Pop­ulist lessons from Brexit

Financial Mirror (Cyprus) - - FRONT PAGE -

The af­ter­math of the United King­dom’s un­ex­pected vote in June to leave the Euro­pean Union is be­ing mon­i­tored closely. Peo­ple all over the world – and par­tic­u­larly in Europe – want to know how Brexit will un­fold, not just to man­age its spe­cific ef­fects, but also to gain in­sight into what is likely to hap­pen if other up­com­ing votes tip in favour of na­tion­al­ist agen­das.

Those agen­das are cer­tainly mak­ing a po­lit­i­cal come­back. In Ger­many, which will hold a gen­eral elec­tion in 2017, sup­port for the far-right Al­ter­na­tive for Ger­many (AfD) is on the rise, ex­em­pli­fied in the party’s strong show­ing in re­cent state elec­tions. In France, the Na­tional Front’s leader, Ma­rine Le Pen, hopes to ride na­tion­al­ism to power in next year’s pres­i­den­tial elec­tion.

The trend is not ex­clu­sive to Europe. In the United States, Repub­li­can pres­i­den­tial can­di­date Don­ald Trump has promised to im­pose trade tar­iffs on China, build a wall on the bor­der with Mex­ico, and bar Mus­lims from en­ter­ing the coun­try.

So what eco­nomic con­se­quences would a vote for na­tion­al­ism have? Judg­ing by the Brexit ref­er­en­dum, the im­me­di­ate ef­fects could in­clude fi­nan­cial-mar­ket tur­moil and a shock to con­sumer and in­vestor con­fi­dence. But this could give way rather quickly to an eco­nomic and fi­nan­cial calm. The real ques­tion is what comes next.

To be sure, the calm that has set in in Bri­tain is ten­u­ous. Pre-ref­er­en­dum pre­dic­tions that a vote for Brexit would lead to sub­stan­tial eco­nomic pain and fi­nan­cial volatil­ity re­main likely to ma­te­ri­alise. The sever­ity of the ef­fects will de­pend on how the UK and its Euro­pean part­ners ne­go­ti­ate their tricky sep­a­ra­tion, par­tic­u­larly the ex­tent to which free trade and fi­nan­cial pass­port­ing are up­held.

But, for now, volatil­ity re­mains con­tained. That can be at­trib­uted partly to Prime Min­is­ter Theresa May’s new gov­ern­ment, which has pur­posely adopted a grad­ual ap­proach to the Brexit process. May has also made it clear that she and her Cabi­net mem­bers are not in the busi­ness of pro­vid­ing reg­u­lar progress reports.

The Bank of Eng­land has also helped, by in­ject­ing liq­uid­ity into the econ­omy al­most im­me­di­ately. More­over, the BoE has con­vinc­ingly re­as­sured mar­ket par­tic­i­pants that it is com­mit­ted to main­tain­ing fi­nan­cial sta­bil­ity and avoid­ing the dis­or­der that mal­func­tion­ing mar­kets can cause.

The BoE’s vig­i­lance, to­gether with the fact that eco­nomic and fi­nan­cial ar­range­ments with Europe have yet to be al­tered, has con­vinced com­pa­nies and house­holds to post­pone plans to change their be­hav­ior. They are now wait­ing to see whether the UK ne­go­ti­ates a “soft” or “hard” Brexit be­fore they make any sig­nif­i­cant moves.

Bri­tain’s abil­ity to re­store a sense of calm amid far­reach­ing un­cer­tainty about its eco­nomic and fi­nan­cial fu­ture shows how, with the right ap­proach, po­lit­i­cal ac­tors can man­age shocks and sur­prises. Had Bri­tain’s lead­ers rushed to dis­man­tle long-stand­ing trad­ing sys­tems and other eco­nomic and fi­nan­cial ar­range­ments with the EU, be­fore de­vel­op­ing a cred­i­ble and com­pre­hen­sive al­ter­na­tive, the sit­u­a­tion could be much more volatile. Oth­ers as­pir­ing to ad­vance sim­i­larly in­ward-look­ing agen­das – be they na­tion­al­is­tic Euro­pean par­ties seek­ing to roll back in­ter­na­tional con­nec­tiv­ity or US pres­i­den­tial can­di­dates propos­ing tar­iffs that could well trig­ger re­tal­i­a­tion from trad­ing part­ners – should take note.

Of course, un­der the cur­rent cir­cum­stances, there are lim­its to the ben­e­fi­cial ef­fects of sound UK lead­er­ship. When the de­tails of Bri­tain’s di­vorce from the EU are even­tu­ally an­nounced, com­pa­nies and house­holds will re­spond, par­tic­u­larly if the coun­try’s trad­ing, eco­nomic, and fi­nan­cial link­ages with the EU change con­sid­er­ably. That re­sponse, it seems al­most in­evitable, will hurt eco­nomic growth and spur fi­nan­cial volatil­ity.

But here, too, a mea­sured and cautious ap­proach can help. The UK gov­ern­ment should do its ut­most to con­duct the most sen­si­tive parts of the ne­go­ti­a­tions with its Euro­pean part­ners in se­cret. When it is time to an­nounce changes, it should do so in the con­text of a larger pro­gramme of cred­i­ble do­mes­tic re­forms that tar­get strong, in­clu­sive growth and im­proved fi­nan­cial sta­bil­ity.

It is not easy to keep an air­plane fly­ing smoothly while chang­ing the en­gines. And that is pre­cisely the chal­lenge the May gov­ern­ment faces. It is now pre­par­ing for this ul­tra­del­i­cate ma­neu­ver by iden­ti­fy­ing and ar­rang­ing the com­po­nents of the new engine, and plan­ning for their quick assem­bly; only then will it be able to dis­man­tle the engine of Euro­pean trade with­out risk­ing heavy tur­bu­lence, or even a painful crash.

But even with a care­fully se­quenced plan in place, May’s gov­ern­ment will need to show a level of re­silience and agility far beyond what has been re­quired of its pre­de­ces­sors, in or­der to man­age the tran­si­tion with­out veer­ing off the path of growth and sta­bil­ity. The same would be true for any other na­tion­al­ist po­lit­i­cal fig­ure or party that came to power. The ques­tion is whether any of them would be equal to such a com­plex chal­lenge.

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