Home > Uncategorized > Brexit: The day we entered the eye of the maelstrom

Brexit: The day we entered the eye of the maelstrom

from Thomas Palley

In years to come, the Brexit referendum may come to be seen as the day we entered the eye of the maelstrom that now promises enormous destruction. The immediate consequence looks to be a possible financial crisis, but even if that is avoided the other costs of Brexit will not be.

The European economy was already on the outer circle of the maelstrom. Brexit has swept it into the eye, accelerating the process whereby social alienation and bad economic outcomes produce bad political outcomes, and bad political outcomes produce worsened economic outcomes and further social alienation.

Economic implications

The leading edge of events will be financial markets. Even if an immediate financial bloodbath is contained, the reasonable expectation is for significant downside turbulence over the coming months that will ripple into the real economy. Moreover, a bloodbath now would not be panic. Instead, it can be rationally justified by the economic and political outlook and the fact that asset markets were already richly valued.

British financial markets and the British economy will be the epicenter. The shock to London’s stock market will hit wealth and household confidence, negatively impacting consumer spending and the United Kingdom (UK) real economy.  

Britain’s real estate market (especially London) was already highly priced, and it is now very vulnerable to reduced local and foreign buying. British banks are financed in sterling and a lower sterling exchange rate has unpredictable negative implications for them and their counter-parties.

Business will cut back further on investment in the UK because business dislikes uncertainty. Big ticket investments will be placed on hold until the status of the UK’s access to European markets is clarified.

All these impacts will ramify outward, hitting other economies, including the US. The mechanisms are financial contagion, currency turbulence, and uncertainty, all of which generate negative aggregate demand effects that are then multiplied via the contraction process. The first port of call will be European economy, which is already in a fragile condition and is most integrated with the UK.

Political implications

Bad as the economic news is, the political shocks to come may be worse.

The Brexit electoral outcome map shows all of Scotland voted to remain. That means the UK’s constitutional crisis regarding Scottish independence is likely back on.

In Spain, there is the long-standing issue of Catalonia’s demand for independence, which Brexit further mainstreams and encourages. Now, Italy’s Northern League, which is politically powerful in the rich northern half of the country, is calling for an EU exit referendum.

In effect, Brexit is a green flag for separatisms of all stripe. That has adverse implications for the euro, which is already under the threat of Grexit. Consequently, sterling’s weakness stands to be accompanied by a weakening of the euro, providing an additional currency channel for spreading Brexit’s shockwaves into the global economy.

With regard to US politics, negative economic fall-out from Brexit will injure the incumbent candidate Hillary Clinton and benefit Donald Trump.

Beyond that, Brexit carries vital political lessons for the Obama administration and Clinton campaign, both of which must not give reason for US voters to further disdain the establishment.

Brexit has structural similarities with Trump’s rise. It is the logical outcome of the Conservative Party’s political strategy of the past twenty years. Conservatives used the European Union (EU) as a whipping boy to help smuggle in their “Thatcher – Reagan” neoliberal economic policies. The Labor Party spoke out in defense of minorities, but it did not defend the EU and nor did it adequately confront neoliberalism.

In the US, Trump is the analogue “exit” candidate. His rise is the logical outcome of thirty years, during which Republicans used dog-whistle racism and the culture war to smuggle through their neoliberal economic agenda that has wrought the destruction of shared prosperity. Democrats resisted racism and the culture war, but were complicit in the promotion of neoliberalism.

The lesson for the Clinton campaign is it must move beyond rhetoric criticizing neoliberalism and adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope. Neoliberalism is the ultimate cause of the establishment’s rejection. Racism, immigration and nationalism may be the match for the anti-establishment fire: wage stagnation and off-shoring of jobs are the fuel.

As regards the Obama administration, the lesson concerns the Trans-Pacific Partnership (TPP). On all sides, the US electorate has rejected the TPP, but the Obama administration keeps pushing it. That further discredits the establishment and benefits Trump who is the outsider candidate. Clinton is the insider who has openly touted her links to President Obama, and she still lacks credibility on her opposition to TPP because of her past endorsement.

In this environment, the Obama administration’s pushing of the TPP is recklessly irresponsible politics that send us nose down, into the eye of the maelstrom.

  1. June 26, 2016 at 4:20 pm

    After all the scare-mongering from the usual sources, I came here to read something sensible. This post is proof that there is no “heterodoxy” on all the important questions in economics.

    A genuine alternative to the orthodox would focus on human behavior. It would identify how the environment humans experience will change and how humans have reacted to similar changes in the past.

    What environmental changes are predicted here? A change in international currency markets is asserted. What else? An increase in “uncertainty”.

