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The Story of


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The Story of Brexit

How a Brexit Would Undermine

Europe’s Balance of Power 3

Brexit: Britain’s Call Options 7

The Trouble With Europe 11

What to Expect After the Brexit 13

The EU Britain Will Leave Behind 16

What Brexit Means for the World 21

Reflections on the Referendum 28

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A British postal voting form for the European Union referendum. (CHRISTO-
PHER FURLONG/Getty Images)

How A Brexit Would The Franco-German alliance is the cornerstone on

which European power dynamics rest. Conflict be-
Undermine Europe’s tween the two drove three Continental wars between
1870 and 1945; its resolution facilitated peace after
Balance Of Power World War II, planting the seeds of eventual integra-
tion through the European Union. But France and

Germany are not the only countries shaping Europe’s
ritain’s approaching referendum has led to
course. A third actor plays the role of power broker
rampant speculation about the economic and
between the two, stabilizing their relationship and, by
financial consequences of a vote to leave the
extension, the Continent: the United Kingdom.
European Union. And indeed, in the wake of a Brexit,
uncertainty — the archenemy of economic growth
When France and West Germany founded the Eu-
and financial stability — would abound. But if Brit-
ropean Economic Community (EEC), the European
ain withdraws from the Continental bloc, its primary
Union’s predecessor, in the 1950s, they had two goals.
effect would be geopolitical, shaking the balance of
The first was to create a political and economic struc-
power in Europe to its very foundation and forcing the
ture that would bind the two states together, reducing
bloc to rethink its role in the world.
the chances of another war breaking out in Europe.

The second was to facilitate trade and investment to during the administration of Prime Minister Margaret
rejuvenate Europe’s war-weary economies. Both were Thatcher. Under the Tory leader, Britain simultane-
pleased with the solution they found: France felt it ously pushed to lower its contribution to the EEC
had neutralized its eastern neighbor while maintain- budget and eliminate trade barriers inside the bloc. In
ing control of Continental politics, and Germany had Thatcher’s now-famous Bruges Speech, she dismissed
successfully reconciled with the West. the notion of a federal Europe, instead describing
the Continental organization as an agreement among
Meanwhile, the United Kingdom’s relationship with sovereign states to establish free trade. A few years later
the European project was somewhat ambiguous. As her successor, John Major, negotiated Britain’s opt-out
an island nation, Britain historically had been shielded from the eurozone.
from events unfolding on the mainland. If the Unit-
ed Kingdom intervened in Continental affairs, it was Thatcher also advocated enlarging the EEC to the east,
usually to ensure that power remained balanced and yet a strategy Labour Party Prime Minister Tony Blair con-
dispersed enough to keep Britain safe. When the EEC tinued in the early 2000s. Bringing the former com-
was born, London initially reacted with skepticism, munist states under the Continental umbrella not only
wary of any project that would transfer more sovereign- sped up their transition to market economies but also
ty from the British Parliament to unelected technocrats created new demand for British exports. As an added
in Brussels. France, moreover, was eager to keep Britain perk for London, the bloc’s expansion into a larger and
out of the bloc; it was concerned about granting EEC more loosely connected entity helped to dilute France
membership to a country Charles de Gaulle described and Germany’s hold over Europe.
as “an American Trojan Horse in Europe.” De Gaulle
was also reluctant to include the only country in But Britain’s approach has produced only mixed re-
Western Europe capable of competing with France for sults. Few new EU members have joined the eurozone,
leadership of the bloc. It came as no surprise when, in showing the limits of the federal union, and many
the 1960s, France vetoed Britain’s membership twice. share Thatcher’s view of the bloc as a pact among
sovereign states. At the same time, the admission of
But in the early 1970s, things changed. De Gaulle was countries such as Poland and Romania has led to a sig-
no longer France’s president, and both Paris and Berlin nificant increase in immigration to the United King-
were quickly realizing the geopolitical importance of dom, a development that Brexit supporters consider a
expanding the EEC’s membership. Across the English primary reason for leaving the bloc.
Channel, London had lost its empire and was in the
midst of reassessing its international priorities and Upsetting the
trade relationships. Though it saw EEC membership as
an opportunity to influence the process of Continental Balance of Power
integration, Britain’s interest in accessing the common
market far outweighed its aspirations of building a fed- If Britain quits the European Union, though, it risks
eral Europe. Unlike France and Germany, Britain had disrupting the base of power the bloc has come to
little enthusiasm for transforming the Continent into a rest on. Germany relies on Britain’s backing when it
United States of Europe. comes to promoting free trade in the face of France’s
protectionist tendencies. France sees Britain as
These motives formed the basis of Britain’s modern not only a key defense partner but also a potential
relationship with Europe, which was largely established counterweight to German influence. Removing
Britain from the equation would shatter this tenuous

arrangement at a particularly dangerous time for the Union is already deeply divided over related issues such
deeply fragmented Europe, when neither Germany nor as the eurozone and Schengen Agreement, which have
France is satisfied with the status quo. little to do with Britain since it is not a member of ei-
ther. The looming referendum has only revealed more
Should the “leave” camp win the British referendum, points of contention within the bloc that would be
tension would rise between the Continent’s north and aggravated by a Brexit. The Dutch government, for ex-
south. Countries in Southern Europe want to turn ample, recently argued for limiting membership in the
the European Union into a transfer union that redis- Schengen zone to a handful of countries in Northern
tributes wealth from the relatively rich north to the Europe, while the right-wing Alternative for Germany
less developed south and shares risk equally among party proposed the creation of a “northern eurozone.”
members. Northern Europe, by comparison, is ea-
ger to protect its affluence and would agree to share The north-south divide would not be the only gulf to
risk only if the bloc assumed greater control over the widen on the Continent, either. Should Britain leave,
south’s ability to borrow and spend. The regions also the European Union would split between east and
disagree on how the European Union should use its west, too. Countries in Central and Eastern Europe
funds. Southern Europe advocates generous subsidies see Britain as the defender of non-eurozone members’
for agriculture and development, a view most Eastern interests, and many share London’s views on the sov-
European states share, but Northern Europe would ereignty of member states. Poland, Hungary and the
prefer to freeze or even reduce the bloc’s budget. Czech Republic, for instance, are generally supportive
of the European Union but suspicious of Brussels’
As a net contributor to the European Union’s budget, attempts to interfere with their domestic affairs. In
Britain has been particularly vocal on these issues. particular, these countries have sympathized with
According to VoteWatch Europe, the country was on British Prime Minister David Cameron’s campaign
the losing side of votes related to EU spending more to give national parliaments more power to block EU
often than any other member between 2009 and 2015. legislation. Poland and the Baltic states also see Britain
Generally speaking, Northern European states such as as a critical partner on the issue of Russia, since Lon-
Sweden, the Netherlands and Denmark tend to vote don has fought for a tough European stance against
alongside Britain. Germany also usually sees see eye Moscow in response to its annexation of Crimea. In
to eye with Britain on certain topics, such as Europe’s the event that Britain leaves the Continental bloc, its
common market, though the two tend to disagree on Central and Eastern European allies may eventually
issues like the environment. But regardless of other become more isolated from Brussels.
members’ stances, Britain has proved more willing
than any of its peers to openly voice opposition to EU Weakening Europe’s
decisions. Without it, the European Union would be
short a liberalizing and market-friendly member, and Influence Abroad
the bloc’s political balance would shift in the favor of
protectionist countries in Southern Europe such as The loss of one of the few EU members that is able to
France, Italy and Spain. operate on a global scale would undermine the bloc’s
external strength as well. Only France can match the
As fears of a takeover by this Mediterranean group international presence Britain has, thanks to London’s
grow among Northern European governments, they vast political and economic connections and its con-
would probably become more resistant to the process siderable military prowess. Though a Brexit would not
of Continental integration. After all, the European keep Britain from cooperating with Europe complete-

