WASHINGTON: Britain’s decision to bolt the European Union means economic pain for the United Kingdom above all. But it also imperils the economic alliances that helped drive decades of prosperity in the West after World War II.
And it could tip an already wobbly global economy into recession.
The Brexit vote “is just one chapter in a much bigger global story about the decline of the Western world,” Megan Greene, chief economist with Manulife Asset Management, wrote in a research note Monday.
Greene and other analysts warn that the messy aftermath to the Brexit vote may splinter the EU, which has promoted postwar cooperation and the free flow of trade, job opportunities and immigration across Europe.
Already, there have been calls for a referendum on EU membership in France and the Netherlands. Discontent with the EU is also running high in Italy, Sweden and Hungary.
Britain is facing breakup pressures of its own. Voters in Scotland and Northern Ireland, both part of the United Kingdom, overwhelmingly favored staying in the EU. Nationalist leaders in both countries have vowed to leave the kingdom if necessary to stay in the EU. Many voters in Scotland and Northern Ireland valued the economic benefits of EU membership. In Northern Ireland, some also feared that the loss of EU membership would mean the re-establishment of security checkpoints at the border with neighboring Ireland.
The EU and other postwar institutions were meant to promote a European identity that would replace the toxic nationalism that led to war in 1914 and 1939. And through the mid-2000s, they appeared to succeed, said Carmen Reinhart, an economist at Harvard’s Kennedy School of Government. Barriers to trade and immigration inside Europe were torn down. Nineteen countries adopted a common currency, the euro.
Then came the 2008 global financial crisis, which revealed that countries like Greece on the European periphery had borrowed recklessly. Creditor countries, led by Germany, took a harsh stance in dealing with what they saw as profligate neighbors. Old frictions re-emerged.
The EU’s fumbling response to the debt showdown — and to a refugee crisis involving migrants from Syria and elsewhere — undermined confidence in Europe’s institutions. That loss of faith came just as millions of British and European workers were left behind in what was seen as a lackluster recovery from the financial crisis. Average pay in the U.K. remains 7 percent below 2008 levels when adjusted for inflation, according to Dartmouth College economist David Blanchflower.
Most immediately, tremors from the Brexit vote are destined to diminish economic growth in the region and well beyond.
The global economy has little room for error. Even before the Brexit vote, the global economy was forecast by the World Bank to grow a lackluster 2.4 percent this year. It was the latest in a series of downgrades by institutions that monitor the international economy.
“It’s a dangerous time because you’re already flying low to the ground,” Reinhart says. “It doesn’t take a major catastrophic shock to put you in a really bad place.”
The paralysis will likely grow as Britain and the EU begin to wrangle over the terms of their divorce and other EU countries consider abandoning the alliance.
The International Monetary Fund says world trade will likely grow 3.1 percent this year after expanding 2.8 percent in 2015. In the years leading to the financial crisis, trade routinely grew faster than 7 percent a year.
The EU and other postwar institutions encouraged freer trade within Europe. The Brexit vote reflects, in part, growing sympathy in the United States and United Kingdom for protectionist policies, like the 45 percent tariffs that Donald Trump has vowed to slap on Chinese imports if he wins the U.S. presidency.
Direct economic damage of the Brexit vote will fall most heavily, of course, on the United Kingdom and Europe. As an EU member, Britain enjoys tariff-free access to member countries’ markets and can lure skilled workers from across the bloc. The Brexit vote jeopardizes all that. Now the U.K. must negotiate new trade and immigration deals with the EU. Businesses will hesitate to invest in Britain until they know what the rules will be.