Brexit after the hysteria

I DELIBERATELY avoided writing about Brexit—the exit of the United Kingdom (Britain) from the European Union—soon after the Britons voted on it in June. Aside from the fact that most everyone else was writing about it then, I thought I’d wait until the dust had more or less settled so as to have a calmer, more reasoned perspective on the matter.

In asking what Brexit’s impact would be, there are four levels to the question. What would be its impact on the British economy itself? What are its implications for the European Union? How would the world economy be affected? How would the Philippines be specifically affected?

As in past similar instances, it’s in the volatile financial markets where the most immediate and dramatic impacts happen, as seen in currency exchange rates and stock and bond prices. Here, speculation rules, and economics takes a backseat. In the immediate aftermath of the Brexit vote, the British pound sterling hit both a six-month high and a six-month low within the same day—peaking at over $1.50 per pound when the “Remain” vote was widely thought to have prevailed, then plunging below $1.35 when “Exit” suddenly emerged the winner. The British stock market dived, with similar declines in markets worldwide. Globally, stock market investors collectively lost more than the equivalent of $2 trillion on June 24, the worst single-day loss in absolute terms ever recorded, and by June 27, this had grown to $3 trillion.

But dust eventually settles, and speculation gives way to more reasoned analysis. Now, more than a month later, the London stock exchange has rebounded, and actually hit levels higher than pre-Brexit. But the British pound remains low at $1.32, reflecting a more fundamental loss in confidence in the British economy. A weakened pound is not necessarily a bad thing, as it makes British exports (and tourism in the United Kingdom) cheaper, hence more attractive and competitive. This could help stimulate growth that could counterbalance the direct negative growth effects coming mainly from diminished consumer and investment demand. Meanwhile, the British paper The Guardian cites reports noting that the UK economy contracted over the past quarter at the fastest rate since 2009. Services and manufacturing sectors have both reportedly suffered, with output and new orders having fallen in the past month alone. Still, these could partly be knee-jerk reactions not necessarily grounded on the economy’s longer-term prospects.

Over the longer term, the nature of Brexit’s impact on the British and European economies will depend on how exactly the “divorce” will transpire. The key question is: Will the United Kingdom be able to maintain duty-free access to the EU market, through a new free trade agreement with the group it has opted to leave? Or will the European Union “penalize” it by slapping regular import tariffs on UK products? With about half of UK exports currently going to the European Union, the latter scenario could indeed depress the British economy. It’s impossible to anticipate the outcome until formal negotiations on the “divorce” actually transpire—and it could take well over a year before such talks even formally begin.

In the meantime, no material changes need to really happen, except for the effect of actions triggered by expectations rather than actual changes in the economic relations between the United Kingdom and its neighbors. For example, certain investments may already be relocated to the European mainland out of Britain, on the anticipation that the latter will cease to have duty-free access to the large EU market—even if free trade may yet continue, if subsequently agreed so. For sure, new investments into the United Kingdom will not be as forthcoming based on this reasoning, and for this and other reasons, one can reasonably anticipate a UK slowdown, or even recession.

The Britons’ stunning vote to leave the European Union was clearly not based on the economics of the issue. Rather, it was a vote against greater influx of “outsiders” into the British economy and society, and a vote for greater exclusivity—for some, even for isolationism. Whether all this makes sense in the context of a now highly globalized world will continue to be debated for some time to come, even as it would take years to fully implement the exit.

How will the European Union itself be affected? Based on the economics of it alone, Brexit should not be debilitating, as the British economy is far exceeded by the collective economy of the remaining members. But there is a self-destructive sentiment apparently rising in Europe favoring “punishing” Britain, as if to warn others against contemplating a similar exit. Economist Jeffrey Sachs calls this “European politics at its stupidest,” and argues that the rest of the European Union should instead reflect on its obvious failings and fix them. “Punishing Britain—by, say, denying it access to Europe’s single market—would only lead to the continued unraveling of the EU,” Sachs argues.

How will the Philippines be affected? Direct impacts ought to be minimal. After all, Britain accounts for a mere 0.9 percent of our exports, and even less of our imports. Only 6.5 percent of our foreign direct investment inflows last year came from Britain. And none of these will be entirely wiped out because of Brexit. The stronger effect could well be the indirect impacts based on its impact on the world economy as a whole. But because this will apparently depend more on psychology rather than economics, it is anybody’s guess at this time. The biggest loser would be Britain itself, which is taking a rather bitter pill for whatever advantages it sees in exiting the union. So let’s not get any ideas of a Phexit (from Asean), just yet.

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