ly, given its continued NATO membership and shared something that would be difficult to achieve amid the
security interests with France and Germany, its col- atmosphere of isolationism that has settled over the
laboration with the Continent would be limited. As a Continent. The political calculations of French and
result, Europe’s ability to cope with challenges abroad German leaders preparing for general elections in 2017
— whether the migrant crisis, international terrorism would make such cooperation even harder to come by.
or a more assertive Russia — would diminish.
No matter what British voters choose, the damage to
Germany’s and France’s recent calls for the European Europe has already been done. If Britain leaves the Eu-
Union to deepen its military and security cooperation ropean Union, it would throw the Continent into yet
seem to suggest the two are concerned about this very another political and economic crisis, giving Euroskep-
outcome. Berlin has steadfastly avoided taking on the tic forces greater ammunition against the bloc and vot-
more active role in world affairs that a Brexit would ers fewer reasons to defend it. But if Britain keeps its
require. Since the start of the European financial membership, it would have proved to other European
crisis, Germany has reluctantly shouldered the burden governments that it is possible to demand concessions
of leading the bloc’s political and economic policy- from Brussels while winning support at home. And so,
making, but assuming a prominent military role is regardless of what happens June 23, Britain has set a
another matter. France, for one, would accept it only precedent that Brussels cannot stop other EU members
within the framework of an EU-wide military union, from following. n

Mugs from the British “remain” and “leave” campaigns. (DAN KITWOOD/Getty Images)

Brexit: Britain’s
etting markets still think Britain will remain in
the European Union, the increased popularity

Call Option of the “leave” camp notwithstanding: They are

now pricing only a 27 percent chance of a Brexit. But
betting markets are not infallible. After all, they priced
an 85 percent chance of a hung British Parliament
Editor’s note: The following analysis was written by
after the 2015 general elections, which proved em-
ETM Analytics, an economic and financial advisory firm
phatically wrong. The recent momentum in the polls
with offices in the United States and South Africa. While
suggests that this one is too close to call.
not a Stratfor analysis, it complements our views on the
geopolitical stakes of the June 23 Brexit referendum with
The uncertainty surrounding the referendum has been
an eye toward the vote’s macroeconomic implications. We
reflected in financial markets. Over the past week,
hope this joint effort amplifies our readers’ understanding
for example, sterling volatility rose higher than it was
on the eve of this historic vote.
during the global financial crisis of 2008. Observers
simply do not know how things will look if Britain

Net UK Migration by Nationality
Net migration is the difference between immigration (positive) and emigration (negative). While the UK has
traditionally received migrants from its former colonies and the EU, the accession of countries from Central
and Eastern Europe in the early 2000s led to a significant rise in migration from EU citizens.*





−50,000 United Kingdom


1991 1995 2000 2005 2010 2015

*Some data was revised in the 2011 UK Census, meaning 2004-2008 could be underestimated.
Source: House of Commons of the British Parliament Copyright Stratfor 2016

leaves the European Union, but most studies have The economic threat posed by tighter immigration
come to the same conclusion: A Brexit would be bad policies is also cited as a reason against a Brexit. If
for the British economy. Britain were to curb immigration, the argument goes,
it would be less economically dynamic. And that’s
A Failure to Cure All Ills probably true, if it actually came to pass. But the
British are not isolationists. Britain’s demographics and
But would it? The prevailing wisdom says Britain would economic ties with Europe — and, indeed, the world
be worse off outside the common market, subject as — demand a liberal stance on immigration. London is
it would be to the European Union’s common import an international city that holds the rest of the coun-
tariffs. Those concerns, however, are misplaced. Europe try on life support. Having greater national control
is not, strictly speaking, a “free trade zone.” Zero inter- of immigration policy while maintaining a healthy
nal tariffs alone do not a free trade area make. Europe openness seems well within the realm of possibility in
imposes extensive import duties, which by definition the event of a Brexit. Therefore, we don’t see sweeping,
is not free trade. Internal EU commerce, moreover, is radical anti-immigration policies in such a situation,
subject to onerous regulations on standards, packaging, and certainly not the kind of immigration stance that
safety, labor, logistics and so on. The European Union would damage the economy.
also engages in wide-ranging industry protectionism,
particularly for the agriculture sector, which raises pric- If Britain left the European Union, it could unilater-
es, lowers efficiency and hampers structural competitive- ally liberalize internal and external trade arrangements
ness. Britain would have the option to dismantle much with any country or economic grouping in the world,
of this stifling protectionism in a Brexit scenario. cut subsidies and deregulate markets. The transition

that would necessitate would be painful for those who pushes financial services away from London, it would
benefit from the current arrangement, but it would actually regress. But these outcomes are far more
eventually create more opportunities for wealth cre- dependent on political choices than on the esoteric
ation. Under the right policies, the benefits may well “inevitability” asserted by pro-EU campaigners.
outweigh the costs.
A Brexit would fail to cure all that ails Britain. Leaving
Unraveling some 40 years of EU regulatory and the union would not inoculate it from all the diseases
political integration would, of course, be difficult and that afflict Europe and that precipitated the referen-
politically taxing. Those who gain from the status quo dum in the first place: financial dysfunction, onerous
would clearly favor its continuation. There would be regulations, nationalism, resentment of the political
political casualties on both sides of the English Chan- establishment and a migration crisis. Its links to the
nel, and European relations could get colder. There Continent are simply too deep, and the regional risks
has been some mild saber-rattling by Europhiles that are shared. But, critically, a Brexit could give London
a Brexit would see Brussels take a hard line with the greater flexibility in treating these diseases. It offers an
recalcitrant Britain. additional layer of immunity to systemic EU risk to
that already afforded by retaining the British pound.
As bad as things would appear to be, though, it could
just as easily be argued that deeper integration is aggra- Whether Britain would ride a wave of reform after its
vating rather than alleviating political tension in Eu- departure is unclear. The Conservative government is
rope — and that a Brexit could, therefore, ease those not particularly conservative and doesn’t have a sweep-
tensions. After all, the Brexit referendum aside, the ing mandate to reform. Still, the point is that London,
European Union faces crises on many fronts — fiscal, having liberated itself from some of the constrictive
monetary, economic, political and social. If Brussels policies endemic to the European Union, could reform
wants Britain to continue sharing its burdensome load if it wanted to. The scenarios supporting a “remain”
(immigration, bailouts, military commitments and ab- vote seem to assume a stasis on the part of the govern-
sorbing some of Europe’s unemployed), it would have ment after a Brexit, making political representatives
to play nice with London. unresponsive to new realities and challenges. But the
evidence from British political history suggests this is a
That’s not to say a Brexit would guarantee success for naive perspective.
Britain. The country has a gigantic current account
deficit, the present extent of which has never ended A Brexit, moreover, gives Britain a chance to structure
well for economy or currency. Like the United States, a sensible and more market-friendly financial regula-
Britain is also overleveraged and beset by a zero interest tory architecture. This possibility may even constitute
rate policy, if not yet Europe’s negative interest rate Brussels’ (and Washington’s) biggest fear of a Brexit:
policy. It has a creaking welfare state, and its leviathan- that London could create and exploit a regulatory
ic National Health Service is an immense systemic arbitrage by re-liberalizing finance and enticing capital,
burden. If Britain leaves the European Union but con- technology and expertise away from European and
tinues to look like the European Union, then a Brexit U.S. financial centers. There have been warnings that
won’t help. If Britain keeps the same EU-level tariffs after a Brexit foreign banks and financial institutions
and protectionist subsidies in place while facing higher will have to “de-Londonize.” With the right kind of
EU tariffs after a Brexit; if it pulls up the drawbridge regulation, the opposite is possible.
and massively curtails access to immigrants; or if it

