Breaking Down BREXIT

"The Shot Heard Round the World..."
“The Shot Heard Round the World…”

Last Thursday, in the most consequential political development in Europe since the collapse of the Soviet Union in 1991, British citizens voted to leave the European Union (EU), creating a crossroads for the post WWII European unity project, while catalyzing uncertainty and reassessment in the UK and across Europe, with global implications.

But what does it all mean?  We break it down here.

British Leadership:  As the biggest proponent of the “Remain” faction in the UK BREXIT debate, British Prime Minister David Cameron has stated that he will resign.  Cameron has telegraphed a stately transition period of 90 days, for internal party elections to choose his successor, but this plan may not hold given the furious pace of events since the BREXIT vote.

Boris Johnson, the former mayor of London, and the highest profile BREXIT supporter, has the inside track to become the next Conservative Party leader and  prime minister. But Johnson is not without his critics, both inside the Conservative Party and out, and the kind of “establishment intrigue” that so animates the Trump movement in the United States will be on full display in the UK as factions within the Conservative party jockey for advantage.

Critically, whoever emerges as the next leader will not have a voter mandate. Given the outsized importance of BREXIT decision on the UK, it may be impossible for a new Conservative government to implement the referendum without fresh elections to support the mandate.

British Politics:  by Friday morning, BREXIT had not only re-ordered the leadership of the Conservative Party, it had sent an earthquake through British politics.

The Labour Party, whose leader, Jeremy Corbyn, makes Bernie Sanders look like a raging moderate, has been struggling for relevance since its repudiation at the polls in 2015.

Since Thursday, Corbyn has been under increasing criticism for what has been seen as middling support for the “Remain” faction in the referendum.  Labour MPs worry that with a party platform that is wholly out of step with British voters, and the immediate rise of Scottish nationalists after the BREXIT vote, new elections this year could be an extinction level event for the Labour Party. Frantic efforts are currently underway to get Corbyn to step down or, failing that, to vote him out, so that new leadership can put a better face on Labour and forestall potential disaster.

Scottish nationalism, thought settled after the 2014 referendum on independence, now has a second life. The Scots voted 2-1 to remain in the EU, and the BREXIT vote provides fresh rationale to revisit the question.

Scottish First Secretary and leader of the Scottish Nationalist Party, Nicola Sturgeon, has seen her fortunes rise faster than any other public figure in the UK since the BREXIT vote. With Scottish sentiment strongly aligned with pro-EU vote, the Scottish Nationalist Party could benefit from new elections this year to significantly increase its presence in the British Parliament (currently 54 seats), using that leverage to press for a new vote on Scottish independence. As the Labour Party’s stronghold is in Scotland, all most all Scottish gains will come at Labour’s expense.

The United Kingdom: the centrifugal forces unleashed by the BREXIT vote exposed deep fault lines by demography and geography, with a majority of English voting in favor of BREXIT, but larger majorities of Scottish and Northern Irish voting against it.

While Scottish Nationalists see a second opportunity for independence, there were also new calls within Northern Ireland to end its union with the UK and rejoin the Irish Republic in the south, in order to remain in the EU – something that would have been unthinkable 25 years ago.

As a result, the very future of the United Kingdom – formed in 1707 – could now be on the line.

The process for sorting these questions out will likely make the UK a more inward looking nation, for at least the short-term. If independence and/or separation referendums do eventually succeed, the British Isles, which have been at the center of world politics for three centuries, may fade from relevance in the years to come as a break with Scotland would remove 32 percent of the UK’s land, 10 percent of its GDP and 90 percent of its oil, along with eight percent of its people.

The European Union:   at first blush, even amidst the shock,  the BREXIT vote must come as a relief to the EU administrative state in Brussels.

Now, the EU can finally get on with its business of continental integration without the priggish UK constantly objecting. The British weren’t really European, the English Channel having served as a de facto barrier to genuine union and continental fraternity. It was the UK, after all, that refused monetary union with the Euro, choosing instead to keep its pound sterling. Even the Germans  – the Germans – were willing to part with their cherished Deutsche Mark for the greater good of Euro-harmony.

With the British gone, the EU appeared to be aligning in a natural manner. Indeed, there was significant  sentiment in Brussels to punish the British through the terms of separation from the EU, so that the Brits will more fully understand the advantages of EU membership and the folly of the BREXIT vote, while warning off other would be “successionists.”

