There are many possible consequences of the recent Brexit referendum but for some curious reason some of the more obvious likely impacts appear to have escaped those presently expressing joy. Prior to the referendum much of the talk appeared to imply that proponents of Brexit were merely seeking to regain a sense of sovereignty, local identity and local control. The sub-text of reducing the impact of unwelcome immigrants (and in some cases pandering to outright xenophobia) was portrayed as a secondary issue.
What appears to have escaped the notice of those now celebrating, is that the nature of modern globalization means that the Leave vote has apparently triggered an inevitable though admittedly widely-predicted serious and wide-spread financial instability and a series of swings in the share market which if protracted (?) will continue to impact the people of Britain and elsewhere. This is doubly embarrassing to the leave strategists who prior to the vote had been pushing the line that leaving the EU would free up millions of dollars for the National Health System.
It may be no surprise to learn that now the uncertainties and erratic signs of likely downturn have kicked in, the same strategists are now saying they were misunderstood.
If a more settled community in Britain was ever one of the objectives of the Leave faction, the spate of racist attacks and racially targeted protests over the last few days sends a very different message. The Poles, the Africans and the Muslims have all reported a very visible indication that many want them out. Primary schools with high immigrant proportions have been picketed and a high number of incidents of public personal abuse have been reported. Yesterday for example saw a large number of parked German cars defaced in London with scratched Swastikas. This may meet the desires of some who wanted their immigrants to leave anyway, but unwelcome members of a community are not likely to make the community a happier place to live. Since many in Britain pride themselves on tolerance and moderation, witnessing unwelcome signs of xenophobia will be deeply disturbing to the moderates.
Even for the most ardent Leave campaigner it should be becoming obvious that the current drop in the pound, the fall and fluctuations in global share prices, and the increased prospects of inflation are not designed to encourage investment in the UK. The Treasury had predicted that a Leave vote would mean that British shares would become less attractive to investors and as a consequence British business would suffer. Weakness in business means increase in unemployment. Several major companies are now saying they are putting staff employment plans on hold until the situation is more stable. The very places where the economy was weakest may well have been centres for supporters of the Leave campaign but are now the very places where economic uncertainty seems now likely to make things worse.
Since a good portion of the Tax intake derives from various EU relationships, George Osborne is on record just before the referendum of predicting a Leave vote is likely to make tax increases inevitable. At the very least the current period of austerity will need to be continued beyond 2020.
The most vulnerable in Britain now have to face the prospect of higher fuel prices (via a lower pound), pension funds which have lost value, higher unemployment rates, the prospect of Scotland revisiting an independence position, and fewer opportunities for employment in the EU for the young people from Britain. We can only hope that someone is now asking the young who gave majority to the stay vote if lost opportunities were in their minds.
Although the prospect of fewer expensive holidays in Europe for British tourists as a consequence of a lower pound may not seem so serious we should not overlook the possibility of the down-turn in the travel industry as a whole. Given the investment of British Airways in EU travel this may well have a long term cost. On Monday easyJet stocks fell 22% on the predicted loss of custom in the latter part of Summer. More significantly Airbus say they are reviewing their manufacturing sector in the UK. This is unlikely to be an idle threat since the British contribution of wing manufacture is now being challenged by alternative wing manufacture in China and the US.Even those British pensioners currently enjoying reciprocal privileges in the villas in Spain and Portugal have every reason to be wondering about their future.
In its wider business predictions the UK Treasury now predicts a consequent increase in unemployment, a drop in real wages of an average of 780 pounds a year and an increase of about one thousand pounds a year for the average house mortgage. Also under current discussion is the need to reduce welfare payments.
During the referendum campaign the Prime Minister predicted that a leave vote would almost certainly call into question the so-called annual triple lock system which adjusts state pensions by 2.5% or to the rate of inflation (whichever is higher).
It should go without saying that the referendum has seriously upset those who wanted Britain to stay in the EU. The first Minister in Scotland is taking the majority Stay vote in Scotland to indicate a good case for separating from the rest of Britain. The alternative action of placing a Scottish veto on the expected British withdrawal from the EU is also being investigated by Scottish politicians. The Northern Irish who similarly voted Stay are now asking if their best future would be to unite with the Republic of Ireland so that they can stay in the EU.
Prior to the referendum the analysts had been warning that Britain’s main trading partners in the EU would be in no mood to show its members that leaving the EU would be an advantage. Despite British politicians now talking soothingly of a gradual and staged withdrawal, some of the key EU politicians are angrily calling for immediate action. With other member nations manoeuvring for advantage, Germany in particular appears to feel a need to show the other nations the need for collective responsibility. The four Presidents of the EU’s main institutions: EU Council President Donald Tusk, Commission President Jean-Claude Junker, Parliament President Martin Schultz and Dutch Prime Minister Mark Rutte came out with the collective statement that: “any delay would unnecessarily prolong uncertainty”.
Britain as the leaving partner is likely to face long and difficult negotiations about the form of tariffs, and which if any current agreements will be allowed to continue. While the Brexit economic leaders have been talking up the British and EU economists’ view that an exit should be seamless and mutually agreeable, most EU political leaders want a more brutal approach as a warning to others.