The Power of Perception slow, steady and tightly controlled. If panic persists for
more than a few days or weeks, however, and if polit-
After June 23, Britain will have a definitive answer to ical assurances are unconvincing, then it could begin
the question of whether it will stay in the union. But to expose British (and European) macro fragility rather
the outcome of the vote won’t change the fact that the quickly. The especially destabilizing factor to watch
British economy is cyclically and structurally fragile. here is that as business cycle risk emerges, markets
Nor will it solve, by itself, the problems created by a correct lower and growth slows, so a Brexit would be
debt super-cycle, zero interest rate policy, regional stag- in line for receiving the bulk of the blame. That could
nation and asset market bubble risk. Europe’s banking spark further rounds of Brexit panic, causing some-
system is frail, Brexit or not. thing of a vicious cycle that precipitates a recession and
credit crunch.
The vote does, however, affect perception. A Brexit
could create sufficient uncertainty to spark panic in Such a recession would be the inevitable cyclical
financial markets, even though it would be a mere outcome hastened by a Brexit, rather than a funda-
catalyst rather than the ultimate cause. A victory for mental consequence of it. The strategic opportunity
“remain,” on the other hand, could calm the markets. here is a long-term one. There is a significant chance
The latter could offer opportunities to position for a that Britain Inc. gets oversold. If the country can move
bearish phase of the business cycle and for the neg- toward sensible economic and financial sector reforms
ative structural consequences of EU entanglement, and retain an open, smart immigration policy, it could
including having less flexibility to treat Europe’s present attractive re-entry opportunities for investors,
chronic illnesses. especially as a relative play to the medium- and long-
term dysfunction expected to prevail in the European
A Brexit would be more difficult to exploit. Do mar- Union and eurozone.
kets panic, or do they wait patiently to watch how
leaving the European Union will unfold? The initial Despite the narrative in the mainstream media, a
reaction, most likely, will be some degree of panic. In Brexit may not fundamentally hurt the British econo-
one scenario, this panic persists only for a few days my. On the contrary, it offers a medium- to long-term
or weeks and then settles down as the slow, measured call option on greater economic dynamism and a more
process of a Brexit begins. Politicians convince markets efficient and autonomous crisis response mechanism.
that it will be a gradual, amicable split. There may Also lost in the Brexit noise are the macroeconomic
have to be a series of joint announcements with the problems Britain faces regardless of the referendum. n
European Union assuring that the transition will be

The European Commission building in Brussels. (CARL COURT/Getty Images)

The Trouble are doing member states more harm than good. But at
other points in Europe’s history, federalism seemed to
With Europe be the answer to healing the Continent’s wounds.

In 1941, a group of Italian political prisoners drafted
he British referendum on its membership in
a secret document proposing a solution for Europe’s
the European Union has reignited a debate,
perpetual state of war and political violence. The
not only about the United Kingdom’s role
document, called the “Ventotene Manifesto” after the
in Europe but also about the present, and the future,
island on which it was written, argued that only the
of the union. Euroskepticism is on the rise across the
creation of a federal Europe would bring an end to
Continent, and the bloc’s leaders, hampered by their
the massacres that kept erupting across the Continent.
own diverging views on how Europe should be man-
During the next decade, the Ventotene Manifesto and
aged, seem unable to stop it. Meanwhile, supporters of
the European Federalist Movement that it inspired
the “leave” and “remain” camps in the United King-
gave rise to plans for the European Communities, an
dom, despite their opposing opinions, agree on one ba-
idea that seemed promising at the time. Professional
sic point: Attempts to federalize the Continental bloc
politicians and clashing nationalist sentiments had led

Europe to death and destruction. By contrast, turning given the country’s financial crisis — but it is also low
power over to technocrats who could administer the in France and Spain, which play a bigger role in man-
Continent free of the dictates of their own national aging the bloc.
interests would keep those problems from recurring.
In other words, if nationalism was a poison, federalism At the core of the arguments for and against a feder-
(or supranationalism) was the antidote. alist Europe lies the issue of identity. Most countries
have a national identity, or at least certain elements
Ironically, Europe’s current political crisis follows the that unite its people and hold the state together. In
same debate that dominated the 1940s and 1950s, some cases, the common sense of belonging is hard-
only in reverse. After six decades of Continental inte- won. It took a civil war to fully unite the United
gration, federalism has become the problem, and the States, and Italy went to war multiple times between
nation-state its solution. This does not necessarily mean the 1860s and the 1940s in hopes that a national ex-
adopting nationalist policies and their xenophobic vari- perience would forge a national identity. But Europe’s
ants — though some parties have gained ground doing manifold competing — and often conflicting — na-
just that — but restoring the prerogatives that individ- tional identities have precluded a single Continental
ual states should not have lost in the first place. One one. It is hard to imagine many EU citizens going to
of the pro-Brexit camp’s main arguments during the war to defend the European Union.
referendum campaign was that the British Parliament
had ceded too much authority to unelected officials This explains why, despite its many positive attributes,
in Brussels. As a result, they contended, irrational EU the European Union is losing the battle for its citizens’
regulations were undermining British businesses. Some hearts and minds. Undoubtedly, the bloc is a remark-
Brexit supporters have reasoned that American voters able achievement. Six decades ago, the Continent was
would probably not tolerate the U.S. Supreme Court at war, and three decades later, it was divided by the
subordinating its decisions to the rulings of a foreign Iron Curtain and haunted by the threat of nuclear war.
court, as EU member states do. Today, one can rent a car in Portugal and drive all the
way to Estonia without facing any border controls.
One could argue that the United Kingdom does EU citizens can study, work and retire anywhere they
not represent the European Union, and, to a certain want in the Continent. Even so, increasing numbers
extent, this is true. After all, Britain is an island, and of voters see the European Union as an alien, or even
maintaining some distance from the Continent is a key hostile, institution. For EU leaders, this has made for a
part of its national strategy. London has been skeptical constant struggle to balance national sovereignty with
of the European project from its inception, interested continental accord. The European Union is at once
more in the bloc’s common market than in any fed- too centralized and not centralized enough, and this
eral aspirations. Nonetheless, surveys show that Eu- middle ground is becoming increasingly untenable.
roskepticism is the new normal in most EU member
countries. A recent study by the Pew Research Center The British referendum, just one of many symptoms
showed that the European Union was viewed favor- of Europe’s fragmentation, has likely put the federal-
ably by only 51 percent of the people surveyed. In the ist thesis to rest for the time being. In the early stages
10 EU countries selected for the survey, a median 42 of the EU crisis, the political debate revolved around
percent of people want more power returned to their deepening integration to save the bloc. That strategy
governments, while only 19 percent advocate giving has apparently failed, and the focus will shift to slowly
Brussels more authority. Support for the European dismantling some aspects of the European Union in
Union is particularly low in Greece — not surprising order to keep it alive. n

A Union Jack umbrella near the Big Ben clock face and the Elizabeth Tower at the Houses
of Parliament. (JUSTIN TALLIS/AFP/Getty Images)

