Global Implications of Brexit
Published on 2016-06-29
In this report you will read Control Risks' view on geopolitical implications, global economic implications, global security implications, and European implications of the Brexit.
The UK on 23 June voted in a referendum on the country’s EU membership, and 51.9% of voters chose Brexit, the option of leaving the EU. British Prime Minister David Cameron on 24 June tendered his resignation, which is likely to take effect in October when the ruling Conservative Party chooses his successor. The new prime minister is likely to trigger the mechanisms to start the formal process of the UK’s departure from the EU, which should take around two years.
- Brexit is a crisis of globalisation and yet another indication of resurgent nationalism in global affairs. The UK’s rejection of the EU marries traditional British euroscepticism with general Western disillusionment with globalisation, simmering since the 2008-09 financial crisis. It is the furthest step yet in the pattern of right- and left-wing populist insurgency against ‘elite’ political and economic establishments, and probably a harbinger of further political shifts in Western countries against globalisation. The vote will strengthen nationalist political movements across Europe, and sharpen lines of international confrontation and competition.
Anti-immigrant sentiment apparently played a major role in mobilising the Brexit vote. The UK government did not keep pledges to dramatically reduce immigration, much of it from recent EU accession countries from Eastern Europe, and there was substantial overlap between Brexit voters and regions heavily affected by immigration. In addition, the Brexit debate incorporated concerns about the EU’s ability to handle illegal migration from the Middle East and North Africa. Ironically, even as the EU’s deal with Turkey successfully slowed illegal migration in the second quarter of 2016, it fuelled concerns about Turkish accession to the EU. Brexit ensures that there will be a significant shift in UK immigration policy within the next few years, which is likely to impair hiring by multinational companies.
Brexit will undermine several pending trade deals. The UK is one of the staunchest supporters of both free trade and multilateralism, alongside the US, even in the face of mounting popular opposition to both. Cameron’s government, in particular, was a major supporter of the stalled US-EU Transatlantic Trade and Investment Partnership (TTIP). Brexit, however, will eject the UK from the TTIP negotiations, taking it – in US President Barack Obama’s words – ‘to the back of the queue’ in US trade negotiations. Cameron also supported the EU-Canada Comprehensive Economic and Trade Agreement (CETA), which was concluded in 2014 but still requires ratification. Brexit, presumably, will force the UK outside CETA as well. Finally, Brexit will undermine negotiations between the EU and the Gulf Cooperation Council (GCC) on a free trade agreement. As for trade with the EU itself, future UK limits on free movement of people would preclude membership of the EU Single Market.
Brexit is of particular strategic concern to the US. The Obama administration came out forcefully against Brexit, as did Democratic presidential candidate Hillary Clinton. It is primarily concerned that Brexit damages Western solidarity and undermines the liberal democratic order promoted by the US since the end of the Second World War. The US is also concerned that Brexit will increase the drift in US-UK military and strategic relations since the end of the Iraq War (2003-09). However, populist sentiment is probably more sympathetic to Brexit, given similar concerns about globalisation and immigration. Indeed, presumed Republican presidential candidate Donald Trump – currently visiting Scotland – congratulated the UK on the vote. That said, contrary to the social media consensus, Brexit does not substantially improve Trump’s prospects of becoming the next US president.
Snap Chinese reaction to Brexit is largely muted. The UK government has assiduously courted Chinese investment and sought to strengthen bilateral relations over the past year. Brexit is likely to further strengthen China’s leverage in its relationship with the UK.
Geopolitical impacts in the Middle East and North Africa are also likely to be limited. The UK is likely to retain strong bilateral relations with Saudi Arabia and the Gulf states, but these nations will be concerned about the UK becoming a weaker and more distracted partner. However, the country stands to become even less relevant to North Africa and the Sahel region, where the EU and France are the main players. Brexit could provide a platform for more independent UK engagement with Iran, but that depends heavily on the shape of the next British government.
Brexit will have a short-term negative impact on sub-Saharan Africa, mainly through general global volatility and increased political risk aversion to emerging and developing markets. Countries with close UK relations, such as South Africa, Nigeria and Kenya, could see a more significant impact. As a result of the looming change in the British government, Brexit could have an impact on the UK’s development assistance commitments in sub-Saharan Africa. Perhaps more importantly, the Brexit vote pushes sub-Saharan Africa down the British and European policy agendas.
- Brexit benefits Russia’s confrontation with Europe and the US. Russia’s position is strengthened by anything that undermines EU political cohesion and NATO security cohesion. The EU on 21 June extended sanctions against Russia, while NATO on 14 June agreed to deploy additional forces to Poland and the Baltic states – including a contingent from the UK – in response to unprecedented Russian military exercises in the region. European disarray in the post-referendum period could provide Russia with an opportune moment to strengthen its positions in the Baltic Region and Mediterranean Sea.
Global economic implications
- The Brexit shock increases the likelihood of a global economic downturn. The global economy is fragile due to the sharp slowdown in emerging market growth and persistent weak growth in the US and Europe since the 2008-09 crisis. With public debt high and interest rates at historic lows (and already negative in much of Europe), policymakers have few fiscal or monetary policy options remaining to stimulate growth. Brexit could push this situation into an overdue global slowdown, or even recession. However, the Group of 7 (G7), which includes the UK, stated that it is prepared to respond to market volatility in the wake of the vote.
