Europe – Britain = ?

Everett Rosenfeld started writing about the U.S. implications of  Britain’s referendum to leave the European Union …

Nearly every market move over the last two weeks has been attributed to the upcoming British referendum on whether the United Kingdom should remain with or leave the European Union.

A poll showed Brits might want to leave? Down go stocks. Then it looked like the U.K. would stay in the political and economic bloc? Here’s 200 points to the upside for the Dow Jones industrial average. …

And it’s not just trading desks who cared about Thursday’s referendum. Federal Reserve Chair Janet Yellen said earlier this month that a British exit from the EU “could have consequences in turn for the U.S. economic outlook.”

… then had to update when a majority of Britons voted to say tally ho to the Continent:

As could be expected, the primary stance of EU politicians was that the U.K. should stay within the bloc, but nations and expert groups across the world also expressed their preference for a stay victory.

Important British trading partners — including India and China — indicated they were worried that an exit would create regulatory and political volatility that could harm the economies of everyone involved.

The U.K.’s Treasury itself reported that its analysis showed the nation “would be permanently poorer” if it left the EU and adopted any of a number of likely alternatives. “Productivity and GDP per person would be lower in all these alternative scenarios, as the costs would substantially outweigh any potential benefit of leaving the EU,” asummary of the report said.

As the overall economy weakens, the British government would see weaker tax receipts than otherwise, and those losses would vastly outweigh the benefits of reduced contributions to the EU, according to the analysis.

The Bank of England, the International Monetary Fund, and others have warned of the long-term negative effects of a British exit.

And although some have dismissed those analyses as “rotten propaganda,” most mainstream economists overwhelming agreed the move would be bad for the U.K. …

The general thinking is that many international corporations, notably those based in the U.S. and China, invest in U.K. operations partly so they can readily access the free-trade corridors the U.K. enjoys with the rest of the European Union. So since the leave camp won, many of those companies could see drastically reduced profits.

The sudden need to reset tons of global investment channels — against the background of the ambiguous and extended period of the U.K.’s exit negotiations — could have a freezing effect on the whole region.

“Negotiations on post-exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility,” the IMF said in an April report. “A U.K. exit from Europe’s single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization.”

Depending on how you measure it, the EU as a whole ranges from the first to the third largest economy in the world. And in terms of trade, the bloc easily topped the U.S. and China in both imports and exports.

So a slowdown there would mean a global slowdown. One that could last months — if not years.

And here’s why the fallout is global

Yeah, it does sound hyperbolic, but there are actually a couple arguments for why a British exit may hurt the rest of the globe.

In Europe, the EU could run into economic trouble for a couple of reasons. The lengthy and as-yet ambiguous exit negotiations could cripple investment, as mentioned above, but they could also lead tomore exits. Nationalist groups across Europe will be watching the referendum closely to see if they can use the results into their advantage.

Elsewhere, the economic risks are best understood as a function of uncertainty. EU uncertainty: If financiers and companies are concerned that they may get cut out of free-trade channels, they may find safer (which is to say, less productive) uses for their money. And British uncertainty: All those billions of dollars already invested in the U.K. and invested abroad by British entities could be in limbo as London rushes to negotiate new non-EU trade deals with key partners.

In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission.

If even a small percentage of that is disrupted, it could reverberate across the globe.

Similar concerns apply for Chinese, Indian, Japanese and other international companies and investors.

And then there’s the issue of currencies…

With all of that uncertainty rushing around, a British exit will likely result in a massive rebalancing of currencies.

Investors will (and have already begun to) dive out of the British pound and into cash that’s perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar. The euro could also see some weakening if investors are worried about the fate of the EU.

While being a safe haven could sound like a boon for the U.S. economy, such a large, sudden currency swing could have significant negative implications for American multinational corporations.

The fallout from those currency moves could be another source of short- and medium-term economic tumult.

So why did the UK vote to leave?

Most experts laid out arguments like the ones above in explaining why the U.K. should vote to stay in the European Union. But there are many reasons why Brits voted

First and foremost, a lot of people simply didn’t care about the multinational corporations and investors who would likely bear the immediate losses of a vote to leave — not to mention the fact that “expert” predictions are increasingly unpersuasive to voters.

