Tuesday, 28 June 2016

Some Consequences of Brexit Across the World

“... for systems belonging to the singular part of the stability boundary a small change of the parameters is more likely to send the system into the unstable region than into the stable region. This is a manifestation of a general principle stating that all good things (e.g. stability) are more fragile than bad things. It seems that in good situations a number of requirements must hold simultaneously, while to call a situation bad even one failure suffices.”  Vladimir Arnold, Catastrophe Theory

In the aftermath of Brexit, it is instructive to see how Britain is viewed by the outside world. It is very much seen as economics in turmoil, as a fiscal shockwave rolls through the markets. I have used the above quote on the mathematics called "catastrophe theory", and a picture of a catastrophe surface to illustrate this.

Note that to describe it in this way mathematically does not imply it is a catastrophe in common parlance - rather a mathematical "catastrophe" occurs is when there is a sudden and rapid change of state which is exactly what we have seen post-Referendum. The mathematics just describes what happens; it does not make value judgements.

CNN Reports on a “chaotic aftermath of the Brexit vote, with both the United Kingdom and Europe in turmoil”, but Michael McFaul, a former U.S. ambassador to Russia suggests that despite general displomatically neutral statements from the Kremlin . "Brexit is a win for Putin".

This is for two reasons: Britain was the country taking the strongest lead in sanctions against Russia after the Crimea and Ukraine, and secondly, anything which destabilises the EU is good for Russia, especially after many former Soviet States joined the EU.

Bloomberg notes that there are other echoes. The breakup of the Soviet Union began with one Baltic republic declaring independence, and others falling away like dominoes:

“Russia’s recalling the trauma of the end of the Soviet Union as the U.K. wrestles with the consequences of becoming the first member state to choose to leave the EU, casting a shadow over the bloc’s future existence. The USSR was dissolved in December 1991, more than 18 months after Lithuania led the Baltic republics in declaring independence.”

“In the ‘current fragile situation, one black swan can pull others along with it,’ Russian Finance Anton Siluanov said Friday in Moscow, referring to the economic impact of rare unpredictable events.”

My own view is that it is unlikely that the EU will break up, although the pressure of migrants fleeing Syria will certainly lead to less open land borders, a development which has already taken place, but which will become accepted as the norm. 

The nationalist elements in different EU nations, while vocal, command nowhere near the numbers of those in the UK, although concessions may be needed to mitigate their impact. The Soviet Union was a monolithic state ruled from the centre, whereas the EU is a coalition of member states, and that is a key difference.

Meanwhile Quartz looks further afield to China. The UK and the City of London has provided a smooth conduit for Chinese imports and investment into Europe, but this may fall away:

“Among Brexit’s biggest losers is China. The UK’s pending departure from the EU will cause China to lose one of its strongest allies in the trade bloc. An EU without the UK might be more liable to slapping China with higher tariffs, for starters.”

On the flip side of the coin, while Bejing is making the polite diplomatic statements about sovereign nations, and respecting decisions, internal State media is using it for propaganda purposes:

“The state media, which is often a barometer for how the party at large feels about something, has been quick to hold Brexit up as an example of the pitfalls of democracy. In an op-ed written days before the actual referendum, professor Wang Yiwei of Renmin University of China described the referendum as a ‘game’ that had been ‘kidnapped by populism’:”

“Democracy is supposed to be an achievement in the political civilization of human beings. But now it seems to have become a game that people play around with; this can only be described as a tragedy. The fact that Europe constantly put on these games of “referendum” proves that democracy is being kidnapped by nationalism and populism, and more and more negative impacts are emerging.”

Meanwhile taking a look at the business analysts' viewpoints, Business Insider comments that many expert analysis are looking to continuing uncertainty, and using words such as "Recession," "contagion," and "stagflation".

This is a direct result of uncertainty in the market, and is likely to remain unresolved until at least the skeleton bare bones of a post-Brexit arrangement emerges, which may not be for some time:

“The UK economy is likely to enter a period of stagflation … This decision to leave the EU, in our view, will exacerbate current elevated levels of uncertainty and thus amplify already slowing economic momentum”

“Now the UK has voted to ‘Leave’ the EU the only thing we know is that we know very little about where UK economic and political arrangements are heading. We do not even know what the geographical boundaries of the UK will look like in a few years. This uncertainty is likely to be prolonged and will lead investors - including residential investors - to postpone decisions. The economy will turn down quickly in our view.”

The markets are looking for clues, and there have been some backtracking by the Brexit camp which may give more market confidence, but which would probably be looked upon as a betrayal by hardline fanatics like Nigel Farage:

“The sign of the effect on the economy of today's vote is clearly negative given the economic uncertainty. But the size of the effect is less clear. That depends on the policy choices of the next few days: whether they fan or reduce fears. For instance, whether the ‘Leave’ campaign stick to their pledges or show signs of rowing back on some of them in order to secure continued EU single market access.”

Part of the problem is that the “Leave” campaign was more of a coalition of different groups, all of whom wanted Britain to leave the EU, but who seem to have had different pictures of what a post-Brexit EU relationship could be like. Would Britain follow more the Norway model, or the Canada model? An Australian points system for immigration has also been mooted.

As no strategy was mapped out for what could be put in place, there are different and largely vague positions being given by different politicians, but no clarity as to where the lead will come from and in which direction it will go. 

In one respect, the instability has similarities to the invasion of Iraq, which was an objective which succeeded, but afterwards, it rapidly emerged that no real plans had been made in the event of its success.

As a result of this uncertainty, Reuteurs reports that Goldman Sachs’ top economists think that Britain will enter recession within the year as a result of the vote, stunting economic growth:

“Goldman sees three principle risks for as a result of the vote: terms of trade are likely to deteriorate; companies are likely to scale back investment due to the uncertainty created by the outcome; and financial conditions will tighten due to exchange rate fluctuations and weakness in risk assets like stocks and junk bonds.”

And finally, on perhaps a lighter note, the Telegraph reports that the Australian repuplican movement has seen a surge in membership in the wake of the Brexit vote:

“... as Australians question the benefits of remaining part of ‘little Britain’. An ‘AusExit’ campaign, including calls to remove the Union Jack from the flag and remove the British monarch as head of state, has gained momentum since Friday, when Britain voted to leave the European Union.”

That at any rate, while perhaps upsetting for the British monarchy, would surely have very little in the way of economic or social consequences!

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