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GLOBAL CONSECUENCES OF GREAT BRITAIN’S EXIT FROM THE EUROPEAN UNION

By: Abel M. Hibert (June 26, 2016)

During the last general elections in the UK in 2015, Prime Minister David Cameron promised a referendum to evaluate Britain’s place in the European Union. His goal was to alleviate pressure from the eurosceptics in the conservative party while also beginning to re-negotiate some issues in the British agenda within Europe, mainly with regards to migration policy due to the great movement of refugees, among other topics.

The strategy seemed sound: on the one hand, he re-negotiated with Europe, strengthening the United Kingdom’s position, while calling for a referendum that would position him as a leader who listened to his citizen’s voices. The end result should have been to stay with the European Union.

The same thing happened with the “Leave” and “Remain” campaigns as happened with the Scottish referendum. The campaign for leaving was more aggressive and striking. It wasn’t until the end, when they realized the “Independence” position was gaining tract on polls, did the “Remain” proponents reacted and began campaigning in strength. But one of the reasons the Scottish ultimately decided to stay was because of the membership in the EU, and not any long-lost love for the English.

This time, too, the “Leave” campaign was framed by clear and convincing arguments that needed little analysis or thought from the voters.

First of all was the topic of migration. They were scared with the possibility of the United Kingdom being flooded with Syrian refugees and other immigrants from the Middle East and Africa.

The second subject was that, if they left the EU, they would save 350 million pounds A WEEK. This money would be spent, instead of on Brussels bureaucracy, on improving the National Health System.

The third was a fear campaign started by international organisms such as the International Monetary Fund, the OECD and others, including European leaders and even president Obama. The message sent was that, if they left the EU, the United Kingdom would be thrown back into the Middle Ages, economic growth would be impeded, as would the British stock markets, and British businesses would be abandoned to no man’s land outside the EU.

Truly, the fact that the United Kingdom abandons the EU will have an effect on economic growth, jobs, business opportunities and stock markets, but not only for the UK but all of Europe. We felt its impact in Mexico even before the stock markets opened.

But wanting to scare people with this argument, especially coming from foreigners, is something the British people did not take well, and had the opposite effect. There is no doubt that a free flow of goods, capital and people bring more benefits. Sadly, however, globalization is not always a win-win game, at least short-term, and we have both winners and losers. On the balance, ventures like the European Union have undoubtedly brought more benefits to the member countries, including the UK.

However, the ones who have lost the most in this integration are people who have worked on the traditional manufacturing sector, whose processes have been taken to countries with cheaper workforces to maintain profitability. And sometimes, because of age, these people cannot re-insert themselves in the winning economies of the economic integration processes.

It should surprise no one that this population segment, people older than 50, are the ones that receive these messages clearly and pushed the referendum balance towards “Leave”.

On the day of the referendum, everything seemed to show that “Remain” would win by a thin margin, but at the end of the day the UK would still belong to the EU. The behavior of stock markets that day reflected this expectation: the pound revaluated 3.3% during the month, to 1.4893 dollars per pound, the highest value in 270 days. The FTSE 100 closed that day at 6,338.1 points, with a margin of 1.2% in relation to the previous day. The proceedings closed at 10pm UK time (4pm Central Mexico time). An exit poll was published then by YouGov, anticipating that “Remain” would win with 52% versus 48% for “Leave”. There was nothing to worry about. Cameron’s strategy had worked perfectly.

However, several British media began publishing the results of the referendum (I was, of course, following the BBC broadcast), and what the first numbers showed was a very different reality: “Leave” was gaining ground. I thought, along with many other optimists, that as more results started coming in, rationality would prevail. However, statistical reality and normal distributions imposed themselves. At 7:52 Central time the Brexit was winning with 51.5% votes. At that moment, the stock markets began understanding that the situation was going to be very different from what they were expecting. The futures of the FTSE were at 2.% and falling, and the pound at 2.2%. At 8:28, for the first and last time, “Remain” dominated the referendum with 50.9% of the votes. This was more heart-stopping than a UEFA final match. At that moment, I thought the statistical tendency would correct itself and it would start converging with the results of the exit poll. At 9:30pm, the “Leave” had 293 thousand votes more than “Remain”. 20 million votes were still uncounted, and whichever option won more than 16.9 million votes would triumph. By that moment, the stocks on the London market were 5.9% falling and the pound sterling was 5.5% on the red.

At 0:29pm, with 60% of the votes accounted for, “Leave” had obtained 51.3% of the votes. At that moment, FTSE 100 stocks were 7.7% down and the pound sterling losing 9.3%, obtaining its lowest value since 1985. At this time, the Mexican peso was almost 20 pesos per dollar. According to voting tendencies, it was impossible for “Remain” to win and the difference in votes surpassed half a million votes. I am sure that, at that time, David Cameron received very angry calls from Angela Merkel, Francois Hollande and other European leaders, as well as Obama, asking: “What have you done?” There must have also been meetings (videoconferences or even Skype) between heads of central banks in the United States (Yanet Yellen), the European Union (Mario Dragi) and the Bank of England (Mark Carney) to see how they would add liquidity to the stock markets, just hours before the London stock markets opened. There would have been cause for alarm among anyone responsible for financial institutions.

At 10:49 the BBC announced the UK’s exit from the European Union. The final results were 17.4 million votes for “Leave” and 16.1 million votes for “Remain”, with a participation of 72.2% of the electorate. This left a fractured United Kingdom. In England and Wales 15.2 million and 854.6 thousand people voted for “Leave”, against 13.3 million and 772.3 thousand votes for “Remain”. In Northern Ireland and Scotland 349.4 thousand and 1.7 million people voted to remain in the EU, against the “Leave” option which only garnered 349.4 thousand and 1 million votes respectively. Cities like London, Edinburgh, Glasgow, Belfast, Cambridge and Oxford mostly voted to remain, as did the youth. Felipe González said it best: “young people whose future has been decided by those who don’t have one anymore”.

Curiously, on the next day there was a massacre on all European stock markets except the London market, which had a moderate 3.15% fall while Milan (FTSE MIB) fell 12.48%, Spain (Ibex 35) fell 12.25%, France (CAC 40) 8.04%, Japan (Nikkei) 7.92%, United States (Dow Jones) 3.39% and our own Mexican Stock Market only receded 2.37%.

What is next? Many British people are now realizing that leaving was a mistake. The day after the vote, many people turned to Google to find out what the European Union was. More than 2 million signatures have been gathered to ask the Parliament for another referendum. European leaders, like the French president, have answered with spite by asking the UK to speed up the leaving process.

 

We should look carefully at the consequences this decision will have on Mexico. We export a bit more than 2 billion dollars against the 380.6 billion dollars we exported during 2015, which is not significant. But the main implication is philosophical and strategic. The Brexit vote is against free commerce and for protectionist. It is for erecting walls and isolating countries. It is against integrating economies and making a flatter world. It is against the belief that free commerce is better than protectionism. The formation of commercial blocks rather than economic isolation is what has allowed the world economic growth in the last 35 years. The European Union has allowed the European continent its longest period of peace in centuries after two very costly world wars and centuries of scattered warfare. The vote strengthens the position of populists and nationalists that seek to isolate their economies and societies. We cannot forget that, for Mexico, the biggest impact of this vote is that it improves the possibilities of a certain character to become president of the United States. It certainly does not paint a pretty picture.