Blog No. 104. After Brexit, Now What?

Blog No. 102, “Brexit: Arguments, Consequences and the Trump Factor,” expressed our view that, while the burdens on Britain of membership in the EU were genuine, they were far less than the costs and risks of leaving. Our tone, however, was cautionary rather than alarmist:

The Brexit proposal will be put to the voters in a referendum on June 23, and to the questions “What will happen?” and “What will it mean?” there is clearly only one answer: no one really knows. Without attempting predictions, our view is that if the vote is to leave the EU, the risks to Britain, the EU, and ultimately the United States, could be significant.

Well, we now know what happened, and to some extent why, but what it will mean—for Britain, the EU, global markets and the United States–is something that still no one really knows.

For Britain, the financial and economic consequences of Brexit are a matter of speculation and debate that will continue for a considerable period. Apart from the immediate impact on financial markets, there is no way of yet knowing what problems will emerge during the anticipated two years of negotiation over the terms of Britain’s withdrawal. For example, it remains to be seen whether the EU, or individual European countries, will take a punitive approach, or a cooperative one, to the negotiation of new trade agreements. Moreover, that question is further complicated by the possibility that the entire EU may begin to unravel.

It is similarly too soon for a definitive assessment of the consequences of Brexit on the EU and its constituent members. Even short of an unraveling, however, those consequences are likely be significant and generally negative, both economically and politically. The impact, however, will vary among different countries, and Stratfor has provided a helpful country-by-country analysis in “The EU Britain Will Leave Behind.”

In the United States, financial markets were down sharply on Friday (over 3% for the Dow and S&P and over 4% for NASDQ) but it is not certain whether that is a short term effect or a precursor of more serious developments. Thus competing arguments could be found on the same financial page of The Wall Street Journal. The Heard on the Street column argued that the spike in the VIX volatility index was relatively modest and that Brexit was “no Lehman.” It concluded that “Friday, June 24, 2016, will undoubtedly be a red-letter day in U.K. history. But in the financial-history books, it will likely go down as a mere footnote.” At the same time, the Moneybeat column was titled “Here’s How It Could Get Out of Hand” and explained:

The risk for the U.S. financial system is that large swings in stock, bond and currency prices could trigger heavy losses for some market participants, potentially setting off a cascade of forced selling of assets into already volatile markets that are less liquid because banks have dialed back trading activity in recent years.

However that may be, we are inclined to doubt that the broad, sunlit uplands of Dow 18,000 will be seen again soon.

President Obama sought to provide a measure of reassurance with a statement that “The special relationship between the United States and the United Kingdom is enduring, and the United Kingdom’s membership in NATO remains a vital cornerstone of U.S. foreign, security, and economic policy.”  Obama made no reference to reaching a bilateral trade agreement with Britain or to walk back his previous statement that such an agreement would be “at the back of the queue.”  We hope that he and the next administration will give such an agreement greater priority as several Republicans have urged.

Obama’s reference to NATO was notable since the potential effect of Brexit on NATO had not been widely discussed either here or in Britain. NATO leaders, however, had expressed serious concerns. The day before the referendum, Secretary-General Jens Stoltenberg told The Associated Press:

A strong U.K. in a strong Europe is good for the U.K., but it’s also good for NATO. “We are faced with so much uncertainty, so much unpredictability, with terrorist threats, with a more assertive Russia in the east,” I believe that a more fragmented Europe will be something which will only add to the uncertainty which surrounds us.

Earlier, Lieutenant-General Frederick “Ben” Hodges, commander of the United States Army in Europe, had raised concerns that the European Union could unravel in the event of a Brexit weakening efforts to resist Russian expansionism in Europe and the Middle East:

Anything that undermines the effectiveness of the alliance has an impact on us, and so if the EU begins to become unraveled, there can’t help but be a knock-on effect for the alliance also.

Hodges added that he was “worried” the EU could unravel just when it needed to stand up to Russia.  Indeed, a clear winner from Brexit is Vladimir Putin who obviously relishes–and will see opportunities in–European chaos and disunity.

If the economic and geopolitical implications of Brexit are unclear, so to are the political ramifications on both sides of the Atlantic. In Britain, Prime Minister Cameron’s announcement that he would step down in the fall left open the question of who his successor will be. The most obvious possibility is Boris Johnson, the former Mayor of London and a leader of the Brexit wing of the Conservative Party. In the case of Brexit, Johnson had been “against it before he was for it,” and there has considerable speculation that his change of position was designed as a strategy to become Prime Minister. In our previous blog, we expressed reservations as to Johnson’s fitness for that office, and we expect that he will be subject to considerable scrutiny and assessment in the coming months.

In the United States, Donald Trump had offered his support for Brexit and, after the fact, expressed his pleasure at the outcome of the referendum. Indeed, he even appeared to be trying to ride its coat tails:

The people of the United Kingdom have exercised the sacred right of all free peoples. They have declared their independence from the European Union and have voted to reassert control over their own politics, borders and economy….
Come November, the American people will have the chance to re-declare their independence. Americans will have a chance to vote for trade, immigration and foreign policies that put our citizens first. They will have the chance to reject today’s rule by the global elite, and to embrace real change that delivers a government of, by and for the people. I hope America is watching, it will soon be time to believe in America again.

(For a more unhinged version of the candidate’s views, delivered in his inimitable style, see Chris Cillizza in The Washington Post, “Donald Trump’s Brexit press conference was beyond bizzare.”)

We had earlier noted some commonality between the Brexit campaign and the support for Trump, and Trump may well believe that he is riding a global wave of of anti-establishment populism. Perhaps he is. Nevertheless, his manifest deficiencies in experience, character and temperament may yet become so inescapable as to mitigate the force of that wave. Moreover, if the negative consequences of Brexit are widely felt in this country—plunging values in 401(k)s, contraction of the jobs market—they might persuade even some Trump supporters that recklessness can come at an unacceptable price.