What to Expect by over 10 percent against the dollar and is on track

for its worst single-day decline in 45 years. Outside the
After the Brexit United Kingdom, emerging market currencies and oil
prices are also dropping, and stock exchanges around

the world are likely to follow, with money moving into
n a historic referendum, British citizens voted to
havens such as the Japanese yen and gold. In recent
leave the European Union on June 23, with 51.9
days, markets had reacted optimistically to opinion
percent of voters choosing an exit. For the first
polls saying the “remain” campaign would prevail. This
time since its creation in the mid-1950s, the bloc will
suggests that their reaction in the coming days could
soon lose a member. The move is triggering a chain of
be particularly hard. Japan’s Nikkei index, for example,
events that will be felt around the globe, and it pushes
has already suffered its worst single-day fall since the
both Britain and the European Union into a prolonged
Fukushima incident in 2011.
period of uncertainty that will fundamentally change
the future of Europe.
Depending on the depth of the negative market
reactions, the European Central Bank (ECB) and
The implications of the referendum will become clear
the Bank of England will have to activate emergency
in stages. In the immediate term, markets will react
agreements (such as a swap operation between pounds
negatively to the results. The pound has already fallen
and euros to provide liquidity to banks) discussed in

recent weeks. The ECB is meeting later on June 24 Negotiating the Details
to discuss its next moves. The United Kingdom has a
high chance of plunging into a recession, putting the of the Divorce
Bank of England in an incredible bind: Cutting inter-
est rates in an attempt to mitigate the risk of recession From a political point of view, the referendum could
would hurt its currency even more, creating inflation lead to the resignation of British Prime Minister David
concerns. But raising them to support the pound will Cameron, who campaigned heavily for his country to
choke off growth. remain in the European Union. Considering the fric-
tions among the ruling Conservatives (roughly half the
Thus, the coming days will be marked by uncertain- party’s lawmakers supported the “leave” camp), new
ty, which will affect financial and economic decisions elections before the end of the year in Britain cannot
by investors and households around the world. Bond be ruled out. The results will also reignite indepen-
yields in the eurozone periphery are also likely to dence demands in Scotland and, to a lesser degree,
increase as investors move to havens such as Germany. Northern Ireland.
Depending on the pressure on those countries, the
ECB’s promise to do “whatever it takes” to protect the The referendum is not legally binding, which means
eurozone by intervening on debt markets will be tested. the British Parliament could technically decide not

Results of the British Referendum

The United Kingdom has voted to leave the European Union.
Scotland and Northern Ireland voted to remain, but England Scotland
and Wales elected to leave. Its departure may encourage other
countries to reconsider their membership in the bloc. Northern
REMAIN Overall LEAVE England

48.2% 51.9% Wales

90.8% counted

45.4% 54.6% English voters are dragging
Northern Ireland out of the EU.
44.5% 55.5% DECLAN KEARNEY

Scotland Scotland has delivered a strong,

62.2% 37.8% unequivocal vote to remain in the
EU, and I welcome that endorse-
Northern Ireland ment of our European status.


Copyright Stratfor 2016

to respect its outcome — though this would mean also have to negotiate over the status of EU citizens liv-
ignoring a vote in which more than 33 million citizens ing in the United Kingdom and British citizens living
participated. The evolution of political events in the in the EU states.
United Kingdom will determine when negotiations
between London and Brussels over the withdrawal Broader Implications
begin. According to EU treaties, countries that want to
leave the bloc have to formally notify Brussels of their EU leaders will probably strike a hopeful tone about
intentions, but the exact moment of the announce- the future of the Continental bloc. In the coming
ment is decided by the country in question. Members days, member states led by Germany and France will
of the “leave” camp have said that there is no need to send messages of unity and even portray the vote
make such an announcement immediately and that as an opportunity to continue with the process of
London and Brussels should be allowed some time to Continental integration. But the British vote is the
negotiate informally. most dramatic event in a long process of political
fragmentation in the European Union. Euroskeptic
The formal declaration of the intention to leave will parties across the Continent will present Britain as
trigger a two-year negotiation period, during which an example to follow and, depending on the depth of
the United Kingdom and the rest of the member the economic impact on the United Kingdom, their
states will hammer out the terms of the divorce and moderate rivals will be under pressure to make sim-
the framework of their new relationship. It is worth ilar proposals. One of the most critical countries to
keeping in mind that, while negotiations are taking watch in this regard is France, which faces elections in
place, the United Kingdom will remain a full mem- 2017 and whose main Euroskeptic party, the National
ber of the European Union. The free movement of Front, is already calling for a similar referendum. With
goods, services, capital and people between Britain Britain preparing its exit, the more France drifts from
and the Continent should remain unchanged until at the core, the quicker the foundation of the European
least mid-2018. Any agreements between London and Union crumbles.
Brussels will then have to be ratified by EU member
states as well as the EU and British parliaments. This Over the longer term, the main effect of the British
could further delay the exit process. In an event this referendum will be geopolitical. Without Britain,
unprecedented, those with a seat at the negotiating ta- the European Union will be missing a liberal, mar-
ble will decide how to proceed based primarily on their ket-friendly member, potentially shifting the balance
interests, regardless of what the EU treaties say. of power in the bloc to the more protectionist econ-
omies in the south. This could exacerbate tension
The United Kingdom will be intent on preserving its between Northern and Southern Europe, which are
access to the EU common market, since roughly 45 already at odds over issues such as the Schengen Agree-
percent of British exports go to EU countries and 53 ment and the management of the eurozone. A Euro-
percent of its imports come from the bloc. The United pean Union without the United Kingdom will also
Kingdom’s trade access will, however, need to be ne- be less relevant at the international level, as the bloc
gotiated. The scope and depth of Britain’s access to the is about to lose one of its few members that has a true
common market will determine the extent to which global presence militarily, diplomatically and economi-
the country will have to comply with EU regulations. cally. By the time London and Brussels end the nego-
Once EU norms are no longer enforced, the British tiations over their disconnection, the Continental bloc
Parliament will have to reintroduce, amend or abolish will look very different from how it looks today. n
its laws currently in place. London and Brussels will

The front page of the London Evening Standard reporting the resignation of British Prime
Minister David Cameron. (DANIEL SORABJI/AFP/Getty Images)

The EU Britain Will non-eurozone peers in Northern and Eastern Europe,

meanwhile, may decide to distance themselves from
Leave Behind the bloc after losing such an important ally outside
the currency area. And as the cracks undermining

European unity spread, the bloc’s foundation —
he European Union is on the verge of losing
the Franco-German alliance — will weaken.
one of its members for the first time in its
history. The repercussions of Britain’s depar-
Britain’s decision to leave the European Union will
ture from the bloc will ripple throughout Continental
affect each of the bloc’s members differently. The
politics, economics and finances, shaking Europe to
countries that will be most damaged by the split
its core. Britain’s biggest EU trade partners, which
are listed below.
stand to be especially hard-hit should Britain lose
access to the common market, will desperately seek to
expedite a free-trade agreement between Brussels and Ireland
London. At the same time, countries in the eurozone
periphery will have to brace themselves for a period The Irish are particularly concerned by the results of
of political instability and financial uncertainty that the British referendum because Britain is Ireland’s larg-
could threaten their feeble economic recoveries. Their est trade partner, accounting for roughly 14 percent

The Risk of a Brexit
A Brexit would lead to a period of
uncertainty in Europe that would
have a negative impact on most EU
economies. In addition to this gener-
alized risk, some countries face spe-
cific challenges linked to a Brexit,
Ireland Germany
such as a sharp decrease in exports, Poland
higher bond yields and an increase
in domestic Euroskepticism. Luxembourg

Austria Hungary
Financial risk

Political uncertainty
Portugal Italy
Rising Euroskepticism Spain
Economic risk Greece


Countries with high levels of deficit and debt, fragile Countries with strong Euroskeptic opposition parties
banking systems or unstable governments could come could see an increase in anti-EU sentiment. Moderate
under financial pressure after a Brexit. Small financial parties could feel threatened by Euroskeptic forces
services centers and countries linked to Britain and adopt elements of their agendas. Opposition and
through foreign direct investment and remittances government parties could demand referendums on EU
could also be hurt. membership or aspects of it.


