The moment of truth

Gayle Allard. Professor. IE Business School

1 August 2016

Brexit is both a cause and a consequence. It is the cause of the impact that this decision will have for the whole of Europe, but it is also the consequence of the failure of the governments of the old continent.

When the moment of truth comes common sense will prevail, we said. But it didn’t. Last month the British electorate narrowly opted to leave the European Union after 43 years as one of its key members, with only London, Scotland and Northern Ireland backing Remain. 

The news is, of course, a bombshell for the British economy. Within hours its bonds were at risk of losing their AAA status, while the pound suffered its worst fall in more than three decades and the stock markets fell by 9%. 

But worse is to come. The British cannot expect an easy exit from the EU, which guarantees access to Europe’s markets, while those living in Europe (there are more than 300,000 in Spain alone) also face an uncertain future. Brussels may well decide to make an example of Britain to avoid “Frexit” and “Nexit” by showing France and the Netherlands, for example, that leaving the EU is not without consequences. 

If Britain’s exit turns out to be difficult, then its economy could go into recession. According to the experts, the British financial sector could shrink by between 6% and 9% between now and 2020. JP Morgan and HSBC have warned that they may decide to move their operations from London to the continent. British farmers receive around 55% of their income from the European Common Agricultural Policy. How will Brexit affect labor costs if the flow of European immigrants is cut? And what about flights to the continent, or exports? These and many other questions remain unanswered. 

What’s more, Brexit adds a further element of uncertainty to an already volatile global situation. Stock exchanges around the planet fell on the news of the Brexit referendum result, an interest rates in the nations of Europe’s periphery rose. What is going to happen to the European and British economies in the coming weeks and months following what former US treasury secretary Lawrence Summers has called “the worst self-inflicted wound by a G7 nation since the G7 was formed 40 years ago.”   

The repercussions of the referendum will be profound and wide ranging. The financial crisis and the ongoing slow recovery have hit the working and middle classes hard, prompting an ever-stronger backlash against globalization in just about every developed country. And typically, as has been the case with Brexit, immigration and global free trade are the main cause of people’s anger. Right-wing nationalist parties are doing well in Austria, Germany, France and other EU members—and of course there is Donald Trump in the United States—, reflecting widespread rejection of mainstream politics. Brexit could be just the first of a series of defeats against the world order that has reigned since the end of World War II. 

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