Simonomics on the Brexit: What’s at Stake
WHY YOU SHOULD CARE
Because the U.K. is important in helping the U.S. counterbalance the growing strength of China and an increasingly belligerent Russia.
By Simon Constable
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
If you travel to Britain now, you can almost hear the sounds of the Clash singing, “Should I stay or should I go? / If I stay there will be trouble / And if I go it will be double.” That tune springs to mind as the people of my homeland, Britain, prepare for the Brexit referendum, in which they will decide on June 23 whether Britain exits the European Union. And there’s a lot riding on the vote.
Britain’s politicians, who at times can make Donald Trump sound measured, are venting their frustrations with the EU. The beef is basically what can London do, or not do, while still remaining inside the EU. There’s a long history of, shall we kindly say, this sort of tension. This time, a lot of it involves questions of migration and who can claim pricey British social benefits. So Prime Minister David Cameron has renegotiated the membership deal, at least enough in his view to recommend that British people vote to stay in the EU. That’s where this referendum is quite different from an election, because in the run-up to the big talks between Europe’s leaders there was every incentive to look like the country would bail. Now that the deal is done, the discussion about leaving the EU has taken on a life of its own, with a high-profile member of the ruling Conservative Party recommending people to vote to exit.
In the event of Brexit, certain experts see some financial services business leaving London for Frankfurt, Paris and New York.
It still looks like Britain might stay in the Union, although British elections can be a roller-coaster affair. Economically the scales aren’t balanced in one way. Britain is an important economy for Europe; it’s the second largest behind Germany and is home to Europe’s financial capital, London, where its dealings occasionally rival those of New York’s. But the rest of the EU has an economy that is, frankly, huge, so it too is important to Britain. In the event of Brexit, certain experts see some financial services business leaving London for Frankfurt, Paris and New York. It would be bad for London as a financial center, says Marc Chandler, the global head of currency strategy at Brown Brothers Harriman.
On top of that, there’s the uncertainty whether Brexit would stress the economy. The pound has already taken a hit, of course, “because markets will worry about the future of the U.K. outside the EU,” says Brian Hilliard, chief U.K. economist at French bank Société Générale. That uncertainty could mean money fleeing the country and less inward investment, both of which will hurt growth. And if the polls indicate Britain leaving, the sterling will fall even further.
There’s also the geopolitical consequences of a potential Brexit. A united Europe has proved to be a good counterbalance to the growing strength of China, Chandler says, and an increasingly belligerent Russia. “The U.S. has long had an interest in a strong Europe,” he says. Sure, Britain might be able to keep up its considerable naval capability — in spite of reducing its army — whether or not it’s in the EU. But the optics of the countries being united as a bloc are even more powerful at a time when Russia has been pushing President Vladimir Putin’s expansionist agenda.
Then there’s the question of national vanity. No British prime minister wants the dubious distinction of seeing the 300-year-old union of Scotland, England, Wales and Northern Ireland end. Scotland voted a firm “no” to leaving the U.K. two years ago, though it has traditionally been much more pro-EU than England. If the same circumstances existed now as in 2014, a “yes” to Brexit would likely prompt an immediate Scottish demand for a vote on leaving the U.K. It seems unlikely that any British leader would want to risk that — perhaps even more so for Cameron, given that he is distantly related to the current queen, who is known to want the Kingdom to stay united. So expect to see him devoted to some vigorous campaigning.