers, aware that many voters chose “Leave” due to concerns over immigration. However, single market rules must accept free movement of people as well as goods.

The greater worry is that with EU gone the Brexit supporters would need scapegoat for blaming any unwelcome things like rising prices, housing shortage, etc. This could disturb multi-cultural harmony.

Already graffiti have appeared name calling and abusing Poles, Muslims and non-Whites on the streets. Hopefully, Johnson has thought out a solution to this tricky problem. After all, he is rumoured to announce soon that he would like to be leader of the Conservatives. And if skinheads appear again, they will encounter ethnic minority groups of 2016 and not 1963, more successful than the locals and biggest contributors to good feel factor.

In fact, there may be a good antidote to the ill-effects of Brexits.  It is quite possible that after Brexit, the EU will reform itself and stage a comeback while Britain becomes a backwater struggling to hold on to Scotland. However, we could also see Europe get gridlocked by competing regional demands while Britain uses its new-found policy flexibility to rebuild itself.

Meanwhile, the rise in uncertainty brings both risks and opportunities for India. On the one hand, export markets may be affected by a lack of confidence, on the other hand, commodity prices and global interest rates may remain low for an extended period. Indian policymakers should use the opportunity to cut interest rates and get the banking system going. Brexit is neither good nor bad for India. It’s mostly about how the country responds to the new situation.

UK’s impending exit from the EU is the world’s most significant event since the collapse of communism in the continent. The difference this time is that it signals a shift towards insularity, which may not only lead to the UK’s unravelling but also jeopardise seven decades of European integration.

The ‘Leave’ verdict of  UK referendum about whether to remain in the EU has triggered jubilation among far right parties across Europe, all of whom want their countries to go it alone. Prime Minister David Cameron’s  election promise of a referendum will likely go down as a historical blunder, which harmed his country and also had an adverse effect on the world order. Ironically, Cameron, who campaigned against Brexit, was its first victim – he will be standing down as prime minister.

Political uncertainty looms large and it will have a negative impact on the fragile global economy. India will not remain unaffected. Even if our economic fundamentals are relatively robust, uncertainty will be transmitted through financial markets. The Brexit outcome pulled down the Sensex by over 600 points and rocked the currency market. Moreover, uncertainty tends to lead to postponement of investments. For Indian companies, the UK has been the springboard to Europe. Brexit will mean a dislocation for many of them. India must buckle down and pursue its domestic reform agenda, as this is the best antidote to uncertainty.

(The writer had been in London for over 10 years as Correspondent of Hindustan Times)

by Vijay Dutt

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