What price Brexit?

ON THURSDAY June 23, some 33,577,342 voters in England, Wales, Northern Ireland, Scotland and Gibraltar cast “Remain” or “Leave” ballots on the question: “Should the United Kingdom remain a member of the European Union (EU) or leave the European Union?” Some 51.89 percent, or 16,141,241 voters, said “Leave.” The turnout – 72.2% – was the highest since the 1992 elections. This surprising result has touched off a wave of repercussions, like a huge rock tossed into a quiet pond. The immediate questions here are: Will Israel pay a price? Will Israel lose from the “Brexit” vote? The United Kingdom is Israel's third-largest export market. Of Israel's $64.1 billion in exports in 2015, 6.7 percent, or $4b., went to the UK. Of that, more than three quarters comprised pharmaceuticals ($2.5b.); diamonds (about $400 million); and plastics ($189m.). The United States is still Israel's biggest individual customer, buying $18.1b., or 30%, of Israel's exports. But the EU is its biggest trading bloc. Experts say leaving the EU will cost Britain between 1.1% and 3.1% of its Gross Domestic Product. This slowdown will cut Britain's imports from Israel, though the Finance Ministry claims this will be negligible. On the day following the vote, the pound slid 9% to 5.23 shekels and slipped further to 5.11 shekels as of July 3. This devaluation causes Israeli exports to the UK to be more expensive. The euro, too, fell by 2%, relative to the shekel in the wake of the vote, and this too will make imports from the EU cheaper. The Brexit crisis comes at a bad time for Britain. Economic growth already lost momentum from January to March, slowing to only 0.4% as both housing and manufacturing slumped ‒ factors unrelated to the looming in/out EU referendum ‒ put a brake on growth. There were, of course, big repercussions in financial markets around the world. Stock exchanges in Tokyo, Frankfurt and the US all fell between 4% and 8% on June 24, while gold (a thermometer for global illness) rose by nearly 5% to its highest level since early 2014. Financial losses totaled some $2 trillion worldwide. Nearly all financial traders wanted Britain to remain in the EU because London is a financial hub ‒ the world's largest foreign-exchange market ‒ and Brexit will hinder the free flow of money and capital, which is bad news for those who make money by moving money. They signaled their displeasure June 24 by selling assets. THIS TRIGGERED panic selling by smaller investors and amplified the impact. The insiders then bought back the assets at bargain prices and sold them at a profit as markets bounced back. I wish we small investors would take a deep breath and count to five million before issuing “sell” orders on bad news, which plays into the hands of the money manipulators. The biggest impact of Brexit on Israel will be indirect. A rather long period of global uncertainty will ensue. Technically, the Brexit referendum is “non-binding” ‒ the British Parliament must vote to leave the EU. But according to departing Prime Minister David Cameron – whose miscalculation over the Brexit vote cost him his job – Parliament will invoke Article 50 of the EU constitution only in the fall. This Article sets in motion Britain's exit. A period of tough negotiation will ensue on the terms of the British departure, and EU officials are likely to act tough, even vengeful. “You British have caused us massive trouble, why should we be good to you?” they will say, or think. The European economy is already barely growing, in stagnation, or even in recession. Britain's departure will not help. Capital formation hates uncertainty. Facing an ill-defined future, both in Britain and Europe, investors will put their investments on hold until the fog lifts, and that will take years. This, in turn, will impact on Israel: for a country whose main growth engine is exports, global uncertainty is bad news. London School of Economics Professor John Van Reenen told CNBC: “You get a rabbit-in-the-headlights phenomenon where businesses don't want to make new decisions or new investments because they are uncertain about the future.” Ben-Gurion University Professor Sharon Pardo said in the wake of the vote: “When the EU is sick, Israel will suffer, too, it's as simple as that.” The EU has been sick for a long time, he might have added, at least since the global financial crisis began in 2008 − but it can get still sicker. Unlike the US Federal Reserve's responce to the global crisis, the European Central Bank dillydallied with interest rates, even raising them in 2011. The result has been a slack, flat economy. In some ways, I believe the impact of Brexit on the world, and even on Israel, has been somewhat exaggerated. The pound sterling dropped in value by a third during the 1970s economic crisis, and it fell by a quarter when Britain left the Exchange Rate Mechanism (which fixed the pound relative to the deutschemark) in 1992. Those drops dwarf the current decline in the pound. The main impact of Brexit on Israel will not be economic or financial but geopolitical: the European Union, led by France, is seeking to convene a peace conference on the Middle East and essentially impose a settlement. A century ago, the Sykes-Picot agreement carved up the region between France and Britain, creating an illogical hodge-podge of lines on the map that continue to bedevil the Middle East to this day. Will the French now drop their misguided initiative, owing to Brexit and its preoccupations? They will not, but Brexit clearly has taken the wind out of their sails. Had the French paid more attention to internal EU problems and less attention to the inscrutable Middle East, things might have turned out differently. This is tragically ironic, because