How will Brexit af­fect EU and China?

China Daily (Hong Kong) - - VIEWS -

In the six months since the United King­dom voted to leave the Euro­pean Union, the im­pact on the EU’s econ­omy has been barely no­tice­able. A small dip in econ­omy-wide con­fi­dence in July and Au­gust quickly re­versed, and a mod­est re­cov­ery across the re­gion has continued un­in­ter­rupted. Look­ing for­ward, in­di­ca­tors of ac­tiv­ity even sug­gest that business ac­tiv­ity is pick­ing up.

How­ever, eco­nomic and po­lit­i­cal risks are likely to in­ten­sify next year, once the UK gov­ern­ment for­mally be­gins the process of with­draw­ing from the EU. In the UK, the Brexit ne­go­ti­a­tions will gen­er­ate un­cer­tainty about the short- and medi­umterm eco­nomic out­look for the coun­try. Com­bined with a sharp rise in costs stem­ming from the pound’s de­pre­ci­a­tion in 2016, this is likely to re­sult in a slump in do­mes­tic de­mand and a slow­down in the pace of eco­nomic growth in 2017.

For Europe, the pro­jected eco­nomic slow­down in the UK will un­der­mine ex­port revenue in coun­tries with the largest trade ex­po­sures, no­tably Ire­land, the Nether­lands, Bel­gium and Cyprus. Most other EU coun­tries have mod­est trade ties with the UK, but those with for­eign di­rect in­vest­ment in the UK or close links to its bank­ing sec­tor may also be ad­versely af­fected, in­clud­ing Cyprus, France, Bel­gium, the Nether­lands, Ger­many, Fin­land, Greece and Spain.

Over­all, the short-term eco­nomic fall­out from Brexit will be mod­est for the EU. The UK’s de­par­ture from the EU will ex­ac­er­bate weak­nesses that have been hold­ing back the re­gion’s eco­nomic re­cov­ery in re­cent years, par­tic­u­larly as EU lead­ers turn their at­ten­tion away from do­mes­tic is­sues, such as re­form ef­forts, and fo­cus on ne­go­ti­a­tions with the UK. But the po­lit­i­cal ram­i­fi­ca­tions for the EU of Brexit have the po­ten­tial to be much greater.

The Brexit process will get un­der way at a time of height­ened po­lit­i­cal risks in the EU, pro­vid­ing the back­drop to im­por­tant pop­u­lar votes in which anti-es­tab­lish­ment forces are chal­leng­ing the main­stream po­lit­i­cal par­ties.

In the Nether­lands par­lia­men­tary elec­tions in March, the far-right Freedom Party of Geert Wilders is ex­pected to do well, po­ten­tially be­com­ing one of the largest par­ties in par­lia­ment, al­though it is un­likely to be part of the next gov­ern­ment. Al­though we (at The Econ­o­mist In­tel­li­gence Unit) do not think far-right Na­tional Front can­di­date Ma­rine Le Pen will win France’s presidential elec­tion in 2017, the risk of this out­come has in­creased sig­nif­i­cantly. Even in Ger­many, where pop­ulism has been a less po­tent force than else­where on the con­ti­nent, sup­port for the far-right Al­ter­na­tive for Ger­many has surged over the past 18 months and the party is on course to win enough votes in the fed­eral elec­tion in Septem­ber/October 2017 to gain seats in the Bun­destag.

In Bri­tain’s EU ref­er­en­dum, the ma­jor­ity of vot­ers de­fied the po­lit­i­cal es­tab­lish­ment by opt­ing to leave the EU. The Brexit vote could em­bolden pop­ulist chal­lenges across the EU, where sim­i­lar fac­tors are driv­ing voter dis­af­fec­tion with the po­lit­i­cal elite. It is clear that Bri­tain is not alone in this re­spect. Bri­tain may al­ways have had one foot in and one foot out of the EU and Euroskep­ti­cism has been around a lot longer, but it has be­come in­creas­ingly clear in re­cent years that voter dis­af­fec­tion across the Euro­pean con­ti­nent is be­ing driven by de­clin­ing trust in gov­ern­ment in­sti­tu­tions, par­ties and politi­cians and a grow­ing gap be­tween the val­ues es­poused by po­lit­i­cal elites and large swathes of the elec­torate.

This dis­af­fec­tion is di­rected not only against na­tional po­lit­i­cal elites, but in­creas­ingly against the EU’s supra­na­tional in­sti­tu­tions. The Brexit vote has now opened the door to Eu­roskep­tic politi­cians in the EU to ask their elec­torates to con­sider life out­side the EU. De­mand in other Euro­pean coun­tries for ref­er­en­dums on EU mem­ber­ship may in­crease next year.

For China, the po­lit­i­cal and eco­nomic fall­out of Brexit will be rel­a­tively small in 2017. Bi­lat­eral trade ties with the UK are mi­nus­cule, ac­count­ing for only 2 per­cent of China’s to­tal ex­ter­nal trade. The EU is China’s largest ex­port mar­ket, but we ex­pect only a lim­ited im­pact on de­mand in the re­gion from a pro­jected eco­nomic slow­down in the UK. China’s in­vest­ment ties with the UK are stronger than its trade ties, es­pe­cially in the UK’s prop­erty mar­ket. The pound’s de­pre­ci­a­tion since the vote has also shaken as­sump­tions about long-term UK in­vest­ments in fields such as in­fras­truc­ture, which was ear­lier seen as of­fer­ing sta­ble, de­pend­able returns.

The UK has been one of the main pro­po­nents of closer trade ties be­tween the EU and China, and so the loss of the UK as a sup­port­ive voice for China within the EU could be a blow for Bei­jing. How­ever, the Brexit vote and pop­ulist tu­mult across the EU will add to the bloc’s dif­fi­culty in form­ing a united front on any given pol­icy, which may of­fer China op­por­tu­ni­ties to ad­vance its own pol­icy pref­er­ences.

What­ever the op­por­tu­ni­ties the splits within EU of­fer, the un­der­ly­ing mes­sage for China seems to be neg­a­tive. As in the United States, the mood is turn­ing against glob­al­iza­tion in the EU. In the end, that is go­ing to be dam­ag­ing for China as it seeks ac­cess to ex­port mar­kets and op­por­tu­ni­ties for out­bound in­vest­ments.

The au­thor is an an­a­lyst for Europe at The Econ­o­mist In­tel­li­gence Unit.

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