by Joan Warner
It’s much too soon to make definitive predictions about the long-term economic and financial consequences of Britain’s vote to leave the European Union. The variables seem almost infinite. Who will replace David Cameron, and how will the country’s new leadership shape its future relationship with the EU? Will the “Leave” victory empower similar movements elsewhere in Europe, fragmenting the Union? Does it give Donald Trump an advantage heading into November’s US presidential election? How soon will the financial markets’ shock subside, and which assets will look safest to global investors until then?
My head can wait, coolly, for answers to these questions. But my heart reacted to yesterday’s vote immediately, with grief. Besides worrying about my retirement account, I’m deeply disappointed by what feels like a rollback of Europe’s postwar vision. In 1998, as Business Week magazine’s senior editor for Europe, I covered the birth of the single currency from Frankfurt and New York—probably the most fun I’d ever had in my career in finance journalism. A couple of years later I was thrilled to see handbags in my favorite Berlin boutique priced in both Deutschemarks and euros (and less thrilled to find that just as I’d predicted, eggplants in Paris cost more in euros than they had in francs). Of course, Britain never joined the Eurozone, and the UK has always marched to a very different drummer from the one on the Continent. Still, to me, EMU represented another step forward in the journey that started with the Common Market in 1957, while Brexit seems to represent a step back.
The outlook of my expert colleagues at Oxford Economics gives me some comfort. While the economic costs to the UK will be substantial, in this morning’s global research brief OE’s macro team generally judge the currency and securities markets to have overreacted to the vote and overestimated its impact on world GDP. The team sees a “relatively small” probability that other EU nations will call referendums leading to more exits. Still, OE economists worry that Brexit could be the first major fault line in globalization. If that’s the case, its long-term costs could multiply.
In fact, anti-globalization sentiment has been building for some time. Top executives, including General Electric CEO Jeff Immelt, are forging “localization” strategies and rethinking their supply chains. Global trade agreements like the TPP and NAFTA are under attack, and world trade actually shrank last year, in volume as well as dollar value. As the Brexit vote proved, world leaders have ignored globalization’s negative side effects at their peril. It may be too late to stop the backlash. That makes me sad—and scared.
Joanie Warner is the Thought Leadership team’s Managing Editor for financial services.