First, a strong sense of independence in the U.K., and perhaps also of self importance, inherited from the U.K.‘s island status but also the U.K.‘s period of empire.
At its core here is a suspicion about Europe, but also a strong dislike of the idea of surrendering sovereignty away from its shores.
Second, nationalism, racism, anti-immigration feeling and sentiment, some historical, some new born with the new weight of immigration into the U.K., from the European Union, and elsewhere.
Much was made during the campaign by the Brexit camp that the U.K. could see net migration of 300,000+ per year over the next 20 years which they argued risked essentially changing the character of the nation, while putting huge strains on jobs, housing, education and healthcare.
Third, anti establishment feeling, and the desire to do something different. This feeling was accentuated by a dismal Remain campaign, which all too often used establishment figures, and outsiders, to lecture to the British people about what was best for them. This just turned people off. Indeed, it just accentuated the feeling that our politicians are so out of touch with ordinary voters.
Fourth, a deep sense that the EU is simply not working, with EU institutions appearing as undemocratic, unrepresentative, inefficient and corrupt.
There is a sense that the whole structure is in need of radical/revolutionary reform, and years of attempting to reform from within had simply failed. Perhaps for some only by voting to leave was there really a chance for change. There is perhaps also amongst some a sense that the EU is already in terminal decline, facing centrifugal forces which will inevitably rip it apart, and reflected in the rise of anti establishment political movements across the continent. Hence by leaving now, some would argue that the UK can gain first mover advantage.
But whatever the motives this decision will rock the U.K, Europe and the world, as the EU has become a lynchpin of the global economy, global geopolitics and security, with the assumption of an ever deepening and enlarging Union. The U.K. is, meanwhile, systemic to the global economy through the preeminent position of London as a global financial centre, to rival only perhaps New York.
It is perhaps easiest to view the impact from this decision through the prism of “winners” and “losers”, as there are likely to be many of each.
First, the losers.
The EU – will likely now go into decline, with a crisis of confidence at its heart.
Probably with this decision we are seeing the EU as having peaked in terms of global influence, geographical scope and economic power. The EU will surely now face major internal pressures for radical reform, and perhaps even other nations looking to follow the British lead.
The euro surely has to weaken, as the EU naval gazes over its future, which likely will impact on growth and development.
Aspiring new EU member states will lose a reform anchor.
EU enlargement is probably now at an end, as remaining EU countries will try and keep intact what is, without risking further over-extension. If you believe that EU accession has been a force for delivering peace, stability growth, development and prosperity across the EU’s borders, this process is likely now to go into reverse, with obvious consequences. Do I need to spell this out? But remember the continent is still awash with bitter ethnic tensions and border disputes. These could easily resurface.
David Cameron, George Osborne, and Mark Carney will struggle to survive
In terms of UK politics, the big loser looks set to be the prime minister, David Cameron.
It is still inconceivable to me why Cameron chose to go down the route of calling and holding a referendum on EU membership. During the campaign, Cameron highlighted his view of the seismic economic risks which faced the UK, if it voted to leave. So logic would question why if the risks were so immense would Cameron risk holding such a referendum? This seemed like a huge gamble. Either he did not truly believe the risks were so immense, or made a huge political miscalculation either in assuming he would be asked to honour his commitment to hold the referendum, and then his ability to win it. Therein some would argue that his decision to offer a referendum on EU membership in the Tory election manifesto for the 2015 elections was more aimed at keeping his own Euroskeptic backbenchers in check, as he assumed he would not win those elections, and inevitably the opposition Liberal Democrats of Labour Party would not push forward with the referendum plan.
It seems inevitable that Cameron will be forced from office by Euroskeptics within his own party and government, and a Tory leadership contest will ensue. Cameron might even offer to go to the people first, calling a general election as a measure of confidence in him, and to head off internal party fissures and challenges.
A question therein perhaps is if the Tories lose, and the winners are a Labour/Liberal Democratic coalition whose parties both have a pro-EU policy stance, would they then feel obliged to honor the referendum outcome, or instead seek to use this to negotiate reform of the EU, and better terms of membership for the UK? They both might opt to run campaigns in early parliamentary elections which clearly stated they will further work to keep the UK in the EU. This seems unlikely, but much could depend on the closeness of the vote.
