The Potential Consequences of Brexit

BY HAIK TER-NERSESYAN 

“When partners can’t agree
Their dealings come to naught
And trouble is their labor’s only fruit.
Once Crawfish, Swan and Pike
Set out to pull a loaded cart,
And all together settled in the traces;
They pulled with all their might, but still the cart refused to budge!
The load it seemed was not too much for them:
Yet Crawfish scrambled backwards,
Swan strained up skywards, Pike pulled toward the sea.
Who’s guilty here and who is right is not for us to say –
But anyway the cart’s still there today.”
Fable by Ivan Krylov

Now that the British voted to exit the European Union pundits are speculating on the impact that this event may have on the continent. The referendum is not binding and the British Parliament does not have to ratify it, yet taking into account a democratic discourse it is highly likely to follow suit. In essence, the fallout from Brexit has potential to become catastrophic for the EU and detrimental for the current world order. Krylov’s cart may implode and not be here tomorrow to stay.

The exit of the fifth largest economy in the world from the Union has to send chills in Brussels as well as central banks throughout the world. Trade, tourism, economics and finance are bound to take a hit due to the uncertainty that lies ahead. The already struggling EU economy has to stomach these ramifications on top of its stagnation issues.

It is still hard to quantify the overall impact of the referendum’s outcome because much depends on the developments that are to follow, such as the design and the implementation of Britain’s departure mechanisms.

These uncertainties are sure to create anxieties and will put a downward pressure on commodity prices that will impact the major energy producing states worldwide. As nationalism and isolationism are on the rise across the globe and globalization has not delivered the fruits that were expected, Brexit probably will trigger other EU states to follow suit.

Great Britain is bound to become less significant when not occupying a seat at the EU table. It is a net importer. As the British pound dives, it makes imports more expensive thus it widens the trade deficit, subsequently harming the trade balance further. It is noteworthy to mention that 8 out of top 10 countries that Britain imports from are members of the EU family.

Political ramifications are also dire. In the short-run it is expected that Scotland and Northern Ireland will renew their ambition to exit the structures of the UK. The proponents of this exit have a solid argument in favor of their ambitions. Both citizens of Scotland and the Northern Ireland have voted to remain in the European Union. After the Brexit vote, exiting the UK and joining the EU sounds rational and even justified.

A less attractive Britain is unavoidable, yet the real damage which might prove fatal pertains to the EU and the geopolitics of the region. The EU crystallizes the problems of globalization. While peripheral countries are implementing anorexic austerity, and the core of the Eurozone is inclined for a bailout, the exit of Great Britain, which has 20% of the gross domestic product of the EU, is bound to exacerbate the differences in the fragile union. Banks in southern Europe are undercapitalized and the mediocre economic performance there has a potential of exasperating the calls for disintegration. As the right wing political parties are on the rise on the continent, they may further amplify the situation and call for referendums on disintegration. For the independence-seeking Catalans in Spain, and the right-leaning leaders such as Victor Orban of Hungary in the East, the time has never been riper to take actionable steps that would match their rhetoric. The Brexit vote ratifies enough discontent to potentially create a tsunami.

These undercurrents also find echo on the other side of the Atlantic. Previously unimaginable, the emergence of racial extremism and economic socialism on the national stage find a mirror in political and economic discontent in the United States. It is paramount to recognize the vector of the political discourse. By far, the vector is pointing towards further polarization of the American polity and demonization of the globalized economy. A wider European disintegration can lay groundwork for a populist revolt against the US establishment in a not so distant future.

The absence of London at the EU table may weaken US influence in the region. The British, unlike the French or Germans, have been the strong proponents of most, if not all, US foreign policy undertakings. This can be said to be true about sanctions on Russia, where the French and Germans were less inclined to proceed forward. With the absence of Great Britain, a weakened Europe will find greater incentive to review its relations with the Russian Federation.

At the first sight it may seem that Moscow is bound to benefit from a curtailed EU. Sure, Vladimir Putin will make the best effort to increase Russia’s influence in East Europe, which he considers to be a national security concern at the periphery of his borders. Nonetheless, it is paramount to recognize that the EU is the largest trading partner of Russia and Russia is the third largest partner of the EU. The collapse of the Union will send shockwaves through Russia’s spine that it may find indigestible. The EU is also the largest trading partner of China and China is the second largest trading partner of the EU. For the already weakening Chinese economy Brexit may have significant negative consequences as well.

If Great Britain leaves the EU, the world will find a new equilibrium down the line; however, it is unknown for how long and in which forms the economic and security concerns will ramify, both on the continent and beyond.  New commodity prices and redefined centers of influence and economic relations will eventually coalesce a new world normal in which the EU lacks Great Britain’s membership. What the damage of the Brexit vote will be is unfortunately the question we are left with in the face of an uncertain future.

Image source: pixabay.com

DISCLAIMER: The views and opinions expressed in the article are solely those of the author(s) and do not necessarily reflect the official policy or position of the ERA Institute.

This article is produced by the Eurasian Research and Analysis Institute, Inc. (ERA Institute), a public, 501(c)(3) nonprofit institution devoted to studying Eurasian affairs. All views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

Share this post

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email