The Brexit shock increases the likelihood of an emerging market crisis. Emerging market debt – especially private sector debt – was already at historic highs, raising the risk of a crisis. Brexit will force a reappraisal of political risk across Europe and in many emerging markets, and potentially cause financial and currency volatility as positions are unwound. These factors could increase financing costs for emerging market sovereigns and companies.
Brexit is likely to take a US Federal Reserve interest rate rise off the table in 2016. The US Federal Reserve on 15 June already pared expectations of a further rate rise due to uncertainties about the durability of US growth and the threat of Brexit. The reality of Brexit will force the Fed to keep rates on hold until economic impacts begin to materialise – and especially if these impacts turn out to be as negative as most projections.
Brexit will put a ceiling on the recent rise in commodity prices. Even if underlying supply-demand fundamentals are improving for energy and mineral commodities, Brexit will hit demand forecasts and suppress future prices as the economic situation unfolds. A prolonged period of lower prices will increase the threat of a price shock down the line, due to continued underinvestment in higher-cost supply.
Global security implications
- Islamic State (IS) is celebrating the Brexit vote, which it describes as a motivation to conduct further terrorist attacks in Europe. An official IS communication channel on 24 June released a statement describing Brexit as a consequence of its terrorist campaign in Europe and Syria since early 2015. (A goal of IS’s campaign and shift in strategy towards transnational attacks – including the use of migrants and migration routes – is to weaken and fracture European security and political cohesion.) IS has always been opportunistic, and the referendum result predictably prompted calls for further attacks in Europe, specifically the UK, Belgium and Germany.
We maintain that the threat of right-wing extremist violence in Europe has increased. The run-up to the vote was marked by the apparent political killing on 16 June of pro-EU Labour MP Jo Cox by an assailant with links to some far-right organisations and a history of troubled mental health. While isolated, the incident reflects the bitter polarisation of politics in the UK in recent years, including during the referendum campaign. More broadly, Control Risks has recorded a sharp increase in the frequency of right-wing violence, mostly in continental Europe and mainly targeting immigrants and asylum seekers.
- The Brexit vote means that the EU’s default policy option of ‘muddling through’ is no longer tenable. Confidence in the EU’s leadership has been severely depleted, from the handling of the continuing Greek debt crisis to the more recent migration crisis. While national leaders and European Commission officials profess a desire for further integration and ‘European values’, there is a general consensus that change is coming to the EU, even if it remains unclear what that means. At the very least, EU policy is likely to be forced to make more concessions to national sovereignty, particularly around immigration and border security.
- Brexit will strengthen the populist surge across Europe. Both right- and left-wing populist parties will call for increased autonomy and, to varying degrees, for powers to be transferred back to the member states.
- Italy: The vote does not increase the immediate likelihood of an EU referendum. Victories on 19 June in the Rome and Turin mayoral contests bolstered the populist Five Star Movement’s (M5S) position in Italian politics, and Brexit will strengthen M5S’s call for a referendum on Italy’s EU membership. However, the 2018 presidential election is still far enough away to limit the likelihood of a vote in the near future.
- Netherlands: An EU referendum remains unlikely, but is likely to dominate the political agenda until the 2017 elections. While Geert Wilders, leader of the controversial right-wing Freedom Party (PVV, the largest party based on intention to vote figures), immediately called for a similar in-or-out vote, current Dutch legislation on plebiscites would make it difficult to organise such a vote. A corrective referendum can only be held in response to laws already adopted by parliament and the support of the left-wing Socialist Party (SP) alone would not be sufficient for a parliamentary majority that would allow the PVV to force through a consultative referendum.
- France: Brexit does not significantly improve National Front (FN) leader Marine Le Pen’s presidential prospects. Like Wilders,Le Pen immediately called for a vote on ‘Frexit’. However, she would need to win the presidency in next year’s election to organise a referendum, and this remains unlikely under France’s two-round presidential system. In any event, unlike the more eurosceptic UK, only around a quarter of French voters would support leaving the EU, according to polling carried out before the UK’s referendum.
- Nordic states: The likelihood of similar referendums in Denmark or Sweden remains low. While the anti-EU Danish People’s Party and their brethren the Sweden Democrats have become increasingly politically influential in recent years, there is a relatively strong political consensus in support of EU membership. That said, eurosceptic parties in Denmark and Sweden are likely to push for a reassessment of relations with the EU, in particular on immigration issues. In response to the continuing European migration crisis, Sweden on 21 June significantly tightened migration and asylum restrictions, after introducing border checks in January 2016. Denmark (and Norway) also re-introduced border controls in January 2016; these have been extended until November.
- Germany: The federal government will remain in pro-EU hands. Alternative for Germany (AfD) has strongly built its vote share in 2015-16 after mixing its previous eurosceptic stance with a hard line on the migration crisis. Nevertheless, AfD remains far from attaining levels of support that would make it a serious contender for the federal government and, with the traditional power-holding parties being strongly pro-EU, it has no natural allies to support its call to hold a referendum on Germany leaving the EU.