International banks currently based in London are now facing the loss of potential to trade in Europe and even if they are not intending to shift their headquarters to Frankfurt or Paris they will have to shift large numbers of staff. Stanley Morgan for example was rumoured to be talking of shifting up to two thousand staff positions.
The broader concern is that the British referendum appears to have long term consequences for those living outside Britain. Think for example of those affected by the current uncertainties in the fallen pound and Stock Market. While the focus in the Tabloid newspapers was on the multi billion pound losses sustained by some of Britain’s wealthiest billionaires when the pound dropped, a more sober analysis might have reminded the newspaper readership that those same billionaires head up large multinational organizations.
Investment is influenced by prevailing opinions about future stability. This is why credit ratings can foreshadow share market trends. Moody’s response to the uncertainties in the money markets was to devalue Britain’s financial status. The rating agency Standard and Poors has down graded Britain from its triple A rating to double A. Goldman Sachs has recently stated they are now predicting a probability of recession in the UK as a consequence of leaving the EU. Again such prediction from recognized authorities has global consequences because large overseas investment funds are committed to a portion of traditionally safe shares. Just to take one small local example, New Zealand’s large superannuation fund (Kiwi Saver) is at least partly dependent on the stability of key British stocks and shares. On last Friday the drop in these shares would have meant some genuine loss for individual policy holders in New Zealand although the dimensions of loss would take some time to work through the system.
Again using the example of New Zealand as a small nation with only partial direct exposure to the fortunes of the UK there are several immediate likely consequences for Brexit.
With Britain currently the fourth biggest source of tourists in New Zealand, with a predicted 215,000 for the year to July, the drop in the value of the British pound suggests the number of British tourists is likely to drop at least for the rest of this year..
It is very probable that a fall in Britain’s national income would result in a lower demand for New Zealand exports to the UK. Remember the fall in the pound reduces the ability to pay for the currently ordered imports into the UK. Two-way trade between Britain and New Zealand was worth about $4.6 billion over the past year.
British investment also partly depends on British based investors having continued access to funds. Banks say the changes signal a likely increase in interest rates. Britain provides one of the bigger proportions of foreign investors in New Zealand with many investors buying and developing property and buying shares in New Zealand companies. The current drop in the value of the pound would make it more difficult for UK investors to find investment funding.
For New Zealand investors with interests in the UK although the drop in the pound may make the purchase of UK property and business shares more affordable for overseas investors the current uncertainties for long term prospects for UK based businesses might make the investment more problematic. New Zealand businesses currently based in the UK may need to increase their security by shifting to Ireland or Europe.
Long term travel for New Zealanders. Although there should no change to current travel regulations it is hoped that long term a reduction in EU travel to the UK might result in some freeing of current restriction on working holidays.
In Britain much of the pre-vote electioneering focussed on the freedom of EU passport holders to enter Britain and provide unwelcome competition for jobs. What may have been overlooked was the large movement of British young people currently in Europe for job and education opportunities. As the nations are becoming more global in outlook, with Brexit it is not just young people in Britain who are disadvantaged by competition or foreign migration. For example those from European nations recently arrived in Britain are expressing unease with the way they no longer feel welcome and this unease is also being expressed by their families back home.
The leaders of the Leave faction have spoken about safeguarding British trade opportunities by attracting past traditional trade partners. While it is always possible that old and now defunct trade relationships can be revived, the current uncertainties may well mean that potential partners will not necessarily be anxious for immediate renewal of trade agreements with Britain. To potential trade partners, other current trade super-powers eg India, China, Japan etc may seem better long term trade partners than Britain with its present instability as measured by that low Standard and Poors rating or even for that matter unease looking at the US alternative particularly in that both of the current leading candidates for the Presidency of the United States have already indicated a wish not to develop Free Trade partnerships like the TTPA.
Possibly the most vulnerable to the loss of direct entry into the EU markets are those in the agricultural sector. Like other major US sectors in the short term there are only limited problems. However, two years down the track the agricultural sector has reason to worry. Labour is one serious issue with thousands of EU workers currently assisting on farms and the seasonal boost for EU labourers arriving to help with the harvests. It may not be wise to assume this will continue. With something like two thirds of the farming exports going to Europe and on average almost half each farm’s annual profits coming from EU subsidies, farm owners and those working for the farmers are now expressing understandable concerns for the future. EU members will be expecting compensation for Britain’s withdrawal and are unlikely to favour continued subsidies when British farmers are planning to compete for markets.
Another potential problem for future British technological and scientific development is that at present about $2.5 Billion comes into Britain from the EU for R & D each year. While Britain’s economic stability may return some time further down the track, in the short term, since the EU is unlikely continue this allocation, it is likely that a good portion of this R & D will transfer to the Continent.
Does anyone remember the aphorism that goes: “be careful what you wish for.” One critic of Brexit has gone one better with the standard warning in china shops. “You break, you buy!”
Are there any informed commentators out there who can fill in the gaps in the above argument?