Brexit is the mess that wasn’t supposed to be. To understand the effects of the United Kingdom’s decision to leave the European Union, one must first take a quick look at the political context in which the vote was taken.
Of course leaving the EU was simply the political issue that politicians, such as Boris Johnson, used to gain support from the electorate. They are like the dog who catches a car it is chasing – what next! This a parallel situation to that in the United States where the Republican party used the promise to repeal the Obama administration’s Affordable Care Act as a wedge issue for seven years without any solid plan to replace it. In both cases the result has been a mess. In Great Britain the next hurdle is how the exit negotiations proceed. Will the EU leadership roll up their sleeves and try to work out a solution which minimises any adverse economic impacts, or will the EU hang tough because the leaders fear the temptation will push other nations to leave.
The political climate in France and Germany will not move away from austerity. Hence one cannot expect an improvement in the economies of countries such as Greece which have suffered Depression era levels of unemployment no matter what the Article 50 negotiations produce.
The dominant factor in the EU’s economy over the last five years has been the total failure of President François Hollande to reverse France’s economic doldrums. He never stood up to Chancellor Angela Merkel of Germany to reverse the unemployment due to the severe austerity measures. As for the future, Emmanuel Macron will likely become France’s new president in this year’s election. The former member of the Socialist Party was also an independent. Now he leads his En Marche! movement. From August 26, 2014 to August 30 2016 he was Minister of the Economy, Industry and Digital Affairs. It is said that he is a centrist in the mold of Bill Clinton and Tony Blair. It is unlikely he will fight austerity.
Alternatively the ultra conservative Marine Le Pen might win. If she did, it is unlikely that the European Union would remain together, as it is now. Such turmoil can only adversely affect world trade. However, her win has a very low probability.
With this political environment, EU negotiators will walk the narrow path of preserving levels of trade while injecting some pain to dissuade other nations from leaving. The difficulty is that in negotiations with London the EU lacks the one weapon of massive impact: currency. Recall the leverage put against Greece by Brussels and Frankfurt. It all centered around the euro and the banking system. Alexis Tsipras and former Finance Minister Yanni Varoufakis never had a chance against Wolfgang Schäuble. The Article 50 talks will not be one-sided between Brussels and London.
One thing to keep in mind is that the UK exit will have the effect of giving Germany more power within the Union. Although in the past Britain’s Conservative government wasn’t a counterweight to Germany’s conservative policies, there was always the chance of a change if a Labour government had been elected.
As Article 50 is triggered, the main impact of Brexit for Europe is not what it does, but what it doesn’t do. Brexit has no effect on the disequilibrium of the euro. The only solution to the euro disequilibrium which favours Germany’s export economy with respect to the southern European countries’ economies would be the establishment of a separate currency for the southern countries. Call it the med. The med could then be devalued with respect to the euro and help exports from countries such as Spain, Portugal, Italy, and Greece. But as long as the present situation continues, Europe will not sustain robust growth. And Brexit does nothing to change the euro problems. All bets are off, of course, if Brexit triggers a further breakup of the EU.
But for the United Kingdom, Brexit could be an important issue. As negotiations progress, if the outcome does not look good for Scotland, another referendum could split the UK and perhaps stimulate other regions of Britain to want their own referenda to leave. This would be especially true if Scotland joins the EU successfully.
As the situation is so fluid, the impact on shipping cannot be predicted with confidence.