But that approach is little more than a rash, rush to judgement.

For all the hand-wringing in the wake of the BREXIT vote, the EU, as both an idea and a political entity, is in deep trouble. Indeed, instead of being the “odd man out,” Britain may very well have been at the cutting edge of a movement that is very well-developed, if mostly suppressed, within the 27 remaining countries of the EU.

Originally conceived as an open market for trade, and a forum of reconciliation after WWII, what has become the EU has morphed into a truly gargantuan bureaucracy, mostly unaccountable to the populations of the nation-states it claims to represent, aspirationally seeking the perfection of European harmony through ever more invasive regulation.

No issue, it appears, is too small for the EU to weigh in.

Bananas?  The EU has a regulation for that, stating exactly how much they can or should bend.  Enjoy cinnamon rolls?  The EU spice police have a regulation for that too, calling out the Danish for using too much in their famous sweet treats.

However, on a macro-scale, the EU’s ambitions have never kept pace with the underlying realities, whether fiscal or cultural.

The introduction of the Euro single currency in 1999, meant to further bind Europe, was a catastrophic mistake. Without companion control of the national budgets of member nations, the EU single currency treated the sovereign risk of lending to Greece as the same as lending to Germany. The sovereign debt crisis was the result. The hangover from it endures, as a poorer southern Europe tries to reconcile financial and cultural realities.

In addition, the rapid expansion of the EU to 28 members, and the end of borders between member nations, created startling but predictable demographic trends, with population outflows from poorer nations to those that were wealthier, offering greater opportunity and more generous social insurance, seriously under pricing labor markets in those more developed economies. The Syrian refugee crisis and mass migration into the EU has captured the imagination of anti-EU parties across Europe, and was part of the BREXIT conversation, but it was the migration within the EU that was the true catalyst for the BREXIT results. Foreign born Britons represented barely seven percent of the population in 1993, but that number ballooned to 13 percent in just over 20 years.

Far from being a stronger bloc with the British exit, BREXIT has starkly demonstrated the fundamental weakness of EU writ large. With the door now open, other nations in the EU will certainly press for referendums of their own (France, Netherlands, Belgium among others). Barring full scale withdrawal, it is likely that sovereign rights, not even further integration, will be an emerging EU theme. Whether they the EU bureaucrats in Brussels internalize that, and change accordingly, will be the key harbinger of whether there is any way to preserve the original European project.

European Geo-Politics: BREXIT was the best day for Vladimir Putin and the Russians since the fall of the Soviet Union. In one vote, the EU was deprived of 18 percent of its GDP, 13 percent of its population, $18 billion in revenue, and the single largest military force in the Union.

Diplomatically, the Russians have been given the gift of removing the British from the European table on the critical issue of EU reaction to Russian adventurism in Ukraine. The UK has been amongst the strongest supporters of continued economic sanctions on Russia for its takeover of Crimea and the continued fighting in eastern Ukraine. What the Russians have seen as America’s de facto agent in the EU, no longer has a seat at the table.

The flaws that BREXIT exposed will contribute to a more inward-looking, less assertive EU at just the time that Russia is re-flexing military muscles in it’s “near abroad.” With a more complaint Germany-France axis now effectively in charge of EU policy, and with the Union pre-occupied sorting out its varied political and economic relationships internally, Russia can expect a freer hand as it seeks to assert influence in Ukraine, and more ominously, the Baltic states that are both EU and NATO member nations.

The US & BREXIT: history, language and culture bind the US to Great Britain in a manner that is unique and irreplaceable. As a result, the UK will always have a friend in Washington, with the strong and deep cooperation between the two nations in trade, investment and national security issues enduring.  On the world stage, for as long as there is a united UK, the Brits will continue to be the go-to partner military support in areas of genuine threat.

Despite Obama scare tactics before the vote, indicating that a BREXIT would force the Brits to the end of the American trade negotiating line, practicality will demonstrate the hollowness of that threat. While BREXIT does effectively kill US-EU efforts to forge a free trade agreement, that effort was faltering before BREXIT in any event, between EU intransigence and growing domestic hostility to free trade in general.. It is likely that the US will move expeditiously to set up its own arrangements with the UK as soon as the distinctions of the UK-EU break become clear.

