An alternative perspective

15 August 2016

The World Post-Brexit

Ian Bremmer, President, Eurasia Group

The initial shock following the Brexit vote has worn off and investors now appear to recognise that we’re in for an extended period of tense negotiations. Around the world, governments and market players are weighing up the potential damage. The extent of that fallout will depend on decisions that are yet to be made.

In the coming months, the UK’s Prime Minister Theresa May will lead an effort to win as much access as possible to Europe’s single market with as few concessions as possible on the free movement of EU citizens across the UK’s borders. She must persuade suspicious Brexitbackers in the UK that her negotiating compromises do not betray their cause, win concessions from hardbargaining Europeans anxious to prove that the costs of leaving the EU are prohibitive, persuade angry Scots that England and Scotland are still ‘better together’ by giving them a voice but not a veto, and fend off a press eager to amplify every perceived misstep. Other than that, her job will be easy.

The impact of Brexit on the rest of the world will depend largely on the type of deal May is able to forge with EU leaders. She would love to win an agreement that allows the UK a relationship with the EU similar to that enjoyed by Norway, a member of the European Economic Area but not the EU. That outcome would provide privileged, though less than total, access to the single market while still requiring the UK to contribute to the EU budget and accept EU regulations. Europeans are unlikely to agree to such a favourable arrangement. A ‘Switzerland model’ would force the UK to continue to accept free movement of labour from other EU states while having to forge individual agreements with other EU members to gain partial access to the single market.

Britain is more likely to end up with an arrangement similar to Canada’s, allowing for a ‘comprehensive economic and trade agreement’ that provides some access to the single market without having to open borders to EU workers or help bankroll the EU bureaucracy. But even this result is not assured. Europeans have most of the negotiating leverage. If a single EU country dissents, the UK is left with nothing.

Transatlantic Impact

Looking towards Europe, the first worry for investors is that Brexit will encourage exit referenda in other countries, particularly in France and Italy, the EU heavyweights where public support for such a vote is highest. Yet, new referenda are unlikely for the time being. Even if they happen, voters are unlikely to choose exit, because the fallout for citizens of member countries in both the euro area and Schengen agreement on open borders would be much higher than for the UK.

That said, Brexit has already entered the political bloodstream of every major country in Europe. In Germany, Angela Merkel will face greater pressure ahead of national elections next autumn. Anti-immigration sentiment is running high in a country that has welcomed many more foreign migrants than Britain has – and from Syria and Afghanistan rather than Poland and Romania.

No one on Earth is more closely identified with open immigration than Merkel. She must also contend with competing pressures on how generous or demanding she must be in negotiations with May.

In France, Marine Le Pen, leader of the populist, rightwing Front National, has promised a Frexit vote. She is unlikely to be elected president. Even if there were a vote, France is unlikely to follow Britain’s lead out of the EU, because the evident stresses of exit on Britain will likely provide a cautionary tale ahead of next spring’s election and because EU leadership remains a point of pride for many French voters. Still, anti-EU sentiment will continue its rise as a force in French politics.

In Italy, only the far-right Northern League, which has little chance of winning real power, has called for an exit vote. But the much more popular Five Star movement wants a referendum on the euro. Prime Minister Matteo Renzi won’t allow that, but Five Star populists might well win power at elections in 2018. Even in that case, Italian law requires a constitutional amendment approved by a majority in both chambers of parliament to hold even a non-binding referendum.

In the Netherlands, Geert Wilders has called for an EU exit vote, and his far-right populist PVV are riding high in recent opinion polls ahead of elections next March. Yet, the risk here is less that Wilders will control the next government than that he will condition support for any incoming coalition on a pledge to hold a vote – and that other parties will agree because, like David Cameron, they believe they can avoid defeat.

In Austria, the far-right Freedom Party (‘FPO’) will probably use the promise of an exit referendum to finish first in parliamentary elections in 2018. An FPO government will then use the Brexit precedent and threat of an Austrian vote to push the EU for concessions on border controls, government spending and other issues.

In Denmark, Eurosceptics will watch closely to see what sort of deal May can win for Britain. In Portugal, some officials will use the threat of a referendum to push back against threats of EU sanctions in response to the government’s failure to meet mandated fiscal targets. In Eastern Europe, governments with populist leaders (Poland, Hungary and Slovakia) can use their right to veto any deal with Britain as leverage to win concessions from the EU on issues they care about, fragmenting European unity even further.

Across the Atlantic, Brexit matters much less. Much has been written about the possibility that Donald Trump can capitalise on the anxiety over immigration that boosted support for Brexit to win November’s US presidential election. That’s unlikely. The US electorate this autumn will be much more racially and ethnically diverse than the electorate in the UK, and though the two countries have a similar percentage of foreign-born residents, EU rules have doubled Britain’s share in just the past 15 years.

Immigration is a much older story in the US, and its impact is less keenly felt than in a country much closer geographically to Europe’s migrant crisis. That said, Brexit will change Washington’s view of the value of the ‘special relationship’. The US and UK will remain close allies, for practical, cultural, and historical reasons. NATO will continue to bind them closely together on security issues, particularly in Europe and the Middle East. But commercial ties with a Britain no longer inside the EU will be less valuable in years to come.

Beyond the West

Russian President Vladimir Putin is probably as pleased with Brexit as any leader in the world. Though Britain’s EU withdrawal will take time, its views on security questions already carry much less weight, diminishing Britain’s role as one of Europe’s toughest Russia hawks. Putin probably sees a new opportunity to win a relaxation of EU sanctions on his country. Another advantage for Moscow: Brexit negotiations will occupy the time and energy of EU leaders over the next two years, slowing momentum of EU outreach to former Soviet republics, Ukraine and Georgia. The downside for Russia is that slower economic growth in Europe will weigh on oil and natural gas prices, a crucial source of revenue for Russia’s government and a much bigger factor than sanctions in Russia’s sharp economic slowdown.

Brexit is not good news for China, because a weakened Europe undermines the value of Chinese-EU trade relations and makes it more difficult for Beijing to coordinate with the EU and the UK on political and security questions. China’s leaders need steady economic growth, which depends to a large extent on international peace and stability. Stability is served by an economically strong and steady US and Europe.

Fears of a near-term hard landing of China’s economy have dissipated since the market turbulence that began 2016, but a Brexit-driven slowdown in European demand over the next three to five years will quickly revive market concerns about the power of China’s economic engine, the strength of its currency, and the sustainability of its debt. As a result, Brexit will bolster the argument of those Chinese officials who are calling for a more aggressively pro-growth approach to policy. It will become that much more difficult for President Xi Jinping to limit state stimulus spending while keeping overcapacity cuts in heavy industry and other ‘supply side’ reforms on track.

Finally, there is the broader impact. Even before Britons voted for their country to leave the EU, the value of the transatlantic alliance, the most powerful coalition of capable and like-minded allies in history, was eroding. This partnership has been crucial for international security and the stability of the global economy. US-European trade and investment ties have fuelled tremendous growth.

Working together, US and European leaders have advanced the cause of democracy, individual liberty, good government, rule of law, and the market-based values that have helped lift hundreds of millions of people out of poverty around the world. Many times, Britain has acted as a crucial bridge between American and European policymakers. Following Brexit, Europe and the US will only grow more estranged as each side weighs up how best to respond to China’s rise, repel Russian adventurism and manage conflicts in the Middle East. That’s bad news for the entire global economy.

Ian Bremmer is president of Eurasia Group, the world’s largest political risk consultancy. He is also a columnist for Slate, a contributing editor at The National Interest, and a political commentator on CNN, Fox News and CNBC.

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