The Brexit vote came as a great shock to the British government, which was totally unprepared for the result. Neither United Kingdom Treasury nor Foreign Office politicians and civil servants had prepared a “Plan B” in the event of a Brexit vote. The decision to call a referendum was a reckless political gamble by Prime Minister Cameron, designed to satisfy sections of his own party, and not taken in the interests of the nation as a whole. The outcome, a vote to exit the EU, will have profound consequences, which is why Mr. Cameron was forced to resign. The referendum – which is non-binding and has advisory status – does not just threaten an exit from complex EU legal entanglements and trade agreements, but also threatens the breakup of the UK itself. As such, the British EU referendum will have long-term economic and structural consequences for the global financial system.
Theresa May’s election as Prime Minister was welcomed by financial markets and by the British establishment.
The Conservative Party, whose leadership quickly became aware of the threat posed not only to the government, but also to the party’s future electoral fortunes, was ruthless in its handling of the succession. Mrs. Theresa May was appointed leader of the party, and therefore Prime Minister after successive Conservative politicians had committed political versions of hara kiri. The Labour Party, the government’s main opposition, ignored the the catastrophic failures of Mr. Cameron, and on the Monday following the Brexit vote, allowed him to take leave of the House of Commons in high spirits. Instead Labour turned in on itself, launched a full-blown attack on its elected leader, and embarked on what has been described as an internal “civil war.”
Mrs. May’s election as Prime Minister was welcomed by financial markets and by the British establishment. She is widely regarded as a political “grown-up” and “a safe pair of hands.” Her first action was to put the politicians that had led the campaign to leave the EU in charge of the complex process of disentanglement, and of negotiating new trade agreements with both European and other countries. This is seen in some circles as a way of forcing these politicians (including newly appointed Foreign Minister Boris Johnson and David Davis, so-called “Brexit Minister”) to take the rap, and face the consequences of their “Leave” campaign. Because trade negotiations have in the past been handled at the EU level, there is a severe shortage of trade negotiators within the British civil service, which will further hamper progress. Only time will tell whether these ministers succeed or fail in their ambitious tasks.
In the meantime, Britain faces major political as well as economic threats.
Political threats include the possible breakup of the UK. Scotland’s devolved government seems determined to stay within the EU and is looking for a way of breaking away from the rest of the UK. It is hampered in this by domestic political opposition to the contractionary policies of the Eurozone; by the fall in the oil price on which the Scottish economy is dependent; and also by the fact that Scotland does not have its own central bank and monetary independence, but instead relies on the Bank of England. Of course Scotland could mimic Iceland and establish its own central bank and currency, but this would invite greater economic risk.
Scotland’s devolved government seems determined to stay within the EU and is looking for a way of breaking away from the rest of the UK.
Another political threat is posed by the situation in Northern Ireland. The leaders of the Ulster Unionist Party voted for Brexit because they resent the open (European) border between the North and Ireland. The predominantly Catholic Sinn Fein by contrast, advocated membership of the EU in order to maintain the open border between north and south, and in the hope of creating a united Ireland. The Good Friday Agreement which brought much longed for peace to Northern Ireland, relies for its continuation on open European borders. The Irish Prime Minister Edna Kenny has just announced that he wants negotiations on Brexit to leave the door open for an all-Ireland EU membership. This has rattled politicians on all sides, who rightly fear the resumption of a civil war between Protestants and Catholics in Northern Ireland.
In the mean time, there is growing disenchantment in England with the political class deemed to be “remote” from the lives of ordinary people. And there is anger at an economic system that is seen to suppress the incomes and public services of “the many” while “the few” have grown wealthier since the 2007-9 Great Recession. As the Bank of England’s chief economist, Andy Haldane has argued, the British economic pie (as measured by GDP) has grown substantially larger since 2009. But so too has the number of people eating it. “Taking the two together” he said in a recent speech, “GDP per head has risen significantly more slowly than aggregate GDP since 2009. Indeed, GDP per head today is only around 1 percent above its pre-crisis peak…National income per head suggests there has scarcely been any recovery…Half of all UK households have seen no material recovery in their real disposable incomes since around 2005. Or, put more evocatively and provocatively, the majority of UK households have faced a ‘lost decade’ of income.”
Finally, there is deep resentment on the impact of increased immigration from Europe. As economist Jo Michell has argued, “fear that immigration undermines living standards and increases precarity (in Britain) is strong. The anti-European political right has harnessed this fear in a cynical attempt to exploit the insecurity of working class voters in the era of globalization.” The impact of high immigration levels has coincided with the Conservative government’s (and Chancellor George Osborne’s) policies for “austerity.” In an ideological assault on the state, the government has taken the opportunity of the financial crisis to cut public services and to suppress the wages of public servants. Unfortunately, these cuts, combined with a shortage of housing and a rapidly increasing population placed acute pressures on Britain’s National Health Service and other public services. Resentment over these pressures is widespread.
There is deep resentment in the UK on the impact of increased immigration from Europe.
However, the biggest economic threat that faces Britain is its high current account deficit. Britain has relied for too long on “the kindness of strangers” to finance the deficit between the goods and services it imports and those it exports. The deficit in the three months to December was 32.7 billion pounds, the equivalent of 7 percent of GDP in that quarter, said the Office for National Statistics (ONS). For 2015, it came to 96.2 billion pounds or 5.2 percent of annual GDP. Both figures were the highest since records began in 1948.
So what lies ahead? The only certain prediction is that of uncertainty. Above all, uncertainty as to whether Britain can continue as a union of Scotland, Northern Ireland, and England. Uncertainty as to whether secession from the European Union will be balanced by bilateral trade agreements with other nations, and uncertainty that Britain can continue to rely on “the kindness of strangers”.
We will watch this space with some trepidation.
 Jo Mitchell, “Immigration brings both benefits and costs – but no reason to Leave,” 2 June 2016, https://criticalfinance.org/author/jomichell/