World Markets & the Global Economy: if you wonder how a vote in Britain could cause global meltdown in stocks, remember that it was Greece that triggered the sovereign debt crisis in Europe.

Markets hate uncertainty, and if nothing else, BREXIT has created tremendous uncertainty in everything from the status of Polish nationals living in Britain, to the price of imports to the UK from the continent. It will take time for that to be absorbed, and there will necessarily be abrupt fluctuations in capital flows, as companies defer decisions on longer term investment in Europe until a clearer political picture emerges.

The bigger question is whether BREXIT is the catalyst to expose an entirely different set of facts about the global economy, which has been slowing consistently, and has only been kept breathing through the life support of central bankers and printing presses, while equity markets have vastly inflated.

China remains at risk, having again devalued the Yuan to remain competitive. In the US, growth remains nearly flat-lined with QI GDP increasing less than one percent, and corporate profits barely breaking even after a horrendous Q4 in 2015. At the same time, the EU is still struggling with sub one percent growth in 2016. Russia and Brazil are in the midst of economic contractions. India, with a population of 1.3 billion, is growing less than two percent; not nearly enough to keep up with population increases. None of this bodes well for short term growth prospects.

In addition, BREXIT’s trigger to “safe harbors” has pumped billions of dollars into US Treasuries, which should have a salutary impact on US mortgage rates, but has also led to a strengthening of the dollar, which will adversely impact US exports, which have already been in trouble through a combination of soft demand and a strong dollar.

Can central bankers again save the day and prevent BREXIT from becoming a contagion? This coming week should offer clues.

What BREXIT Tells Us About Today: no sooner had the BREXIT results been announced than politicians and pundits across the pond heralded the vote as the first step in the certain rise of Donald Trump as president of the United States.

In fairness, there is no understating the larger symbolism of BREXIT and the Trump phenomenon in the US. Voters, tired and angry at an out of touch bureaucracy, full of self serving elites, circumventing the will of the people to impose unpopular policies and refuse to seriously address issues of national identity, immigration and security. The demographics of the BREXIT vote even align with Trump’s demo in the US.

But with all respect, BREXIT was both uniquely British and also about something more; the very real limitations of government-imposed harmonization in the age of choice.

“Globalization” has been blamed for the BREXIT vote, but a more refined cause would properly be called “customization.” We live in an individualized, customized world.

We can now buy only the songs we want like. We can choose which shows to watch and what news to read.

Tired of taxis? Take an Uber.

Don’t want to pay a steep price for a hotel room? Use Airbnb.

We have on-demand cars, and if you are environmentally conscious, bike-shares.

Restaurants offer customized menus and curb-side service.

Information technology offers a bonanza of cheap, reliable tools to communicate, with new channels created every day. The Internet has become a marketplace revolution in the 21st century.

In sum, the “one-size-fits-all” societal paradigm, where IBM took care of technology and AT&T took care of your calls in long since obsolete; obsolete that is, in every corner of our society, except government.

Consider that mutual funds and E-Trade have created paths to customized, self-managed wealth. At the same time, taxes paid into Social Security funds are invested at a return of less than two percent. Payment of those funds is wholly dependent on the ability of the US government to tax.

 Individuation makes Facebook, Amazon, eBay and iTunes in-demand products and services that customize life. Government, in contrast, brings you the failures of banana-bending regulations in the EU, and Obamacare in the US.

If BREXIT has a greater meaning, it is not found simply in the perceived backlash against immigration or the impact of stagnant wages and lackluster growth on both sides of the Atlantic, but rather in a natural evolution into a more accountable governance that respects individual rights and community, and which places a premium on efficiency, transparency and relevance of government action in direct proportion to prosperity.

It is, ironically the fullest expression of the progressive creed, “Act locally, think globally.”

That this is an evolution in thinking does not ensure it will be smooth. As BREXIT has demonstrated, it can disruptive, both as a wake-up call to a moribund, all-powerful bureaucracy, as well as its tangible impacts on all facets of life.  Not all of them will be good or pain-free. Growing pains along these lines will have similar impacts in other countries.

We are in a period of the great sorting out.

American political leaders across the spectrum should take note of what the British have set in motion and plan accordingly. But for the jarring reality of Donald Trump, it is American conservatives who hold the upper hand in this new world to come.