Both George Osborne at HMT and Mark Carney at the Bank of England, so forcibly pinned their colours to the mast of Remain, it is difficult to see either of them surviving the backdraft from Brexit. Carney will be particularly exposed to criticism that he allowed the BOE to take an overly political stance when it was not required. This implies a major revamp of the UK’s economic policy team at a time when the UK is set to have to manage a difficult exit from the EU.
And the winners…
Extremes in UK politics should prosper
In the UK, those Eurosceptic Tories cannot perhaps believe their luck. The likes of Boris Johnson and Michael Gove, will no doubt be salivating at the prospect of moving to unseat David Cameron as prime minister. This could though herald splits in the Conservative Party, between the One Nation Tories such as Cameron, and a more Thatcherite, radical right of centre wing likely led by Gove, et al. This could actually then open the way for the return to power of Labour, under Jeremy Corbyn. Net net one big result is that UK politics could be pushed to the extremes. Indeed, if the Scots vote for independence, England is likely to have large structural majorities for the Tories, again opening the way for years of more radical, Thatcherite Conservative rule, which likely combined with EU exit could see radical free marketeering policies rolled out in England – which might push left leaning Wales to also follow Scotland to independence.
The Scots will push towards independence
The Scottish nationalists can perhaps also not believe their luck with this decision being the best case for securing a second referendum on Scottish independence. The fact that Scots voted to remain in the EU, while other parts of the UK voted to leave will surely build their case for a second referendum. And given the political trends through the 2015 general election which saw the SNP take almost every seat north of the border, surely second time around the Scots would vote for independence. Hence this decision could mean the end of the Union, and the likely political disintegration of the U.K. This makes it all the more remarkable that Cameron agreed to hold the EU membership vote when it clearly risked a second referendum on Scottish independence.
Anti-establishment movements in Europe, and the US will be in the ascendency.
I expect other Euroskeptic movements in Europe to follow the UK’s lead. This could see the rise of far right and far left movements, risking releasing further centrifugal forces across the continent. In the US, Donald Trump will be carefully watching the impact of Brexit. If the first round economic impacts are contained, the buckaneering agenda could play to Trump’s advantage in the US elections. If the negative economic impacts of Brexit are hard felt, then US voters might prefer to stick with what they know best, the tried and tested Hilary Clinton.
Putin will be rubbing his hands with glee
If Putin’s agenda is all about weakening Western institutions, including the EU and NATO, then Brexit will likely play to this agenda in the short to medium term at least. Also if this means the end of the eastern enlargement of NATO and the EU, this again could play to Putin’s desires of keeping the West out of Russia’s backyard in the CIS.
But the impact on Ukraine is unclear
On the one hand the demise of NATO and EU enlargement might make Putin feel less threatened in his near abroad, and less needing of intervention in places such as Ukraine and Georgia. That said, if Ukraine and Georgia continue with their reform agendas, towards European values, these “coloured” revolutions could still present a sufficient threat that Moscow would still feel inclined to take direct action to rein governments in Kyiv and elsewhere in the CIS space. With the EU and NATO weakened, Moscow might feel less constrained by the risk of sanctions, and actually more willing to take direct action, while the opportunity presents itself, and while the West is still weak. To might even extend to northern Kazakhstan, which has a large ethnic Russian population congruous to the Russian border, and where the population feel increasingly marginalised by the Kazakhisation programme.
Now while Thatcher’s UK was an ardent opponent of Moscow during the Soviet era, a “New” England with Thatcherite undertones would likely be less ideologically opposed to Putin’s Russia, with plenty of common interests in business, energy, fighting Islamic extremism and migration, and perhaps countering the longer term threat from China.
So how is this all going to play out in global markets?
The knee-jerk reaction in global markets in the first few hours of trading will be lower, as uncertainty will be at the fore in terms of how Brexit is going to be managed. However, soon after the results are known I expect global policy makers to come out in a gaggle, reassuring that “we respect the democratic wish of the British people, and will all work together to manage a smooth transition with minimum market impact”. I expect DM central banks to pump liquidity into global markets, which should ultimately underpin risk assets, USTs, gold, commodities and EM assets should rally. GBP and euro should weaken.
Over the longer term for me much depend on the political impacts of Brexit. If the Scots push for independence, and we see centrifugal forces playing out across Europe, this will be bad for regional peace, security, stability and growth/development. To counter this EU politicians will need to come out with a new vision for the EU, and EU accession candidates to provide reassurance that reform is possible. Failure could see Europe enter a new era of uncertainty and decline.