it was a visionary Frenchman, Jean Monnet, who dreamed up the Common Market, and, against all odds, made it happen. Monnet had a simple idea: if the French and Germans did business together and became rich, they probably would not fight a war again. He was right. Give the EU credit for keeping the peace for more than 50 years. And now? I haven't seen any visionary Frenchmen or European lately who will step up to rescue the EU and shape its new vision. What in the world led the British to vote for Brexit? The truth is, it was us seniors who turned the tide. Some 60% of those over 65 – 20% of the population – voted for Brexit, while 75% of those 18-24 voted to stay. This vast generation gap between the baby boomers and the millennials is easy to understand. The millennials see themselves as Europeans, as citizens of the global village. The boomers are Brits and want their country back, want to control their own fate. What lies ahead for Israel, Britain, the EU and the world? Rocky times. Britain's exit will plant the same hope among many in Spain, France and Italy, where right-wing parties are growing. France and Germany have upcoming elections and Frexit and Grexit will be issues, even though France, and especially Germany, have gained enormously from the huge markets the EU has provided. The United Kingdom itself may become disunited. Scotland and Northern Ireland both voted strongly in favor of remaining in the EU. Scotland may now initiate a second referendum to leave Britain, gain independence and remain within the EU. Northern Ireland may seek to reunite with independent Ireland, an EU member. As one expert observed, Brexit may have disassembled two unions ‒ the European Union and the United Kingdom. The uncertainty induced by this issue will continue to roil financial markets and dampen economic growth. My fellow economists almost all deplore the Brexit vote and bemoan the huge cost to the British people. Many say the people who voted for Brexit simply are stupid and do not understand the consequences. They point out that in Britain, Google searches of “European Union” soared after the Brexit vote, as people sought to better understand the issue. I reject this view. I understand the logic of the pro-Brexit vote perfectly. The 16,141,241 people who voted “Leave” are not stupid. They faced a tough question because nobody was able to tell them clearly, factually, what Brexit meant. The reason is that nobody knew, nor knows now, what the EU will give Britain and what it will take away in the upcoming bitter negotiations. Nobody, even the doom-and-gloom economists, could say for sure what Brexit would do. GIVEN THIS fog, the “Leave” voters simply said, “Enough! I can see that every single day we British taxpayers pay 35m. pounds to the European Union, second only to Germany, or 12.8b. pounds a year. What do we get for it? A bloated parasitic European Commission bureaucracy in Brussels (you have to see it to believe it, and I have) that keeps telling us Brits what to do. “We are a democracy. That means we decide our fate. Not Brussels. Not the French. And not the Germans. We do. We've had enough. We know there will be an economic price to pay for leaving the EU. We think it is worth it. Besides, we working people have already suffered much pain from the Poles who invade our country, study at our colleges for free, qualify for welfare and unemployment, and take our jobs at lower pay. And the European Union won't allow us to stop the influx in any way. Enough!” There are indeed models for Britain to leave the EU unscathed. Norway is not an EU member, but has valuable trade agreements with the EU and abides by most of EU laws and regulations, while keeping its own currency. Norway is prosperous and wealthy. Will the EU offer Britain “Norway” terms? I doubt it. There is also Switzerland, cleverest of all countries, which has managed to cherry- pick its options: embracing the benefits of free trade with the EU with none of the constraints that might endanger its “safe haven” business model – and it retains its powerful Swiss franc. But the terms offered the British will be very far from those given to the Swiss. I believe that Brexit is a British version of “Trumpism” – an expression of simmering rage by the underclass feeling ignored and oppressed, who have made no economic progress in decades, who have seen mines and factories close with no one paying the slightest attention. Those over 65 see their inadequate pensions eroded, find it hard to pay for food, rent and medicine, and are fed up. No one is speaking up for them. Brexit was their way of sending a message. And there is similar Trumpism in continental Europe, not only among the old. There will be more such messages in the future. This simmering anger is a strong economic and geopolitical force, a tsunami, that has baffled experts, made mockery of their forecasts, invalidated opinion polls and continues to sweep across the globe. I think it exists in Israel, but is kept muffled by the constant tension of the Israel- Palestinian conflict. Brexit may be just the first of several thundering exits in the future. Keep in mind that Britain was never part of the euro. It chose to retain its own currency when joining the EU, precisely for the reason many voted 'yes' for Brexit – to control its monetary destiny. But what if a euro nation exits and shakes the common euro currency itself? Israel is like a tiny sailboat tossed about on the enormous waves of global instability. It will need all the leadership and resilience it can muster, as the global economy so crucial to Israel's well-being becomes less stable by the hour. The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com.

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