And for many, concerns about the costs of continued EU membership far outweighed any worries about leaving.

One of the major sticking points in the conversation has been immigration concerns, as some Brits worry that the country’s employment market and social services will drown under the weight of too many new residents. There’s also the worry that upper-crust elites and Brussels bureaucrats are pushing for a continental identity that diminishes the U.K.’s own sense of self.

There were also economic arguments, although they were more often made by pro-exit politicians than by professional economists. Those politicians argued that the EU’s strong regulatory regime and its required contributions actually depress the U.K.’s growth potential.

 Tim Stanley sees it as two votes in one:

There were two referendums on Thursday. The first was on membership of the EU. The second was on the British establishment. Leave won both, and the world will never be the same again.

It’s impossible to overstate how remarkable this victory is. Twenty years ago, Euroscepticism was a backbench Tory rebellion and a political cult. It was a dispute located firmly on the Right with little appeal to Labour voters. It took Ukip to drag it into the centre of political life – given momentum by the issue of immigration – and slowly it has emerged as a lightning rod for anti-establishment activism.

Even so, the circumstances of the referendum were not ripe for victory. David Cameron only called it to hold his own party together; and once it was called,he decided to turn the British and global establishment against it. Out came the Treasury, the IMF, even the President of the United States to argue that Britain had to stay. This was textbook politics, how things used to be done – and it worked back in 1975 when the UK voted overwhelmingly on good advice to stay in the Common Market.

But this time the establishment consensus coincided with a historic loss of faith in the experts. These were the people who failed to predict the Credit Crunch, who missed the greatest economic disaster to hit us since the Great Depression. And we were supposed to believe them? Slowly the consensus came to resemble not just a conspiracy but, worse, a confederacy of dunces.

Even so – even as Leave pulled ahead in the polls – it was still impossible to think it could win. The murder of Jo Cox convinced me that it wouldn’t. I suspected that it would cement in most people’s minds a link between Brexit and risk: Leave forced this referendum, Leave created the febrile debate, Leave had to bear some responsibility for the air of chaos. Even I would’ve preferred the referendum to be cancelled. The whole thing made me feel sick to my stomach. There was talk of Leave support wilting and turnout dropping, while Remain was surging. Remain’s Project Fear evolved, inexplicably, into Project Tolerance. Now a vote for the EU was a vote for love. And if the British couldn’t be terrified into voting Remain, surely they could be guilted into doing it?

No. People wanted to have their say and they did. Up and down the country they defied the experts and went with their conscience. Labour voters most of all: the northeast rebelled against a century of Labour leadership. I am astonished. Staggered. Humbled. I should never have lost faith in my countrymen. Those bold, brave, beautiful British voters.

Why did they do it? That, we’ll pick apart in the next few weeks. I think that Leave genuinely ran the better campaign, more hopeful and upbeat. Immigration mattered a great deal – although one YouGov poll ranked it third behind democracy and the economy. It’s possible that voters grasped the essential point about this referendum better than we the commentators did. It was a vote of confidence in Britain. Should we run our affairs or should we delegate it to foreign bureaucrats? When I was leaving my polling station, I said to a chap: “I found voting quite emotional.” He replied that this was the day we got our freedom back. That’s how it feels for millions of Britons.

Not how it feels, perhaps, for Londoners or Scots. We’ve seen a new division emerge within our country. Scotland increasingly defines its politics as Left-wing and Europhile. London is simply a different country: the metropolis triumphant. The young may have overwhelmingly voted Remain, too – but, hey, they will grow older someday. The young who voted Remain in 1975 overwhelmingly voted Leave in 2016. In part, perhaps, because they didn’t like being characterised as ancient bigots by the Remain side. Top tip for winning future elections: don’t call the electorate “thick” or “losers”. It, er, turns them off.

Politicians there and here have done a bad job of showing why more open societies — freer trade, more open immigration — benefit the country as a whole. It would be an unmitigated disaster for Wisconsin dairy farmers if protectionist Donald Trump was able to restrict trade and immigration, for instance. On the other hand, skepticism toward politicians and the establishment, however you define the latter, isn’t a bad thing.

Another parallel was posted by a Facebook Friend, from the head of the BBC’s polling:

 

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