Brexit and the bitter fruit of de-globalisation

A British exit from the European Union wouldn’t just weaken the economies of both parties, but might mark a significant step back from globalisation.

Embedded in that idea is the prospect of the partial unwinding of a number of forces that for decades have increased economic growth and the returns enjoyed by investors.

British financial markets have suffered a drubbing since the start of this year as polls narrowed on the outcome of a promised “Brexit” referendum which is now seen happening as early as June.

Sterling and British shares have dropped sharply and forecasters now see the Bank of England as being in far less of a hurry to raise interest rates.

A renegotiation by British Prime Minister David Cameron of the terms of the country’s membership of the EU is progressing, setting the stage for an agreement at a summit next month.

Europe’s experience of mass immigration and asylum-seeking has probably not helped sentiment towards the EU in Britain, and Cameron, a qualified supporter of remaining in, has good reason to want to get a vote in before fair weather brings another increase of migration to Europe’s doors.

While the issue is complex, in terms of pure economic output a British exit from the 28-member group would be a negative, crimping trade, impairing growth and worsening the prospects of British sectors like finance.

Bond investor Pimco estimates an “out” vote would shave British output by 1.0 to 1.5 percentage points in the first year, while French bank Societe Generale sees economic growth in this event as lower by 0.50 to 1.00 percentage points annually for a decade.

“The economy would suffer from lower foreign direct investment, a decline in trade, and a weaker financial sector,” Societe Generale’s Patrick Legland, who sees a 45 per cent probability of a vote to leave, wrote in a note to clients.

“In particular, the EU is the largest export market for the UK, representing 40 to 50 per cent of total exports over the past 18 months. Trade agreements would have to be renegotiated with the EU, but also with other trading partners.”

Given that potential economic growth in Britain may be low anyway, losing a half a per cent a year represents a massive impairment, and one with large implications not just in Britain.

Not only would an “out” vote change and complicate the dynamics of European reform, recent polls indicate it would embolden the Scottish separatist movement, potentially leading to a radical change in the constitution of Britain itself.

The long post-second-world-war process of the knitting together of the global economy and polity featured two huge advances: the coming together of Europe and the integration of China into the global economy.

While both of these were unarguably good outcomes, both distributed their benefits unevenly. Owners of capital and those with high skills did very well, as did the mass of rural Chinese labour which was brought into the global economy. Middle- and lower-income people in the Western world did perhaps less well, at least in the past 20 years, not sharing fully in productivity gains.

British willingness to consider leaving the EU, Scottish willingness to do the same to Britain, and Donald Trump’s popularity in the US presidential election race are all partly explained by this uneven distribution of the benefits of globalisation.

Since the 2007-2009 world financial crisis there has been a marked slowdown in the growth of international trade. Last year saw global trade grow by just an estimated 2.0 per cent, according to the OECD, continuing a run of feeble expansions.

Global trade has grown by 2.0 per cent or less annually only six times in the past and each time this has coincided with a substantial slowdown in global economic growth, but this may reflect just one more cyclical slowdown.

Yet, looking at the range of political movements which seem to be backing away from globalisation and its benefits, it seems possible that the object lessons taught by the global financial crisis about self-reliance and national control are having a real economic impact.

China, for example, may have been more willing to speed its transition to building up its domestic consumer economy after the crisis.

If Britain leaves the EU, its companies and investors will get a short and sharp lesson in the costs of backing away from globalisation. Their prospects for trade will diminish and the cost of raising capital in Britain may very well rise, at least relative to growth.

For companies and investors, globalisation has been a great deal, bringing with it a falling share of output from labour and a commensurate rise in the fruits enjoyed by capital.

But the net impact of a Britain outside the EU will be to make the operating environment for business more difficult, though it is possible that a Britain outside the EU deregulates in some respects.

This may or may not be a good thing, but investors will not enjoy the process.

Reuters