Extreme nationalism hurts the nation
BrexitIt hurts to divorce
Holger Schmiedingis chief economist at Berenberg Bank. He writes here regularly on macroeconomic topics.
With a narrow majority of 52 percent against 48 percent, the citizens of the United Kingdom have decided to leave the EU. Above all, the anger of many British people in economically less successful parts of England at the "establishment" has broken through. Only the cosmopolitan area of London and Scotland, Northern Ireland and the more Celtic parts of Wales have voted in favor of the EU.
A period of extreme uncertainty has begun for the UK. Politically there are four questions:
1. New government
Can a new prime minister manage to unite the utterly divided Conservatives behind him in such a way that he - or she - can actually rule? It is conceivable that the future Prime Minister, who will be appointed by the Queen without being elected by Parliament in advance, will not find a majority for his policies in Parliament. A total of around two thirds are against leaving the EU. Even if they will not undermine the will of the people on this issue, they can still make life very difficult for a new head of government. That is quite possible, although it could hit the leading exit campaigner Boris Johnson more than the less involved in trench warfare Secretary of the Interior Theresa May, who also has a chance of moving into 10 Downing Street.
2. Labor Party
Will the Labor Party also tear itself apart, as many Labor MPs blame the left-wing extremist party leader Jeremy Corbyn for the Brexit disaster? Corbyn only advertised cautiously and late to remain in the EU. The EU dropouts won the referendum mainly because traditional Labor voters did not follow the line of their own game.
Can the British nationalists of the UKIP party take advantage of the dispute within the Conservatives and the Labor Party in such a way that they can become a real threat to the mainstream parties even under the conditions of British majority voting? At least that's conceivable.
Will Scotland leave the UK to stay in the EU? Probably not given the current low oil price. But the risk is considerable that the Scottish National Party, which rules the regional parliament in Edinburgh, could soon call another referendum on Scottish independence instead of just keeping the option open.
London will remain important
The UK economy is fundamentally strong. Life goes on. But we expect companies to invest less in the coming quarters after the Brexit shock. Global companies in particular, which use Great Britain as a stepping stone into the entire European market, will probably hold back very much. This could mean that the British upswing could almost come to a standstill for the time being.
Even after the end of a short-term economic crisis, the British trend growth is likely to be slower in future, as London can no longer remain the service center for Europe to the usual extent. Because with Brexit, London will change from an “onshore” to an “offshore” center for financial and other services from an EU perspective. Thanks to its many traditional locational advantages, including the flexibility and quality of the workforce and the English language, London will remain important. But some business areas will probably have to migrate to areas directly regulated by the EU.
We do not expect a real sterling crisis. But given the UK's large current account deficit, which reached seven percent of economic output at the end of 2015, the country relies on the trust of foreign investors. If the political chaos increases, a currency crisis can no longer be ruled out.
Minor long-term damage for Europe
For the other 27 member states of the EU, too, the British vote to leave the EU is a shock. The direct economic damage can be kept within narrow limits. We expect the pace of growth in the eurozone and in Germany to slow down by 0.2 percentage points in each case compared to the previous quarter for some quarters as a result of the Brexit resolution.
From a purely economic point of view, the long-term damage for Europe is likely to remain low. It hurts a little that an important trading partner, the UK, will be less dynamic going forward. But the EU-27 earn only three percent of their economic output from exports to the other side of the channel. The somewhat lower dynamic in this segment is likely to be offset by some smaller gains in jobs that will result from the relocation of jobs from London to the continent.
For the other EU members - and above all for the euro zone - it is primarily a question of political developments. Will other countries want to follow the British example? After all, there are populists elsewhere. That cannot be ruled out. Such a departure could shake the politics and economy on the continent more. But it is probably not. In particular, the current turbulence and the possible damage that Great Britain has to adjust to can ensure that the influx of populists elsewhere is limited again in the long term.
It hurts to divorce. The risks are extremely high, in the UK even more than in the other EU countries. But even in the euro crisis, Europe showed that after all sorts of difficulties it can ultimately deal with major challenges. This ability is now being tested hard again.
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