Countries with fragile government alliances or im- Countries with a strong dependency on exports to
pending elections could be further weakened by the Britain could be negatively affected by Britain’s with-
uncertainty generated by a Brexit. This in turn would drawal from the EU common market.
create financial and economic risk.
Copyright Stratfor 2016

of Irish exports. Trade between the two will not halt has also reopened questions about the status of North-
immediately, since Britain will remain an EU member ern Ireland, where most of the population voted to
for at least two more years, but the depreciation of the stay in the European Union. Northern Ireland and the
pound will make it more difficult for Irish exporters to Republic of Ireland currently have open borders, but
sell goods to Britain. Moreover, hundreds of thousands that could soon change since the Republic of Ireland
of Irish workers reside in Britain, and their status with- will technically border a non-EU state once the Brexit
in the country will have to be defined. The referendum is complete.

More broadly, the Brexit will force Ireland to reassess Meanwhile, June 26 general elections in Spain and
its relationship with its most important economic and an October referendum on constitutional reform in
political partner. In all likelihood, Dublin will become Italy will raise the specter of political instability in
one of the strongest supporters of rapidly granting the two countries, fueling fears for their economic
Britain access to the common market. futures. The European Central Bank’s bond-buying
program, designed to keep interest rates in troubled
Netherlands, Belgium eurozone countries under control, was declared to be
in line with German law on June 22 by the German
and Luxembourg Constitutional Court, clearing its path toward imple-
mentation. But the ruling irritated German Euroskep-
Like Ireland, the Netherlands will have to cope with tics and could become a campaign issue in Germany’s
the fact that one of its largest trading partners, ac- general elections next year. In the meantime, Italy will
counting for some 9 percent of Dutch exports, will no have to grapple with its own Euroskeptic forces. The
longer be a member of the Continental bloc. And, as right-wing Northern League is already advocating an
the home of the Party of Freedom — one of Europe’s anti-immigration agenda, while the anti-system Five
strongest Euroskeptic political parties — the Nether- Star Movement has promised to hold a referendum on
lands will face rising demand for its own referendum Italy’s eurozone membership.
on EU membership. Belgium, too, shares Amsterdam’s
economic concerns, since it also sends about 9 percent
of its exports to Britain. Because the country houses France and Germany
the European Union’s most important institutions,
it has much to lose economically and politically as Though France and Germany have strong trade and
the bloc weakens. Luxembourg, for its part, might financial ties to Britain, their economies are diversified
also experience some economic pain considering that enough to soften the effect of the Brexit. In fact, after
Britain purchases roughly 9 percent of its exports as the dust settles, the French and German economies
well. Of the Benelux countries, though, Luxembourg will probably benefit from the relocation of some
is the only one that may find opportunity in a Brexit: companies in Britain to continental Europe. Paris and
If British financial companies choose to relocate to the Frankfurt, in particular, will compete with each other
European Union, Luxembourg would be an attractive to attract such firms.
destination as one of the Continent’s last remaining
tax havens. Consequently, France and Germany’s primary concerns
in the wake of the vote will be political. The success of
Britain’s “leave” camp will bolster Euroskeptic parties
Spain, Italy, Portugal in both countries. In France, the National Front has
and Greece vowed to hold a referendum on EU membership if it
wins the next presidential election, while Alternative for
Uncertainty in financial markets stemming from the Germany has long supported the creation of a “northern
Brexit vote will hurt the fragile eurozone economies of eurozone.” With French and German general elections
Southern Europe. Bond yields in Spain, Italy, Portugal scheduled for 2017, the countries’ more moderate parties
in Greece will probably rise, even if they remain far will feel pressured to imitate some of their Euroskeptic
below the levels seen during the 2012 crisis. The steep rivals’ proposals as they become more popular. And as
depreciation of the British pound may also discourage the bloc’s leaders struggle to respond to Britain’s with-
tourism in Mediterranean Europe, since British tourists drawal from the Continent, the differences in their views
will find it more expensive to vacation in the eurozone. on how to manage the European Union will be laid bare.

UK Total Trade Value by Partner for Goods
Total trade value for European Union changed from $600.2 billion in 2011 to $550.5 billion in 2015.

0 20 40 60 80 100 120 140

Belgium (EU)

Canada 2011

France (EU)

Germany (EU)


Ireland (EU)

Italy (EU)


South Korea

Netherlands (EU)


Poland (EU)

Russian Federation

Spain (EU)

Sweden (EU)



United Arab Emirates

United States
Source: Trade Map
Copyright Stratfor 2016
Poland accord made among sovereign nation-states Neither
country is likely to leave the Continental bloc any-
The Brexit will raise two major concerns for Poland. time soon — it is a crucial source of funding, and the
The first is the status of Polish citizens working in Brit- Czech and Hungarian populations are supportive of
ain. Since Poland joined the European Union in 2004, EU membership. But both nations might hold refer-
about 1 million Poles have migrated to Britain. How endums on specific EU issues. Hungary, for instance,
they will be dealt with will be determined by whatever has already announced that it will hold a vote on the
deal London and Brussels reach on the status of EU controversial EU plan to redistribute asylum seekers
citizens living in Britain. London is unlikely to start across the Continent.
deporting people en masse, but it could put in place
strict requirements for obtaining and keeping work Sweden and Denmark
permits. Even if Britain agrees to allow EU citizens to
remain within its borders, an economic downturn with Britain often voted alongside Sweden and Denmark
the loss of jobs could force migrant workers to return on EU policies. The three countries shared an inter-
home. Poland, and other states whose nationals have est in preserving the common market while resisting
migrated to Britain in large numbers such as Romania, attempts to federalize the bloc. Denmark and Britain
Bulgaria and Lithuania, will therefore advocate a quick negotiated their opt-outs from the eurozone together
resolution on the status of EU citizens in Britain. in the early 1990s. Not long after, Sweden followed
suit, choosing not to join the currency area.
From a political standpoint, Warsaw will lose an
important ally in the bloc. The Polish government was Sweden and Denmark’s relatively strong Euroskeptic
one of the biggest supporters of British Prime Minister forces could be emboldened by the British referendum,
David Cameron’s calls to repatriate powers from the enough so to call for similar votes in their countries.
European Union to individual members and to give And as Britain’s departure upsets the balance of power
national parliaments greater room to veto EU regu- in Europe, the Continent’s northern members might
lations. The British vote, in theory, has opened the decide that the time is ripe to re-evaluate their rela-
door for Poland to make similar demands itself under tionships with the bloc.
the threat of a Polish referendum. However, Poland
cannot afford to leave the bloc, so any threats it makes Cyprus and Malta
to Brussels would have to be made in concert with its
neighbors to be considered credible. Cyprus maintains strong bilateral ties with Britain, a
legacy of the island’s British colonial presence. Britain
Hungary and the is Cyprus’ second-largest trade partner, and the island,
Czech Republic in turn, is a popular destination for British tourists.
Malta similarly boasts a deep historical relationship
Hungary and the Czech Republic will lose a key with Britain, and it is home to numerous British
political ally as well. Britain is widely seen in Central companies, many of which are in the financial sector.
and Eastern Europe as a defender of the interests of Britain’s divorce from Europe will therefore be a blow
non-eurozone states. Budapest is especially support- to both islands’ trade, finance sectors and tourism. n
ive of London’s view that the European Union is an

Post-Brexit exchange rates in Paris, Tokyo, Sydney and Amsterdam. (-/AFP/Getty Images)

What Brexit Means that he will resign by October, leaving his Conservative
Party to appoint a successor to formally initiate nego-
for the World tiations on the United Kingdom’s exit from the Euro-
pean Union. Naturally, the British economy will take a

hit as the pound and stock markets fluctuate, as capital
ver the coming weeks, the frenzy of the
flees and as companies relocate to continental Europe.
financial markets will dominate the world’s
Renewed talk of secession in Scotland will create yet
attention. But what lies beyond the horizon
another source of political uncertainty. If the United
in a post-Brexit world? Stratfor highlights the areas of
Kingdom loses access to the European common mar-
the world that will be most affected by the latest phase
ket, its main trade partners in the European Union —
of the European Union’s fragmentation.
Ireland, the Netherlands and Belgium — will suffer.

