After months of debate, the United Kingdom officially voted to leave the European Union in a referendum nicknamed “Brexit.” The U.K. had joined the EU’s predecessor, the EEC (European Economic Community), back in 1973.
Blogger Aditya Rana writes, “Following the UK’s epic decision to leave the European Union, global markets went into a swoon with the World MSCI index posting a -5% decline for the day (-3% YTD), thereby more than erasing the hard earned recovery since the lows of early February. As expected, European markets suffered the steepest falls (-9%), with peripheral Europe taking the lead (Greece – 25%, Spain -15%, Italy -13%,) and the UK down -11% (all returns in US$). The US and EM markets performed relatively better, with both being down -3.5%. The best performing global market (YTD in US$s) continues to be Brazil (+34%).”
To look at the impact of BREXIT, Martin Wolf had a perceptive column in the Financial Times. Rana summarizes:
-David Cameron took a huge gamble and lost – while the fear mongering and lies of the exit campaign won the day – leading to a much diminished UK and a damaged Europe. “This is probably the most disastrous single event in British history since the Second World War”.
-The UK (and to a lesser extent Europe) has entered an extended phase of uncertainty – with the new government being tasked with developing a plan for the exit. It is not clear that they will be up to the task. “They broke it; they now own it”.
-The UK will inevitably introduce controls over immigration from Europe, thereby ruling out memberships of the European Economic Area and the single market. At best the UK might be able to participate in the free trade of goods, but, critical services (being part of the single market) would be excluded.
-Europe is likely to adopt a tough negotiating position, and cannot be seen to be granting a cheap option for an exit. While Germany has a current account surplus with the UK, it is very likely that they will continue to sell the high quality products which the UK does not produce.
-The weakness in the pound is expected to provide support to the economy over the medium term, but the continued uncertainty is likely to destabilize markets for years. The financing of the UK’s large current account deficit could be called into question with a loss of confidence in the UK.
-The UK’s structural fiscal position will become increasingly strained, as tax revenues (on which the provinces depend) come under pressure and eventually force fiscal tightening.
-UK businesses set up to benefit from the EU will have to be reconfigured and many will relocate to the EU single market. The city’s trading of euro-denominated assets will suffer. Investment in the economy is likely to decline over time. “The UK did well inside the EU, it is unlikely to do as well outside it”.
-“The UK’s decision to join the EU was taken for sound reasons. Its decision to leave was not. It is a choice to turn its back on the great effort to heal Europe’s historical division.”
“A good summary of the negative impact of Brexit on the UK economy,” say Rana. “The sharp drops in global markets outlined earlier, provide a good entry point to add to long positions as part of a globally diversified portfolio. While the uncertainty over the EU might persist for a while longer, this event is very likely to strengthen the resolve of Germany and others to keep the EU together. Peripheral European assets, which suffered the worst decline therefore present the best opportunities to invest in, albeit in a gradual and cautious manner. Avoid UK assets given the continued uncertainty,” Rana said.
To quote Winston Churchill: “The trouble with committing political suicide is that you live to regret it.”
Rana explains that one of the popular explanations for Brexit (and the rise of anti-establishment populism on the left and right in the US and Europe) has been a rebellion by “globalization’s losers”, the low-skilled workers who have been “displaced” by the “hollowing out” of the domestic manufacturing base.
“But have the prospects of low-skill workers deteriorated faster than their high-skill counterparts in recent years?” questions Rana.
Not really, at least in Europe, writes the economist Daniel Gros, in a recent column citing three reasons:
1) the differences in the employment rates of highly educated and less educated workers in Europe have remained fairly constant over the last decade, with the less educated actually narrowing the gap in recent years.
2) The “wage premium” in much larger in the US (300-400%) than in Europe (50-80%), as are the employment rate differences between the two groups, yet the US economy is less open – and less affected by trade- than Europe’s is.
3) lastly, in Europe the share of low-skilled workers is declining rapidly with University graduates now nearly out-numbering low-skill workers, as opposed to being a third less in 2000.
Rana explains that clear-cut economic explanations for a complicated political phenomenon, while appealing, are rarely accurate. Calling the rise of populism in Europe a revolt by the losers of globalization is misleading. Playing on popular fears and frustrations – from “dangerous” immigration to the “loss of sovereignty” to the European Union – to fuel nationalist sentiment” seems to be the root cause.
“So the natural question to ask is why has it become easier for a broad spectrum of demagogues to play on popular sentiment?” says Rana.
Princeton University philosopher Harry Frankfurt and author of a recent book “On Bullshit” provides a persuasive reason:
- People should care about the truth, because the truth is the truth about how things are and it’s important for us to recognize how things are, not to pretend that it’s something else. If you have the truth you know what reality is like, if you don’t you’re ignorant of reality.
- We are living in an age in which there’s another alternative to the truth, and that’s bullshit. “The reason why there’s so much bullshit I think is that people just talk. If they don’t talk they don’t get paid. The advertiser wants to gain sales, the politician wants to get gain votes. Now, that’s ok, but they have to talk about things that they don’t really know much about. So since they don’t have anything really valid to say, they just say whatever they think will interest the audience, make it appear that they know what they’re talking about – and what comes out is bullshit.
- The danger is that there will be a loss of concern for the truth, and that I believe is an insidious assault on the fundamental principles of society.“
Aditya Rana has worked for 24 years in investment banking, primarily with Morgan Stanley in London, New York, Tokyo and Hong Kong, (and Citibank in Mumbai), spending over two decades in Asia.
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