24 June 2016

A sad day for Britain: Brexit

The Achilles Heel that has bedevilled the UK’s economy for the last century may yet force the British public to confront an inconvenient reality: a classic balance of payments crisis with the rest of the world.

The result of this referendum may well turn out to be the start of a revolutionary period. In the course of campaigning vigorously for a Remain vote, it became apparent that a portion – now evidently a majority – of British society wanted to send a powerful message to “the establishment” and they neither knew nor cared about the economic consequences.  The tragedy will be that those who have already lost from globalisation may well be damaged the most by the eventual outcome.The Achilles Heel that has bedevilled the UK’s economy for the last century may yet force the British public to confront an inconvenient reality: a classic balance of payments crisis with the rest of the world.

Brexit voters have bought the fantasies of the Leavers, and the Prime Minister’s resignation now requires the Leavers to take full responsibility for converting fantasy into reality. If – perhaps more likely, when – they fail, those voters who bought a set of false promises will be entitled to feel utterly cheated. The political consequences will be incalculable.

In the meantime, some foreseeable consequences will begin to unfold. Some were set out in my recent paper(Insoluble Contradictions of the Leavers’ Policies: A Scenario for Timeline to Reality, 6 June 2016link for clients; link to public blog – see 6 June).

·        52% of UK voters will soon begin to appreciate that there are harsh realities that were clearly explained in advance by the much-derided “experts”.

·        The shock to confidence, as well as the destruction of wealth from the decline in the stock market, can only produce lower economic activity in the short-term.

·        At what interest rate will `somebody’ buy the UK government bonds needed to finance a rising budget deficit that responds to the “automatic stabilisers” at a time when the UK’s political system may appear incapable of delivering sound fiscal policy?

·        How will the EU-27 – as well as the rest of the world – react to a competitive devaluation of sterling? Will they really respond by swiftly agreeing trade deals that are favourable to a state that has just seized such an `unfair’ advantage?

·        Moreover, the crown jewel of the UK economy – the financial services industry – will be at imminent risk of seeing its euro-denominated business (perhaps a third of the total) forced to re-locate into the jurisdiction of the euro area to ensure the euro area’s financial stability. That will be an additional hit to the UK’s public finances and, most importantly, pose an even greater threat to the sustainability of the UK’s dramatically large deficit on its payments with the rest of the world.

© Graham Bishop