Europe’s Unraveling Consequently, they will work to expedite a free trade

agreement between Brussels and London. The stabil-
The United Kingdom will be locked in political tur- ity of the ruling Tories needs to be monitored closely.
moil. Prime Minister David Cameron has announced Should the party fail to agree on a replacement for

The Global Response 1.5

to the Brexit
The Brexit has created an aura of uncertainty in global fi-
nancial markets. As a result, investors are pulling out of GBP to USD
riskier assets to buy safer ones. The British pound
dropped by as much as 11 percent after the British vote,
while the dollar, yen and gold all saw strong inward flows.

Data as of noon CST 06/24

Jan. Feb. Mar. Apr. May June

0.010 1.2


0.009 1.1

0.008 1.0
Jan. Feb. Mar. Apr. May June Jan. Feb. Mar. Apr. May June

0.155 0.160

RMB to USD (onshore)

0.150 0.155

RMB to USD (offshore)

0.145 0.150
Jan. Feb. Mar. Apr. May June Jan. Feb. Mar. Apr. May June

1,400 55


Gold 40
35 Brent crude oil
1,000 30
Jan. Feb. Mar. Apr. May June Jan. Feb. Mar. Apr. May June
Sources: Bloomberg; CNBC Copyright Stratfor 2016
Cameron, early elections could be triggered, and by oil price recovery. If prices were to fall much below $30
then the mood on Brexit could shift depending on the per barrel, Saudi Arabia and other Gulf Cooperation
severity of economic pain. Council members would reconsider production cuts
or freezes. If prices remain comfortably above $40 per
It will be up to France and Germany to calm nerves barrel, on the other hand, they could continue with
and frame the financial volatility as an argument for their current strategy, maintaining market share and
integration. But calls for European unity belie the deep waiting out a price correction. Weaker oil prices will
discord in the Continental bloc. Its core members have ultimately impair revenue, hitting oil exporters’ curren-
fundamentally different ideas on how to manage the cies even harder and forcing them to draw on reserves,
eurozone, and the discrepancies will grow starker as maintain austerity and issue more debt than expected.
Euroskeptic forces in France and Germany persevere,
using the British referendum as their main tool to A much more complicated issue is the future energy
repatriate rights from Brussels. Without the United relationship between the European Union and the
Kingdom to balance their differences, France and Ger- United Kingdom, which is still an integral part of
many will become more polarized, which will gradual- the EU energy market. Deciding whether the United
ly erode the foundation of the European Union. Kingdom will stay in the European Energy Commu-
nity, which harmonizes Brussels’ energy policies with
The eurozone’s periphery will come under fire once those of neighboring countries, such as Ukraine, will
more, testing the European Central Bank’s promise be a key area of negotiation going forward. Remain-
to do “whatever it takes” to protect the currency area. ing would afford Britain the advantage of continued
In Italy, Spain, Greece and Portugal, political instabil- access to the common European energy market. The
ity and financial uncertainty may conspire to inhibit move could be a tough political sell for British citizens,
already lackluster economic recoveries. A devalued however, since it would again surrender certain energy
pound, moreover, will make vacationing in the euro- policymaking powers to Brussels — something that
zone more expensive and will cut into critical tourism Brexit supporters would oppose.
revenues in Southern Europe.
China’s Short- and
Having lost an important non-eurozone ally, Central
and Eastern European countries such as Poland and Long-Term Battles
Hungary and Northern European countries such as
Denmark and Sweden will further distance themselves Although the yuan has suffered in the immediate
from the core of the European Union by, for example, aftermath of the referendum, China’s central bank has
rejecting EU politics or renegotiating the terms of the tools at its disposal to mitigate the fallout. In fact,
the union. the sudden depreciation of the yuan — happening for
once without the scrutiny of global markets — could
even be considered a blessing in disguise, alleviating
Oil Recovery Cut Short? pressures on the currency. Even so, the People’s Bank
of China will face continued pressure to limit depreci-
Should the Brexit trigger a recession in Europe, de- ation, and it will likely manage larger Brexit side effects
mand for oil in the world’s second-largest oil market with measures such as reserve requirement ratio cuts.
will fall even more. The decline would reverberate The long-term impact could be far more profound.
in the world’s fastest-growing oil markets, India and European markets, including the United Kingdom’s,
China, because lower British demand would mean account for a substantial 15.6 percent of China’s total
slackened demand for oil overall, prolonging the global

exports. If the Brexit causes a recession that spreads from percent of its gross domestic product — it will face
the United Kingdom to continental Europe, the toll on less trade risk from a recession in the United Kingdom
China’s exporters will compound the considerable pain and European Union. But since Japan is instrumental
that they have already experienced in the past few years. to Asian supply chains running through Chinese and
other Asian manufacturing hubs that ultimately lead
Furthermore, the United Kingdom’s exit from the to consumer markets in Europe, it will still feel the
European Union could complicate Beijing’s efforts at effects, albeit secondhand, of the tumult there.
structural financial and economic reform. As Beijing
tries to manage the Brexit blowback, it may delay As the effects of Abenomics’ monetary policies weaken,
internationally focused measures to liberalize its finan- the Liberal Democratic Party may adopt more uncon-
cial sector. On the other hand, if heightened political ventional means to address Japan’s economic woes. For
uncertainty undermines the pound and euro as reli- now, Abe’s opponents are deeply divided, so if there
able international reserve currencies, China can take is going to be a shift, it will fall to the Liberal Demo-
the opportunity to present the yuan as an attractive cratic Party itself to devise an alternative to Abenom-
alternative. In the long run, however, the slowdown in ics. Two things to watch for are how much Japanese
export growth only further encourages liberalization conglomerates such as Toyota, Nissan, SoftBank and
mechanisms and other structural reforms to increase Mitsubishi come under economic strain as a result of
the efficiency of state-owned enterprises and to sup- the Brexit and how the younger generation of Japanese
port development in the private sector. Beijing will corporate leaders over time break through political bar-
continue to make gradual progress in addressing these riers to advance structural reforms.
challenges, using domestic social stability to determine
how much liberalization to conduct and how quickly. ASEAN Rethinks Integration
Dulling Monetary For those Southeast Asian countries with substantial
Policy in Japan supply chain and direct trade exposure to the Brit-
ish and European markets (for example, Malaysia,
Meanwhile, Japan has the opposite problem. Already, Thailand and Vietnam), a recession in Europe would
the yen has jumped as financial flows head for safer as- have significant consequences. As the Association of
sets. But the stronger yen complicates Abenomics, the Southeast Asian Nations (ASEAN) watches the Euro-
economic reform plan of Prime Minister Shinzo Abe. pean Union unravel, the bloc may rethink some of its
Even without the Brexit, the Bank of Japan has had more ambitious integration plans. A similar dynamic
difficulties generating inflation and weakening the yen could play out among the Gulf Cooperation Coun-
through aggressive monetary policies. Now, the bank cil, the East African Community and the Eurasian
may have no choice but to continue its monetary ex- Economic Community.
pansion, but the dulling effect of the monetary policy,
combined with a stronger yen, will continue to impede Russia Can Thrive
Japan’s growth. Moreover, the currencies of Japan’s on European Division
major trading partners, such as China, have weakened
against the dollar as the yen has surged. The Brexit plays into the hands of Russia’s leaders,
who would like to see Euroskeptic forces gain trac-
Because Japan’s direct trade exposure to Europe is less tion. The more politically divided Europe is, the more
than China’s — 10.6 percent of total exports and 3.3 negotiating room Russia will have with its Western

