Info Service on Finance and Development (Jul16/02)
(A shorter version of this article was first published in The Star in Malaysia on 4 July 2016.)
Everyone agrees that Britain voting to leave the European Union is a gigantic historical event. What happens next and what are the effects on Malaysians, Britain and Europe?
Brexit has advantages and disadvantages for Malaysians. For families with children studying in Britain, the fall of the sterling versus the ringgit is really good news. Sterling will most likely remain weak in the future.
Brexit also benefits Malaysians intending to holiday in the UK as prices of hotel stays and other things will be cheaper.
Malaysians owning property in Britain may suffer from a likely fall in housing prices (especially calculated in ringgit terms) at least for a while until the market picks up again. But those intending to buy will benefit from the cheaper pound and the possibly declining prices.
Likewise, Malaysian companies and funds that invested in British property and businesses can expect falling values, lower revenues and reduced earnings in ringgit terms. How long this will last no one knows for sure.
Other investors looking for profit opportunities may find Britain an interesting place to pick up bargains, but should bear in mind that this is risky business.
As a country, Malaysia will not experience much adverse direct effects but like other counties may suffer indirect effects.
Although Britain will no longer be part of the EU, the terms of its trade with Malaysia will probably remain the same in terms of the tariffs charged on both sides, which are the rates given to WTO members in general.
If Malaysia signs a free trade agreement (FTA) with the EU, then Britain will not enjoy the better access to Malaysian market, nor will Malaysian products enjoy lower tariffs in Britain. To attain the same access as the EU, Britain would have to sign a separate FTA with Malaysia.
Britain is a significant trade partner of Malaysia, but not in the top ten countries. So even if there is a British recession and reduced demand for Malaysian products, it would not be that significant a hit for us.
However the indirect effects could be quite serious. Brexit is predicted by many to have a dampening effect on British, European and world economic growth. The chances of global financial turmoil have also increased.
With the mood in financial markets darkening, there are signs already of a ‘flight to safety”, which includes capital moving out of emerging markets in general. Malaysia could be affected.
The impacts of Brexit on Britain itself and Europe are already very serious and will worsen.
Since the referendum, Britain has been suffering from one big political event to another, including the leadership crisis in the Conservative and Labour parties, and the real possibility of Scotland holding a second and successful referendum to quit the United Kingdom.
Those politicians who won the Brexit referendum don’t seem to have a well thought out plan of what to do next with a time table.
Boris Johnson and other Leave leaders say they want Britain to remain in the EU common market. But the summit of 27 EU leaders (without David Cameron) last week made clear that if Britain wants free access to European trade, services and financial services, it must also subscribe to the fourth freedom – free movement of people.
But the leaders and followers of the Leave camp premised their successful campaign on precisely the opposite – achieving freedom from having to follow the EU rules that each country has to accept immigrants from other member countries.
Unless Britain accepts free movement of people, the EU 27 countries will not grant it free trade in goods and services and free access to their financial markets on the same basis as the EU members..
The restricted access to financial markets will hit the London-based financial institutions hard as London is Europe’s greatest financial centre and some banks have announced plans to move some of their operations to other European countries.
An interesting article from London gives the view that Cameron’s resignation will pass on a poisoned chalice to his successor. Why should he, who led the Remain campaign, have to be tied up in the mess of negotiating Britain’s exit which he is against?
The next PM will have to face the probably hostile 27 remaining EU countries, European Commission and European Parliament.
He or she will most likely fail to achieve the impossible goal of getting free access to the EU markets whilst denying the inflow of European migrants according to EU rules.
Perhaps this was one reason that Johnson decided not to contest for the Tory leadership. He did not want to receive the poisoned chalice.
Besides trade, finance and migration, there will also be a whole range of other issues that the new Britain will have to grapple with and reinvent, including many laws and regulations, foreign affairs, defence and security.
The negotiations of leaving will in themselves be a nightmare of complexity. The EU 27 will not give Britain an easy time. The new trade and other arrangements with the EU may take many years to complete. And the UK will have to negotiate new agreements also with all the countries with which the EU has existing FTAs.
The impact of Brexit on Europe will also be serious, with the political ramifications more serious than the economic.
The extreme right, with its anti-Europe, nationalistic and anti-immigration sentiments, see Brexit as the fall of the first domino. Parties in France, the Netherlands and elsewhere have already called for referendums on whether their countries should leave or stay in the EU.
There is a strong momentum for this movement which some European leaders fear may become inexorable and lead to the eventual break-up of the EU itself.
Perhaps this is part of what the President of the European Council Donald Tusk meant when he predicted on the eve of the British referendum that if the pro-Brexit camp won, it would be the beginning of the destruction of Britain and of European civilisation.
That was quite a shocking statement for a top European leader to make. Perhaps it was said in the height of a campaign to get Britain to remain.
But in the wake of the Brexit vote, which further widened the divisions and cracks in European societies, this prediction may come back to haunt Europe and the world.
The uneven effects of globalisation and the worsening of inequalities are also widely seen as further reasons for the referendum outcome. Much of the English population in the provinces have felt left out of the touted benefits of the economic integration into Europe and the world.
The exit vote was the ordinary working people’s way of expressing their frustration with having to bear the costs of globalisation while London and the elite, especially the bankers and financial sector, became bloated with the spoils.
The neo-liberal policies initiated by Margaret Thatcher and continued in diluted form by New Labour under Tony Blair and later by the Conservatives under Cameron widened the divisions in British society.
It became easy for the anti-EU camp to link the entry of East European migrant workers to the increased competition for jobs, housing and health services and the forces of globalisation. The Brexit vote was an anti-establishment statement.
What happened in Britain has parallels in the rest of Europe and indeed the world. There are thus lessons for the rest of Europe. The extreme opening up of economies lead to unequal outcomes among countries and within societies, for different strata of society.
It is not only the xenophobic far right but also the new leftwing parties, including in Spain and Greece, that have been bolstered by the unpopular austerity policies that are part and parcel of the neo-liberal policies.
The economic and political ramifications of Brexit have so far been a lot more unpredictable and wide-ranging than anyone expected, and this is only the beginning. How it will evolve in the near, and in the far future, and where it will eventually end up no one can properly foretell.
What we do know is that Brexit was let loose by, and will itself let loose, some large and fundamental forces which are now difficult to control.