The Brexit Debacle


Brexit has been the biggest shock to global markets since the Global Financial Crisis in 2008.  EconVue experts weigh in on the likely path of this new crisis, and answer your questions: 

Will Brexit cause a global recession, or will its effects be contained in the UK and more broadly, Europe?

How will other countries and regions be affected?

Is this the first step in the dissolution of the European Union? Will other countries leave the EU, and how quickly?

Are there any winners?

Where does monetary policy go from here?

What is the likely effect on currencies?

What will happen to oil prices?

What are the geopolitical risks?

Panel Discussion

Robert Madsen EXPERT

The news for the European Union is considerably worse.   The day he called the UK referendum, Prime Minister Cameron legitimized the idea that individual countries could reconsider their commitments to the union and perhaps leave.   British voters’ rejection of the EU has gone further still, encouraging Spain, Italy, Greece, Poland, Hungary and several other countries to hold their own referendum.  Even France and the Netherlands could now see the resurgence of movements in favor of abandoning the EU or, at the very least, demanding revision of the terms of membership.  Given that many of these countries have suffered greatly from Germany’s insistence on fiscal austerity—and hence a painful intensification of global deflationary trends—it is inevitable that the EU’s next few years will be consumed in internal debate and probably one or more national defections. 

Eastern Europe will be an area of particular sensitivity because countries there, already straitened, will be hurt disproportionately by the tightening of financial conditions entailed by the shrinkage in the British banking system. 

Diplomatically, Europe—and the West in general—will lose ground to Russia, China, North Korea, Middle Eastern Extremists and other rivals.  For Brexit, the possible reorganization of the UK, potential additional departures from the EU, and restoration of public support for these institutions will leave little time to devote to geostrategic initiatives.  Putin and other anti-Western leaders are probably salivating at the prospect that the EU’s troubles may ultimately lead to the emasculation of NATO, resulting in a permanent shift in the balance of power.

Globally there is in the short term a small chance of a worldwide financial crisis, depending on how much damage has been done to the UK, European, and international banking systems.  It also seems inevitable that world GDP growth will decelerate further over the next few years—perhaps 50 basis points per annum—as the rate of growth in British and European exports decelerates, which in turn will depress global prices slightly more.  Central banks will accordingly persist in their extremely accommodative behavior—Janet Yellen cannot realistically tighten policy—and probably experiment further with negative interest rates and other novel ideas.  

The US and Japan will play their usual role as safe havens during the two-year transition, so yields on treasuries and JGBs will fall significantly farther.  The odds of “currency wars” have also risen. After adjusting to yesterday’s earthquake and the aftershocks that will follow, in early 2018 Britain’s export sector will expand due to the lower exchange rate.  Roughly the same would be true for any other countries that departed from the EU, increasing demands from France and other weak members that the ECB take steps to devalue the euro and level the playing field.  In the meantime Japan will surely have intervened to depress the value of the yen—it may do so as early as next week—and China may do the same.  The UK’s “leave” vote could thus presage more protectionism as well as a return to the global imbalances of the middle 2000s as most of the world uses depreciation against the dollar to import American demand.

Michael Lewis
Michael Lewis EXPERT

Adverse economic consequences are grossly exaggerated. The impacts of a British exit will be minimal worldwide, not that significant for the UK or the EU, and negligible for the U.S.

Financial markets do not like uncertainty, but policymakers are already working to clarify the situation. There is no appetite in Britain or Europe for a trade war, and there is no reason why the EU must deny access to the UK. By year-end, most issues should be resolved with the UK falling into an Associate Membership role in the EU. The road map is well paved: something akin to what Norway has enjoyed for decades.

This been a blow to the dream (by some) of a European superstate. We believe that next year's elections in the Netherlands and even Germany will reflect this. However, economic union, broadly defined, should continue. In fact, it should be more durable.

Marsha Vande Berg EXPERT

Brexit was an historic event for the United Kingdom and the European Union with repercussions globally. The Brexit vote also was a message of frustration and fear. The likelihood of any winners is remote even though an argument is being advanced that China is potentially a winner.

On the side favoring China as a winner,  it can be noted that Europe is China's largest trading partner. Chinese investors also are inclined these days to find Europe more welcoming to Chinese investment than the United States.  Because of Brexit, Euroland will lose its second largest economy and so Euroland, like the UK will have even greater need for investment. Hence the attraction to Chinese trading activity and investment and vice versa. 

The flip side is arguably more compelling. If there any favorable outcomes to the Brexit decision, they may not fall into China's court. Beijing has made clear that internationalizing its currency is an important strategic objective. The special relationship Beijing has cultivated with London, now the largest offshore RMB trading center globally, supports that objective. 

Brexit may very well threaten that ambition to the extent it relies on Britain's right to "passport" into the rest of the 28-member EU bloc. Lawyers advising international investment banks, for example, have told the banks they may need a new legal home in Paris or Frankfurt with unfettered access to the single euro market post Brexit.

There is also risk that UK as a global financial sector is significantly diminished. 

Still, there may be a larger role for China in the post Brexit offing. As chair of the early fall G20 meeting scheduled in Hangzhou, Beijing has the opportunity to focus the global debate set in motion by Brexit on a pro-globalization theme and by extension to invite Asia's leadership to collaboratively position the region as the leading economic alternative to the industrialized west. 

The question is whether China and Asia are up to the task and whether the opportunity may indeed have arrived too soon.