neighbors. A divided Europe will also present a less Trans-Atlantic Partners
coherent response to Russian aggression. Russia has
already accepted that European sanctions against it will Stand Together
be extended soon, but it could have a better chance of
breaking EU unity on the issue toward the end of the The next U.S. president will inherit the consequences
year. Overall, as the European Union becomes more of the Brexit and will have to decide how to navigate
preoccupied with its internal divisions, the Continent the evolving relationship between the European Union
will deprioritize other issues such as the Ukraine crisis, and the United Kingdom. At the same time, London
Nagorno-Karabakh and sanctions. will push for a free trade deal with the United States as
a way to secure a key consumer market for its exports.
Trade between Russia and the United Kingdom is Globally, more bilateral trade deals are likely to be
marginal, but Russia will be concerned about the lon- forged as larger, more ambitious multilateral trade
ger-term effect that a European economic slowdown agreements run into problems. Though the U.S. econ-
would have on markets and financial volatility that omy remains relatively robust and isolated from a trade
would affect the ruble. Kremlin elites are already divid- standpoint, it will nonetheless be affected by a poten-
ed over how to deal with the current Russian economic tial slowdown in Europe via financial linkages.
crisis and foreign relations, and an economic crisis in
Europe that puts further stress on the Russian econo- Financial uncertainty triggered by the Brexit has likely
my will deepen that debate. Russia will be affected if ensured that the U.S. Federal Reserve will hold off on
Europe becomes more bearish on foreign investment interest rate hikes for the remainder of the year, push-
in a worsened economic slump, but Moscow has also ing its next rate increase into at least 2017, depending
worked to isolate itself financially and economically on the state of the global economy. In fact, markets are
over the past two years to cope with weaker ties with factoring in an increasing likelihood of an interest rate
Europe. Russia will be driven to boost energy trade and cut by the end of the year. A flight to financial havens
overall economic ties with China and Japan as it looks will boost the dollar and crimp exports.
east to compensate for lagging interest in the west.
Turkey Haggles
Moscow, which has long seen London as an exten- Hard With the EU
sion of Washington’s foreign policy, has tempered its
anti-British sentiments while Britain has been a part of For Turkey, which for decades has been trying to get
the European Union. But a Brexit could open the way into the European Union, there is a hint of irony in
for even chillier relations between the United King- the United Kingdom’s departure from the bloc. EU
dom and Russia. This could affect Russia’s oligarchs, members will meet June 30 to discuss expediting
many of whom keep homes in London and list their Turkey’s accession. This is a bit pointless, however, and
Russian firms on the London Stock Exchange. The Turkey knows it. So long as the flow of migrants into
oligarchs are still crucial to the Russian state financial- Europe continues to fan the flames of Islamophobia,
ly, so average Russians who work for the big oligarch the government in Ankara can continue to bargain
firms or live in the oligarchs’ single-industry “monoci- with Brussels for concessions, such as finalizing a deal
ties” could also be affected. on visa liberalization. British Prime Minister David
Cameron has said Turkey will not get into the Europe-

an Union for another 1,000 years — and he is prob- The Mexican central bank, like the banks of several
ably right, assuming the bloc survives that long. The other emerging economies, may be forced to cut rates
European Union, for its part, will keep the talks alive in the short term. But longer term, Mexico’s risks are
to sustain the migrant deal, but it will not exert all that far more limited. Its membership in NAFTA gives
much effort to bring Turkey into its ranks. Turkish it relatively low trade exposure beyond the North
President Recep Tayyip Erdogan is ready to spin his American market, and the United Kingdom will view
country’s inevitable rejection, saying he will call his NAFTA as a key free trade opportunity to complement
own referendum for Turks to decide whether they even the European Union as a consumer market.
want to be part of the bloc at all. And so, with the
European Union preoccupied with its disintegration News of the Brexit brought more trouble for Venezuela
and with Turkey preoccupied with the Islamic world, and its president, Nicolas Maduro. The stronger the
accession talks will be perfunctory at best. Ankara will dollar gets and the longer oil prices stay low, the worse
focus its energy instead on maintaining trade and secu- the pain on Maduro and the ruling party. China, too,
rity links with the Europeans. may curb spending on Venezuela: Ahead of a potential
recession in Europe, Chinese demand for oil may slow
The Brexit will jolt Turkey’s currency, the lira, at least down even more, calling into question how flexible
for the short term. But the longer-term concern is the Beijing will be as a lender of last resort to Venezuela.
potential for the European Union to fall back into
recession and make another deep cut into Turkey’s ex- Argentina and Brazil will be in a similar situation.
port markets. The European Union is Turkey’s largest Both will suffer from capital flight, which will compel
trading partner, and the United Kingdom is the sec- their governments to intervene in the short term. In
ond-largest recipient of Turkish goods after Germany. the longer term, there will be an opportunity for the
Some 7 percent of Turkey’s exports go to the United South American trade bloc Mercosur to negotiate a
Kingdom, and nearly 45 percent of its total exports go free trade agreement with the United Kingdom. Mer-
to the European Union. Lower oil prices have helped cosur appears ready to ease off the protectionism it has
Turkey manage its deficit this year, enabling the central practiced in the past, and it is an attractive secondary
bank to make four consecutive interest rate cuts in the market, comparable to Eastern Europe, for British
past four months. The central bank may reconsider exports. Argentine President Mauricio Macri may see
that strategy in light of the financial uncertainty, but this as an opportunity, but although the United King-
Erdogan will apply political pressure to keep borrow- dom would like to fast-track free trade negotiations
ing costs low to boost growth. His government is polit- abroad, political turmoil in Brazil and political hang-
ically well positioned to crack down on dissent amid ups in Argentina may delay the process.
heightened economic stress.
Layering on Crises in Africa
A Mixed Bag in Latin America
South Africa immediately felt the effects of the Brexit;
Mexico has already taken its first step in response to the value of the South African rand decreased by 4 per-
currency stress. Its finance minister announced a 31.7 cent against the dollar. Politically, the stresses on South
billion-peso ($1.67 billion) spending cut, which will Africa’s ruling party, the Africa National Congress,
obviate the need, somewhat, to raise international continue to mount as long-term concerns of another
financing to cover its budget gap, wide as it is thanks potential recession — coupled with concerns about the
to low oil prices and dwindling production. rand — only aggravate the stresses in the South Afri-
can economy. The weaker the economy gets, the more

traction opposition parties gain with voters, increasing Delhi launched in 2007 with the European Union.
the heat on President Jacob Zuma within the African (The agreement has not yet been implemented.) This
National Congress. An early recall of Zuma becomes will probably create the space for India to negotiate a
more likely as the Brexit progresses. separate trade agreement with London.

Nigeria, dependent as it is on oil, must also contend India is the United Kingdom’s third-largest source of
with the slowing recovery of oil prices. But more spe- foreign direct investment, with approximately 800
cifically, the Brexit will affect Nigerian finance in two Indian firms employing 110,000 people. These include
ways. First, it will expose the Nigerian naira to curren- the faltering Tata Steel, England’s largest steelmaker,
cy volatility, thanks to President Muhammadu Buhari’s and Tata Motors, which owns England’s largest car-
decision to finally float it. Nigeria has already managed maker, Jaguar Land Rover. One of the reasons India set
the situation by intervening in currency markets, prop- up bases in the United Kingdom was to ensure access
ping up the value of the naira — which actually rose to the European Union; if the United Kingdom is no
June 24 — by selling dollars. But that kind of policy longer part of that union, then its companies may have
comes at the expense of the central bank’s already to rethink their business strategies.
low reserves, particularly when applied toward social
purposes such as development funding or making deals Moreover, a sixth of India’s information technolo-
with militant groups. Moreover, the value of remit- gy service exports, valued at nearly $19 billion, are
tances sent home from Nigerian workers in the Unit- destined for the United Kingdom. More stringent visa
ed Kingdom could be negatively affected. Nigerian requirements in a more nationalistic Britain may stem
remittances from the United Kingdom exceeded $21 the flow of Indian IT professionals. But a financial
billion in 2015. These challenges will only magnify the crunch in London may also compel the United King-
other issues Nigeria faces, including militancy in the dom to outsource more of its IT needs, which would
Niger Delta. actually benefit India.