    Human behavior predicted: a loss of “confidence”.

    Then there’s just a bunch of assertions about consumer spending and real estate prices.

    What a load of bullshit. Some of the Leave voters were voting very specifically against exactly the woolly headed nonsense on display here. Good grief!

  2. louisperetzperetz
    June 26, 2016 at 4:22 pm

    Thomas. Congratulations for your good analysis. But I am not shure, if Clinton becomes President that she will not change her mind. It is what arrived in France whith Holland.

  3. C-R D
    June 26, 2016 at 4:25 pm

    A beautiful and useful post. As I and many others have said:’almost all the economic and social problems of the world (borne in the West), result direct;y from the blanket acceptance of neoliberal and imperialist doctrines.’
    Now, with regard to Brexit: As every one knows, the Establishment will not hesitate to play dirty to get what it wants. Will it accept the result? Already, there are 2 million signatures asking Parliament for another referendum!

  4. June 26, 2016 at 5:59 pm

    Quote, “In the US, Trump is the analogue “exit” candidate. His rise is the logical outcome of thirty years, during which Republicans used dog-whistle racism and the culture war to smuggle through their neoliberal economic agenda that has wrought the destruction of shared prosperity. Democrats resisted racism and the culture war, but were complicit in the promotion of neoliberalism.

    The lesson for the Clinton campaign is it must move beyond rhetoric criticizing neoliberalism and adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope. Neoliberalism is the ultimate cause of the establishment’s rejection. Racism, immigration and nationalism may be the match for the anti-establishment fire: wage stagnation and off-shoring of jobs are the fuel.”
    Justaluckyfool asks, “Why would you not embrace your own conclusions ?
    BREXIT IS A GOOD MEANS TO FORM A BETTER UNION FOR THE PEOPLE to
    .”.. adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope.”

    “The proper response to the Brexit vote would be for the (NO,NO, read UK…not ) EU leadership to finally embrace reality and adopt an economic policy that will push the continent toward stronger growth and full employment. If it goes this path, the rest of the EU will (delete… not), be anxious to follow the UK’s lead.”
    **This could be the first step for the EU toward solidarity with its members…
    IF only they understood, Quote SODDY, “… every monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society.”… unless and until the barriers that oppose the free and full distribution of wealth from the producer to the
    ultimate user and consumer are broken down and the flow of wealth again fulfils the purpose for which men have striven to create it. Since, in all monetary civilizations, it is money that alone can effect the exchange of wealth and the continuous
    flow of goods and services throughout the nation, money has become the life-blood of
    the community, and for each individual a veritable licence to live at all.”
    Free download-“The Role Of Money” by Frederick Soddy
    https://archive.org/stream/roleofmoney032861mbp/roleofmoney032861mbp_djvu.txt

    “In short, there is no argument against spending more money to both boost growth to create jobs and meet real needs.”
    **OMG, Can the Bank Of England do just that ?

  5. June 26, 2016 at 6:13 pm

    MAYBE, PERHAPS, this may be an intended consequence.

    PositiveMoney
    Dear Carmen,

    There have been three big exciting breakthroughs in the last two weeks, which have been overlooked in all the focus on Brexit*, so we wanted to share the good news.
    These breakthroughs involve three of the world’s most powerful central banks: the Bank of England, the US Federal Reserve and the European Central Bank.
    1) Bank of England

    Screenshot 2016-06-23 09.49.04.pngThe Bank of England has announced that it will be adopting a policy change that Positive Money has been arguing for over the last 2 years.

    The BoE will finally allow non-bank ‘payment service providers’ to hold accounts at the Bank of England, so that they can compete with existing banks to provide current (checking) accounts.

    This might sound like a minor technical change, but it could lead to a profound shift in the financial system. It will reduce the power of banks and expose them to competition in payment services. The financial technology (fintech) firms can then show that payments accounts can be provided cost-effectively without the power to create money.

    It will be then much easier to campaign for stopping banks from creating money completely.

    This is a huge step in the right direction and a big win for Positive Money research team and for the campaign! Read more about it here.

    And please share this news on facebook and twitter.

  6. C-R D
    June 26, 2016 at 6:54 pm

    Excuse the typo. I mean: “….born in the West.”

  7. Ana Pereira
    June 26, 2016 at 8:58 pm

    Excelente

  8. June 26, 2016 at 9:35 pm

    The startling thing I see in comments about Brexit is the coalescing of the Right and Left in opposition to neoliberalism and it’s attendant policies. That spells very bad news for the neoliberal establishment.

