By Greg Ip
Britain's vote to leave the European Union has cast a shadow
over the global economy. How deep a shadow depends crucially on how
the rest of the world responds, which will be driven by politics,
not economics.
The referendum's key takeaway is that sovereignty and
nationalism now rival economics as drivers of voter sentiment. That
is likely to tilt politics in the direction of less openness,
slower growth and less predictable policies.
The initial drops in the pound and global stock markets were
severe, but not cataclysmic. Worries of a financial panic similar
to the bankruptcy of Lehman Brothers or default of Greece look
unfounded for now. The Bank of England and its foreign counterparts
signaled a readiness to lend banks what they need to cover any
temporary cash outflow. Yields on British government bonds went
down, not up, evidence of strong buying demand and no sudden flight
of foreign capital.
Nonetheless, the drop in stocks is a sign of new risks
surrounding the global economic outlook. The vote ushers in two or
more years of uncertainty as Britain renegotiates its trade
relations with the rest of the world and writes rules to replace EU
edicts. The uncertainty had already depressed business
investment.
Economists have predicted a British exit would knock 1% to 6%
off U.K. gross domestic product: anything from a moderate slowdown
to a deep recession. The International Monetary Fund predicts a hit
to global economic growth outside the E.U. of zero to 0.2
percentage point.
Yet these exercises are largely guesses and can't quantify the
more far-reaching consequences of 'Brexit.' In a nutshell, the
referendum is a watershed in two related trends: the rising clout
of antiestablishment politics and the retreat from
globalization.
Globalization's retreat has been under way at least since 2008,
when global finance nearly froze and the Doha Round negotiations
for lower trade barriers collapsed. That was followed by a
sovereign debt crisis that has nearly destroyed the euro, the
European Union's crowning achievement.
These crises, and the economic slump that followed, fueled
disenchantment with the established political order. Ruchir Sharma,
chief global strategist at Morgan Stanley Investment Management,
tracks the average approval rating of governments in 20 major
democracies. It has been sliding steadily since 2010.
Yet it took another factor -- a backlash against immigration,
fueled in part by homegrown Islamic terrorism in Europe and the U.
S. -- to elevate populism from the fringes to center stage.
Last week was the first time in the postwar era that voters in
an advanced economy have affirmatively decided to withdraw from a
free-trade area (other than for a better one).
To be sure, there were reasons highly specific to Britain for
the vote. Traditional British euroskeptics are free traders, not
protectionists. They support globalization of goods and capital,
but not people or regulations. The EU is more vulnerable to
nationalist backlash than, say, the World Trade Organization
precisely because it is much more ambitious (some might say
overreaching). Faced with financial and refugee crises, some EU
members have come to regret giving up control over their monetary
policy and their borders.
Nonetheless, Brexit could accelerate the retreat from political
and economic consensus around the world. History is replete with
examples of political contagion: the fall of communist regimes in
Eastern Europe in the late 1980s; the rise of left-wing populism in
Latin America in the 2000s; and, more recently, the Arab
Spring.
On Friday, Brexit spurred leaders of far-right populist parties
in the Netherlands and France to reiterate demands for referendums
on those countries' membership in the EU, which would revive yet
again the threat of a euro breakup and an accompanying crisis.
Donald Trump, the presumptive Republican nominee, drew parallels to
his own campaign: "People want to take their country back," he said
in Scotland on Friday.
Brexit also signals the waning influence on voters of economic
forces. Elections and referendums often pit fear of economic
isolation and impoverishment against more traditional, and
visceral, considerations of national security and identity. Fear
usually wins, which explains why Scotland voted in 2014's
referendum to stay in the United Kingdom and why Greeks, despite
suffering grievously in the eurozone, don't want to leave.
But in Britain last week, "Project Fear" lost. The bloodless
recitation of economic studies couldn't compete with the conviction
of many voters that they had lost control of their own country --
to Brussels, or to immigrants -- and hadn't shared in the benefits
that globalization has showered on elites. Michael Gove, a
conservative cabinet minister and leader of the Leave movement,
said, "I think people in this country have had enough of
experts."
Elections are usually fought on the familiar terrain of liberal
versus conservative and big government versus small. That is now
shifting to nationalist versus internationalist and ordinary
workers versus elites.
This has become plain in the U.S. presidential election. Mr.
Trump last week delivered his most explicit embrace of
protectionism yet, even invoking the authority of George Washington
and Abraham Lincoln.
"Globalization...wipes out our middle class and our jobs," he
declared in a speech last week. "Our country will be better off
when we start making our own products again, bringing our once
great manufacturing capabilities back to our shores." As president,
he promised, low-paid immigrants would no longer take jobs from
Americans, and "massive new factories will come roaring into our
country."
These promises aren't based on sound economics. The principle
cause of falling manufacturing employment is increased
productivity, which means fewer workers produce more goods, and a
shift in consumer spending toward services. Higher tariffs on China
and Mexico are more likely to provoke retaliation that leaves
everyone poorer rather than bring back jobs. Hillary Clinton, Mr.
Trump's Democratic rival, has launched her own version of Project
Fear, warning that Mr. Trump's economic policies are "reckless" and
will trigger another "economic crash."
But the Brexit debate has demonstrated the limits of warning of
economic catastrophe, especially to the older, less educated
workers who have benefited least from globalization. Mrs. Clinton
has already bowed to this reality, recanting her previous support
for the Trans-Pacific Partnership, a 12-nation accord covering
trade, labor rights, intellectual property and investment for which
President Barack Obama is seeking congressional approval.
For businesses and investors, every election in coming years
brings the risk of more nationalist policies that further impair
the free flow of goods, capital and people. The financial shock of
last week's Brexit vote will eventually fade, but it is unlikely to
be the last.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
June 26, 2016 14:08 ET (18:08 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.