India Reassesses The coming months will bring more market volatility
worldwide as the significance of Britain’s decision to
The Brexit vote will have mixed results for India. The leave the European Union sinks in. But the long-term
United Kingdom, home to some 1.4 million Indians, effects will take years to assess — the United Kingdom
is India’s 12th-largest trading partner. In fact, it is one will likely not exit the European Union until after a
of only seven countries with which India has an export long process of negotiation and untangling. The ques-
surplus, which totals $3.7 billion. A falling sterling, tion remains, however, whether London will be able to
therefore, could hurt that surplus. India’s commerce get its own economic house in order and whether its
ministry, moreover, announced that the Brexit would example will be an inspiration — or a warning — to
force India to reassess the Broad-based Trade and other EU member states. n
Investment Agreement, a free trade agreement New

The British Houses of Parliament reflected in a puddle of rain in Westminster. (MARY TURNER/Getty Images)

Reflections on the
he United Kingdom’s decision to leave the
European Union has raised more questions
Referendum than answers. The results of the referendum
have ushered in greater political uncertainty, a height-
ened sense of financial market risk and deep division
Editor’s note: The following analysis was written by
in British society. But with so many scenarios in play,
ETM Analytics, an economic and financial advisory
there is still much that we don’t know. When will the
firm with offices in the United States and South Africa.
British government actually invoke Article 50 of the
While not a Stratfor analysis, it complements our views
Lisbon treaty and begin its formal departure? What
by providing a macroeconomic perspective of the Brexit
will the new government look like now that Prime
referendum. We hope this joint effort amplifies our readers’
Minister David Cameron has resigned? When will the
understanding of the outcome of this historic vote.
Parliament ratify the referendum results? What does
the future hold for Scotland, which is already consid-

ering a second vote to remain in the European Union? Political discontent has now manifested in ways that
How will Britain’s new macroeconomic, business, trade transcend well-worn political dividing lines, creating
and immigration policies take shape? And, perhaps greater general uncertainty than normal — something
most important, what is the fate of the bloc itself? fragile systems don’t cope well with. The political vol-
atility brewed in this financial and economic cauldron
Before the referendum took place, ETM Analytics unmercifully loops back as a catalyst for even more
argued that leaving the European Union would be system instability. This is where we are with Brexit, and
unlikely to make Britain’s economy structurally worse we expect to see many more instances of the polit-
off but that it could induce sufficient panic in finan- ical volatility feedback loop exposing financial and
cial markets to hasten an inevitable cyclical downturn. economic weakness, not just in Britain but in major
The British economy is fragile whether it leaves the economies across the globe in the years ahead.
European Union or not, but in our view Brexit gives it
more opportunity for constructive reform and greater Breaking this vicious cycle by building a dynam-
flexibility to deal with future regional financial and ic wealth-creation system is difficult but critical for
economic instability and contagion. We also argued, countries in the throes of economic stagnation. In
however, that leaving would not cure all of Britain’s a sense, Brexit is a bet that Britain can do this more
ills. These arguments still hold. So rather than repeat effectively and more quickly outside the strictures of
our previous predictions, we thought we might use this the European Union bloc than in them. There’s good
space for reflections on the past few days that may, we reason to believe this. Our research shows that smaller
hope, begin to clarify the future. nation-states have been highly capable of reforming
their political, legal and financial systems constructive-
Vicious Circles ly since the 2008-2009 global recession in ways that
incubate rather than inhibit growth and diffuse rather
The Brexit takes place against a precarious global mac- than ferment political volatility.
ro backdrop. The global financial and monetary system
is fragile, and, as we have noted, this fragility is a direct Disentanglement from Brussels may buy the kind of
result of a flawed architecture. So we see the Brexit as flexibility Britain needs to tackle this challenging task
a consequence of economic and financial dysfunction, better. Still, Britain is not a small nation-state but a
not a cause of it. large, complex and old one with deep international
financial and economic roots. So Brexit success, while
The system’s poor design has predisposed major eco- achievable, will have to be hard fought and hard won.
nomic systems to financial and economic crises. The
crises, in turn, have inspired quick-fix solutions, not Europe Weakens
a fundamental redesigning of the system itself. Fiscal
deficit spending and quantitative easing, for example, The immediate market reaction to the Brexit — what
treat the symptoms but not the disease of economic some call the “naked” reaction — was jarring. But,
distress. If anything, the quick fixes have made system- tellingly, continental European stock markets, and
ic dysfunction even worse, and state fiscal, monetary particularly banks, not only suffered terribly but
and regulatory control remains permanently elevated performed worse than their British counterparts, even
accordingly. The result is stagnation, rising wealth after adjusting for currency moves. Southern European
inequality and state power concentration that is vora- sovereign bonds also sold off aggressively.
ciously breeding potent political discontent.

The implied early message in the markets is that The reconfiguration of the political balance of power
Europe may be a bigger loser from the Brexit than the certainly leaves a problem of policy uncertainty that
United Kingdom. This idea is certainly plausible even won’t be solved quickly and will probably leave a sour
if one assumed the Brexit did not heighten the risk of taste in the mouths of financial markets. But we know
an EU break-up. Brexit leaves an already fragile union from referendum day poll data that the British elec-
more budget-constrained, less sure of drawing on Brit- torate is predominantly liberal, open and tolerant and
ish support for ailing periphery members, and open to wants to be internationally connected as Britain has
being out-competed by a potentially more nimble and been for centuries. We expect this is roughly where the
dynamic Britain. British political pendulum will eventually swing again,
and that should bode well for reform efforts. Though
Layer over this the particularly precarious state of it may deviate periodically, Britain tends to revert to
the Continent’s undercapitalized banks and the now open financial flows, free trade, and strong global con-
heightened risk of further EU fragmentation and one nectivity of human capital and technology flow.
can see why Brussels’ nose is so out of joint. Investors
are now applying a greater political risk discount across But this “resting place” will have to deal with core
Europe in expectation of escalating vicious circles all grievances of the economically marginalized. The redis-
over the region. We argued that the Brexit could be a tribution of wealth — a temptation for opportunistic
catalyst for recession and financial panic in Britain, but politicians — would have a short shelf life. Not only is
it may be even more so in Europe. Britain in a fiscal cul-de-sac, but the referendum results
make clear that this constituency is tired of the indig-
Political Realignment nity and social immobility wrought by perpetual state
largesse. Constituencies that are heavily subsidized by
The British political landscape stands to be radically EU money voted overwhelmingly to leave the union.
reshaped. Just a little more than a year ago, Brit- Reformers will have to grasp that most of those who
ain’s Conservatives were basking in the glory of their voted to remain did so because to them the European
Parliamentary majority. Now the prime minister has Union represents openness and economic connectivity,
resigned, and there is precious little clarity on what while many who voted to leave want less regulation,
comes next, let alone whether the Conservatives retain jobs not handouts, and bringing sobriety to what they
such strong support. If a new government can’t mus- see as a rogue banking and financial sector.
ter parliamentary confidence — which is no short
order — elections probably aren’t too far off. The This confluence of political forces can and should, un-
referendum has effectively re-marked political ter- der astute leadership, result in politically popular liber-
ritories and may eventually alter British party poli- alization reforms, which could put Britain ahead of its
tics beyond recognition. developed market peers in growth and dynamism. The
Brexit does not guarantee this outcome, but it gives
the country some options. n

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