Asia won’t be spared the waves from the Brexit vote
Dan Steinbock says whether or not the UK decides to stay in the European Union, the heightened risks will add to Europe’s already considerable economic and geopolitical troubles, affecting the rest of the world
Wherever you go in Britain, you can’t help but hear debates about the EU referendum: to “Brexit” or not, that is the question. According to polls, the battle is too tight to call.
Most projections say a Brexit could cause substantial loss of household wealth over time, falling exports, rising prices and possible recession. But what would it mean to Asia? In light of their exposure to the UK, old colonies remain most vulnerable. Among Asian economies, Hong Kong has, relatively, the biggest trade, investment and financial links with the UK. To a lesser extent, Bangladesh, Singapore and Australia are exposed, too.
China is not so vulnerable to British portfolio flows or bank claims. Moreover, its largest trade partners are the US, Japan and South Korea, not the UK. Nevertheless, since China is reliant on Hong Kong as a financial intermediary, the mainland is exposed to Brexit. And the past years have witnessed increasing economic cooperation between China and the UK, as evidenced by London’s decision to participate in the Asian Infrastructure Investment Bank and support the renminbi as an international reserve currency. A Brexit could endanger some of these achievements.
If the Remain camp wins, Europe may shift closer to a truly integrated union. In that case, a relief rally would drive the markets. The pound would appreciate against Asian currencies, emerging Asia’s stocks and bonds would benefit, while reduced uncertainty would support commodities.
If the Leave campaign triumphs, it could spark a chain reaction of further EU fragmentation. The UK would face prolonged stagnation. Markets would be in turmoil. The pound would depreciate against the renminbi and other major Asian currencies. Emerging market equities and bonds would be shaken.
In practice, the referendum outcome could prove conditional in two ways. Even if the Remain camp wins, Europe might suffer a series of crises. Conversely, if Britain exits, Europe could still prove resilient but further integration would be slower in a rigid, protectionist EU in which Germany would dictate policies. In both cases, the net outcome would reduce the benefits of export-led growth in Asia. And, whatever the outcome, it could fuel Euroscepticism that’s already on the rise across the continent.
A protracted period of economic uncertainty, market volatility and political risk is precisely what the world economy can least afford today.
Along with the migrant crisis and security concerns, the demise of the Schengen agreement and new geopolitical threats, the Brexit risk is not Europe’s only challenge. The continent also struggles with liquidity issues and systemic banking risks; inadequate fiscal adjustment that has led to stringent austerity and mass unemployment; deteriorating competitiveness and innovation; and rising debt burdens.
In Paris, labour reform demonstrations against President Francois Hollande’s socialist government will continue. In Italy, Prime Minister Matteo Renzi’s administration is seeking to reform an economy mired in corruption and a grey market. Under Chancellor Angela Merkel, Germany remains powerful even if its best days may be over. Greece is preparing for the next bailout drama. In the Nordics, the generous post-war welfare systems are coming to an end.
Economically, Europe relies on the European Central Bank’s zero-bound interest rate policy and continued quantitative easing, even though their effect is diminishing and monetary addiction cannot cure fiscal challenges. Politically, “integration without common institutions” is now shakier than in years. Militarily, Brussels has nurtured assertive policies towards Russia and in the Middle East that threaten to undermine economic prospects.
Since bailouts are not a viable option in Europe’s core economies, progress requires structural reforms. If Europe boils over, the implications will not just be regional. Nor will Asia remain immune.
Dr Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (US) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). See http://www.differencegroup.net/