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Britain's Future
Brexit continues to
reverberate not just in Europe but around the world, with the underlying
presentiment that suggests all politics is going off the rails, and that the
governing elites everywhere have lost touch with their electorates. And yet
the business of government must go on, and one of the more pedestrian but
nonetheless impressive phenomena of post-June 23rd British politics is
how the government has picked itself up, voted in a new Prime Minister, and
begun the horrendously complex task of working out a new future for
Britain.
"The answer to
a very large number of questions around Brexit today is 'I don't know',"
said Chris O'Connor, the British Consul General in Los Angeles. O'Connor was
on a plane back to London a few days after the vote for a meeting of
ambassadors and heads of mission of Britain's Foreign Office. He said they
realized quickly the "enormity and complexity" of the job ahead of
them and also that they would need to get with the program very quickly -
because they had not designed any back-up plan for leaving the EU in advance
of the referendum. "The government doesn't plan to lose, the
government plans to win," he said, explaining the lack of contingency
planning.
O'Connor shared the
stage with Joe Brusuelas, Chief Economist at RSM US LLP, at a LAWAC dinner
that looked at the political and the economic fall-out and future
implications of the June 23rd decision by the British voters to
leave the EU.
Despite the shock at
the Leave vote, the institutions of government got back into motion. "It
was a phenomenal reflection of how things work," said O'Connor joking
that the election results are announced at about 3am, and
at 6am the moving vans come to pack up the Prime Minister. "In
less than a four week period, we had a leadership election, we had a new
Prime Minister, we had a new government, we had a new structuring of
government to create a new department for international trade," he
said.
Meanwhile the
financial community was emerging from its shellshock to calculate how best to
survive in a post-Brexit world. "In about 20 hours, we saw roughly an
11% depreciation of the Sterling," said Brusuelas on the economic impact
of the Brexit vote. "The shock that we saw was so large that it's
roughly the equivalent of a 1 in 1 billion probability," he said. While
consumption has been pretty strong and there hasn't been a decline in
employment, he said we haven't seen the worst of it yet. "It will get
worse - we'll probably see a light recession early next year in the UK,"
he said. And although the pound is now trading around $1.30, Brusuelas
said the "blue chip economists" expected it to drop further to at
least $1.20, with some even predicting a pound-dollar rate of $1.10.
(On June 22nd, the day before the referendum, the pound was trading at
$1.47). Looking forward, Brusuelas said he will be watching to see what kind
of economic models the UK wants, and what sequencing of policy the UK wants
to exit from the EU. Of particular interest - and no little urgency - to the
big US investment banks and others, is whether the British will be able to
negotiate some form of continued "financial passporting" for their
institutions which would allow them to continue doing business in Europe from
a base in London. And the big banks don't want any sudden shocks.
As the second
biggest economy in Europe after Germany, the UK is simply too large for the
rest of Europe to turn their backs on. But the dilemma facing the UK as it
negotiates its future relationship with the EU is how much access it will
have to give to migrant European labor, in exchange for being able to continue
trading with Europe on a preferential basis. O'Connor said Britain is aiming
for maximal access to the single market. "Also, it's clear that we'll be
requiring that we'll have some control over immigration." Last year
Britain accepted 330,000 immigrants, roughly half from the EU and half from
elsewhere. One of the aggravating factors in the referendum campaign was the
sense that Britain had no say over immigration from Europe: "so we were
obliged to favor a European over an American for a job application, even if
that was not necessarily the person we wanted," said O'Connor. In the
future, he said Britain would want to continue to accept large numbers of
immigrants, but wanted to be able to control who came in itself, and not
defer to Brussels. He said the objective will be to have "maximum access
to the single market and maximum control of our borders."
An additional
challenge will be normalizing Britain's trading relationship with the 52
other countries with which the EU has special trading arrangements. These
free trade agreements will each have to be renegotiated by the UK as it will
no longer be covered by the umbrella EU deals. "And that process can't
even begin until we leave the EU," he said.
A more subtle
challenge will be how Britain handles foreign policy and security - and
whether Britain will carve out its own niche in terms of policy. Of all the
issues, O'Connor said "each needs to be done at the same time and each
is very complicated" and it will be pretty tough to do in two years.
He said that this did not mean the end of the "special
relationship" between the US and the UK - on the contrary, he suggested
that now that the UK is no longer bound by EU rules and is not forced to
consult with 27 other foreign ministers on matters of policy, "Britain
might be able to be more nimble in approaching foreign policy issues,"
which could prove a boon to US-UK relations.
On what economic
model Britain might pursue, Brusuelas said "Singapore fits best
economically and politically... freedom of ideas, capital, and to a certain
extent people." The British economy is organized around the city of
London - financial services, banking, insurance - which accounts for roughly
a quarter of GDP and is driven by about half a million individuals. He
believes the sequencing of the exit should be a "slow, soft exit that
goes on for a number of years." He said 10 Downing Street is trying to
buy time - waiting for external developments to work themselves out like the
referendum in Italy that's coming up and to see how the Germans will deal
with immigration internally. "It's in the EU's interest to keep Britain
in the fold," said Brusuelas, "because if you're Angela Merkel, the
last thing you want to look at in 5 years is my legacy was I lost
$2.7 trillion in GDP and I got to keep Greece."
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Joe Brusuelas, Chief Economist at RSM US LLP
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Asked whether Brexit
is a done deal, or if some form of second referendum could be contemplated,
O'Connor said "it's a done deal." He explained that it was a clear
question from the beginning, everyone accepted that over 50% of the vote
would win and 72% of people turned out to vote. "While the vote was
relatively close, it was in no doubt."
O'Connor said that
despite early predictions that the Scots, who had voted to Remain in the EU,
would now pursue another referendum to leave the UK, the leader of the
Scottish National Party Nicola Sturgeon is now backing away from that
position - partly because Scotland is realizing that the financial challenges
of going it alone would be daunting.
As for Ireland, and
the widespread concerns that the Brexit vote would require Ireland and
Britain to re-erect the border between northern Ireland and the Republic that
was basically abolished by the 1998 Good Friday Peace Agreement, O'Connor was
optimistic that some solution could be found. "First of all, it is clear
that nobody wants to go back to the violence of the past," he said. And
since 1998 "a good deal of trust has been created between the various
parties at the table - in Belfast, in Dublin, in London and in
Brussels." O'Connor speculated that the border between the two parts of
Ireland might be something unique in the world, perhaps with some
technological innovation, perhaps with some limits of travel from northern
Ireland to the rest of the UK.
Brusuelas said that
in the longer run Brexit will not be seen as Europe's major problem, as far
larger issues are looming - starting with the uncertainty over Italy's
banking system, its upcoming referendum on economic reform and the
possibility that a failure in Italy could spark a systemic global shock.
Brusuelas also said that the debate over free trade agreements, like the
debate in the US over the Trans Pacific Partnership (TPP) with Asia, "is
a completely false debate." The reason jobs are disappearing is not
fundamentally because of free trade but because of the introduction of
technology. "Until we confront that issue and find ways to deal with it,
we will solve nothing," said Brusuelas.
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Sincerely, Terry
McCarthy, President and CEO, Los Angeles World Affairs Council
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