  9. Alan
    June 27, 2016 at 5:24 am

    The Brexit electoral outcome map shows all of Scotland voted to remain. That means the UK’s constitutional crisis regarding Scottish independence is likely back on.

    Yes, but you completely fail to understand the significance of the Scottish vote and Scottish nationalism. Scots were detested Thatcher and her policies almost from the beginning. The Tories were destroyed as a political party in Scotland as a result. Labour became the dominant party but turned out to be corrupt and incompetent so they were also been destroyed as a political force in Scotland. Scottish nationalism is a very different animal to UKIP, Trumpism (Trump is detested in Scotland) and many other reactionary nationalists. It’s driven by anti-austerity and a politics of a fairer more equal society. Here’s analysis from a Scottish journalist writing in the Guardian:

    on Friday morning, the people of Scotland woke to find that they were to leave the EU because of a furious act of rebellion, in large part by English working-class voters who have been ignored, silenced, scapegoated and neglected for too long and have now lashed out in an ill-directed but passionate act of defiance. It’s not that Scotland does not understand the anger against the mainstream UK political parties that caused Thursday’s political earthquake. When Nicola Sturgeon made her first post-Brexit statement at Bute House, she stood there as first minister because Alex Salmond’s masterly positioning of the SNP as Scotland’s new party of social democracy made them the massive beneficiaries of Scotland’s own rebellion against the parties of establishment neoliberalism, first the Tories, then New Labour. It was Scotland’s good fortune to be offered an alternative that leaned to the centre-left and was – and remains – explicitly anti-racist and pro-immigration. And increasingly Scottish working-class voters have seized that alternative with both hands.

  10. simon lamb
    June 27, 2016 at 2:36 pm

    Thomas Palley’s “The sky is Falling” essay on Brexit is sadly short on fact and lacks depth and understanding. For just one example, a renewed constitutional crisis involving Scotland’s is no-where near as likely as he intimates. Sturgeon is faced with a multiple quandary, not least because if she loses a second referendum she is probably finished. Inter alia, Scotland would lose the £ and shoulder massive debt. It would have hugely diminished income from oil, decimating her previous budget calculations, and she has to persuade Scots to give up increasing independence within the UK for the same growing EU hegemony that England and Wales have just rejected. She is also vulnerable to being outgunned by a charismatic, intelligent, highly articulate, populist opponent in Ruth Davidson. No wonder she restricted herself to saying cautiously that a new referendum was “on the table”.
    Rather than go on about all the other, with respect somewhat panic-stricken points Thomas makes (I know it’s been a tough few days for many), I suggest a rather more calm and balanced view on our prospects can be found at:
    http://www.vox.com/2016/6/24/12024728/brexit-economy-economists-recession

    • Alan
      June 27, 2016 at 6:55 pm

      She is also vulnerable to being outgunned by a charismatic, intelligent, highly articulate, populist opponent in Ruth Davidson.

      Ruthie is all that when compared to the English school boys that run her party south of the border and for that she’s very popular in England but not so much in Scotland. She did a little better than the Tories usually do in the last Scottish election because she ran as Ruth Davidson and not Ruth Davidson, Scottish Conservative. She also managed to steal some of the Unionist rump that no longer trust Scottish Labour. That’s all going to change. Sticking with Brussels is a much better bet than sticking with Westminster. For goodness sake who is even running the show at Westminster? No leadership, no plan. Nothing but rear effluent from a bull. The game is up.

    • Alan
      June 27, 2016 at 7:11 pm

      Scotland voted against independence 2 years ago because staying in the UK offered stability and economic security. English voters just torpedoed that rationale for a large section of those Scottish “no to independence” voters.

      As Tory and Labour politicians fight amongst themselves at Westminster and dither about what to do, Sturgeon knows exactly what she is about.

    • Alan
      June 28, 2016 at 7:08 pm

      Ruth Davidson was smacked around in the Scottish Parliament today by the SNP, Labour, the Libdems, and the Greens. So much for Ruthie out-gunning Nicola. Ruthie’s idea for how to deal with Brexit is to follow Westminster! She ignores that the crisis was created by her own Westminster colleagues in the Tory party playing stupid leadership games and both her party and the opposition Labour Party in Westminster are now in meltdown, leaving a leadership void during what may turn out to be the UK’s greatest crisis since WWII.

  11. June 27, 2016 at 3:19 pm

    Thomas writes: “The Labor Party spoke out in defense of minorities, but it did not defend the EU and nor did it adequately confront neoliberalism.”

    Wrong: the Party didn’t confront neoliberalism at all — in fact, it went out of its way to implement it, from public/private partnerships to finance infrastructure, to imposing university tuition fees.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s