Contrary to all expectations, including last-minute voter surveys, Britain voted to leave the European Community by a margin of 52-48, or more than 850,000 votes, BBC and Sky News forecast at 5:00 a.m. Greenwich Mean Time. Midnight trading in financial markets produced record swings in currency and security prices, with gold up nearly $100 just before 5:00 a.m. and the British pound trading at just $1.33 to the dollar, down from $1.50 before the voting began.
This is NOT a global financial crisis. The hissing sound you hear is the air leaving various financial bubbles, but this is not 2008 all over again.
The British corporate sector has a strong balance sheet. Among the companies in the FTSE 100 equity index, net debt is only twice earnings before interest and taxes, slightly more than the S&P 500. Italian companies by contrast have net debt at nearly 8 times earnings before interest and taxes. The record fall in the pound sterling brings its exchange rate against the Euro to precisely where it was in 2014, before the pound rose against the European unit along with the US dollar. It’s a long-need correction that will benefit the British economy, which has suffered from an overvalued currency.
Financial authorities around the world warned of dire consequences were Britain to leave the Euro, but it’s hard to see what these might be. Britain’s auto industry is mostly owned by German companies, who will not stop producing or buying cars made in their British plants. The 2008 collapse had already cleaned most of the fluff out of the City of London, which shed more than 130,000 jobs in the years after the crisis. The global ambitions of European banks are long since gone and it is unlikely that a great deal of financial business will leave the already-shrunken City.
Britain contributes half a percent of its GDP to the rest of Europe each year, mostly to Eastern Europe; this drain on the British taxpayer will end. Most important, the ambitions of the European Commission to install a supranational government dictating fiscal and regulatory policy to its members have collapsed. Europe’s ambitions to field a common foreign policy also are in ruins after today’s vote.
It is a victory for democracy and national sovereignty, and a defeat for the Utopian ambitions of the European elite. Some sectors of the British economy (most of all export industry) will benefit; others will suffer due to the inevitable obstacles to free trade that will emerge as Britain exits.
Europe’s attention now will turn to Italy, whose $2.2 trillion sovereign debt is the same as Germany’s with an economy barely over half the size. Roughly a fifth of Italian bank loans are non-performing, and Italian banks are trading at liquidation prices. The Italians now will be tempted not merely to leave the European Union, but to breakout of the common currency–which would allow the Italian Treasury to pay back its debt in devalued local currency, and to issue IOU’s to paper over the problems of its banks. The victory in last Sunday’s Rome and Turin mayoral elections of the Five Star Movement – an expression of populist surrealism — portends a collapse of the center-left government of Prime Minister Matteo Renzi. The Brexit vote probably will set an example for the Italian populists and Euroskeptics elsewhere.
That is a serious problem — not big enough to bring down the world financial system, but enough to keep European bureaucrats running in tight circles for some years to come.
Another victor in the unexpected Brexit vote is American presidential candidate Donald Trump, whose brand of populist nationalism resonates with anti-European sentiment in Britain. Trump will point to the British vote as a defeat for elite economic management and a precedent for a popular movement to restore national sovereignty to economics.
The opinions expressed in this column are the author’s own and do not necessarily reflect the view of Asia Times.