I remember dimly wondering, back in my student days in 1979, why everyone was making such a fuss about the election of a grocer’s daughter as Britain’s prime minister. It didn’t take long to figure it out. Margaret Thatcher transformed British politics, claimed an outsized role for the U.K. on the European and world stage, and unleashed a wave of market-oriented reforms — privatization, deregulation, free trade and capital flows — that remade the global economy.
The decision by British voters to endorse the country’s withdrawal from the European Union is every bit as epochal as the Iron Lady’s victory, but in a very different sense. With its 52-48 vote, Britain has not only turned its back on two generations of closer ties with its European neighbors, it has given a resounding vote of no confidence to globalization. The referendum is an historic turning point for the U.K. The only question is how far the shock waves will spread, and how much of today’s world they will sweep away.
The financial fallout was immediate. The pound, which briefly rose above $1.50 Thursday evening on early polls suggesting a Remain victory, plunged to a 31-year low of less than $1.33 before recovering to just above $1.36 on Friday (this morning it was back below $1.32). Stocks fell more sharply on the Continent and in Japan than in the U.K., reflecting fears of global fallout and a belief that a weaker pound will cushion the impact on the British economy.
Central banks, led by the Bank of England, vowed to provide liquidity and act as a stabilizing influence in markets, but that risks exacerbating the excessive reliance on monetary policy that defines the global economy today and leaves it vulnerable. British and European bank stocks, which stand to suffer from a continuation of zero to negative interest rates, were hammered Friday. The yield on the ten-year U.S. Treasury plunged 19 basis points to 1.56 percent, suggesting few believe that the Federal Reserve will raise rates anytime soon.
The conventional wisdom is that Friday’s shakeout was more 1987 than 2008: a financial shock that won’t derail the underlying economy — with the exception of the U.K., which most analysts see headed for recession in the near term. “This is a major shock to the U.K., but a local one,” says Stephanie Flanders, chief market strategist for the U.K. and Europe at J.P. Morgan Asset Management in London. “We don’t think it poses a fundamental threat to the global recovery.”
That said, the global economy remains highly vulnerable. Japan is stagnant, Europe and the U.S. are growing only modestly above stall speed, China remains in slowdown mode and many emerging markets (think Brazil and Nigeria) are suffering from recessions, bad politics and commodity price weakness. The Bank for International Settlements warned Sunday that low productivity growth, high debt levels and a paucity of policy tools with interest rates already at record lows posed a “risky trinity” for the global economy.
Although it is likely to have profound economic consequences, Brexit is an inherently political event. The Leave campaign focused heavily on fears of rising immigration, which rose last year to 333,000 on a net basis in the U.K., far above the tens of thousands that Prime Minister David Cameron had promised to achieve. Boris Johnson, the Leave campaign leader and early favorite to replace Cameron as prime minister, portrayed the vote as a chance for Britons to “take back control” of their country from a remote and unelected EU bureaucracy.
Virtually no one in the Remain camp, and certainly not Cameron, dared mention that the Brussels bureaucracy was in no small part a creation of Thatcher’s. In the mid-1980s, when Europe was suffering from a bout of political and economic stagnation, Thatcher made common cause with Helmut Kohl, François Mitterrand and Jacques Delors to complete the EU’s single market. Hers was an expansive vision that sought to spur competitiveness and encourage entrepreneurial activity by lowering borders. The Single European Act of 1986 set out concrete measures and a timetable for fulfilling the bloc’s four fundamental goals — free movement of goods, services, capital and people. The act greatly expanded the use of majority voting to drive through hundreds of rules changes, with much of the work led by Britons such as Lord Cockfield and Sir Leon Brittan. The act was to Europe what the World Trade Organization was on a global level a decade later: a foundation stone for a new era of globalization.
Today, globalization lies largely discredited in the countries that had advanced its cause most fervently, the U.K. and the U.S. We take for granted many of its benefits — cheap goods, easy travel, wider job opportunities for those with the right skills and connections — while decrying the increasingly evident costs of stagnant middle-class incomes, large-scale immigration and growing inequality. There is no shortage of populists eager to take advantage of a mounting sense of insecurity, but no one has articulated a clear and positive vision for the future, least of all the Brexit supporters.
Consider Boris Johnson. At his moment of supreme victory just hours after the result came in, the former London mayor did not boldly proclaim an agenda for a post-EU era. Instead, he urged caution and delay. Britain, he said, should not immediately trigger Article 50 of the Union’s governing treaties, which sets a two-year timetable for negotiating withdrawal. It seems EU opponents were very clear on what they wanted to leave but were unprepared for forging their country’s new role in the world.
The danger of unintended consequences, beginning with a potential breakup of the United Kingdom, is great. Nicola Sturgeon, the First Minister of pro-EU Scotland, has threatened to block U.K. legislation triggering an EU exit or to hold a fresh referendum on Scottish independence so the region can maintain its EU links. The Irish republican party Sinn Fein is called for a referendum on Irish unification, noting that voters in Northern Ireland rejected Brexit. The referendum result has left the U.K.’s two major parties in turmoil. The ruling Conservatives face a months-long battle to decide a successor to Cameron and a negotiating strategy to adopt with the EU, while several pro-EU politicians in the opposition Labour Party have resigned their shadow cabinet posts to protest the flaccid referendum campaign of party leader Jeremy Corbyn. The idea that Great Britain could become little England is not far-fetched.
The risks of European fragmentation are equally great. Right-wing parties in Denmark, France and the Netherlands have demanded their own referendums on exiting the EU, while leaders in Hungary and Poland have demanded greater national autonomy to deal with immigration and other issues.
In the past, one could have expected the electoral shock to produce a push for closer integration, just as Denmark’s initial rejection of the Maastricht Treaty back in 1992 ended up spurring the bloc on toward launching the euro. Today, however, there is little sign that Angela Merkel is prepared to push for deeper integration among the euro area’s core members, fearing it could alienate the rest of the bloc and fuel fragmentation. The Franco-German partnership that has led the EU so many times before is inoperative because of François Hollande’s political weakness. Instead of a bilateral meeting ahead of this week’s EU summit meeting in Brussels, Merkel has invited Hollande, Italian Premier Matteo Renzi and EU Council president Donald Tusk to dinner in Berlin on Monday.
As for the U.S., Donald Trump was quick to try to capitalize on Brexit, welcoming the vote at his Turnberry golf resort in Scotland on Friday and seeing it as a parallel to his call for taking back control of U.S. borders (seemingly oblivious of the fact that Scots had voted not to leave the EU). No one should underestimate the degree to which the fears that motivated British voters will be present in U.S. voting booths in November. Whether Trump can win anxious voters more than he repels others remains to be seen, but the political mood leaves President Obama’s signature trade deals — the Trans-Pacific Partnership in Asia and Transatlantic Trade and Investment Partnership with Europe — hanging by a thread.
Brexit has brought one era to a close without defining a successor. That uncertainty will test politicians, markets and ordinary citizens for some time to come.
Follow Tom Buerkle on Twitter at @tombuerkle.