The Eerie Calm After Brexit

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Political scientists in general have long been doubtful about excessive reliance on direct democracy, where individual voters can decide on narrowly defined single questions. Representative democracy allows for horse-trading across different issues. It provides, in theory, if not always in practice, a vehicle for taking tough stances – possibly unpopular, but ultimately in a nation’s best interests – on complex problems. Political systems need to accommodate increasingly complex economic realities, but it is crucial to get the right mechanisms.

When the results of the UK’s referendum on Brexit started coming on the 24th June morning the whole world was in a state of shock. The opinion polls were indicating a close fight, but nobody really believed that Brexit will happen.

While the process of an eventual exit of UK from EU will be a long drawn affair, the ramifications are significant on the geopolitical and economic front.

Now in the case of the Brexit vote, the question of process is even more important than the outcome. If 52 per cent of the UK electorate feels EU integration is inimical to Britain’s long-term social and economic interests, the voices of those voters need to be heard. Yet one can question a process that rode roughshod over the views of the minority (the young, for example) and provided no formal outlet for reconsideration. If other countries follow the UK’s lead, the outcome will be chaos.

Not everyone agrees that referendums are destabilising. Several leading Swiss political theorists would beg to differ. They argue that the threat of referendums helps break up coalitions of entrenched politicians engaged in monopoly behaviour inimical to public interests. They also argue that referendums produce healthy debate and a more informed electorate. But Switzerland has very different traditions from the UK’s and long familiarity with the referendum process. The Swiss votes of recent years – say, the 2014 referendum on whether the central bank should hold more of its reserves in gold – have been clinical and easily reversible compared with the Brexit mess.

With the EU still struggling to coalesce around a strategy to preserve the currency union, and populist pressures building everywhere, it is highly likely that similar demands in other parts of the EU will start gathering momentum and disrupt the continent. A widespread resort to knife-edge votes to address complex, nation-defining economic questions with international implications would be a concern even amid strengthening global growth. But the situation is just the opposite — and in this context, such mechanisms are a recipe for instability and disaster.

The biggest economic risk from the Brexit vote is that it turns out to be the start of a vicious cycle of low growth and populist policies that lead to still lower growth and even more populist policies across the west. Not all populist prescriptions are bad right now; redistributing income through taxes and transfers is a logical reaction to growing inequality. Retreat from the liberal global trading order is not. US workers, for example, concerned about stagnant wages, could face far worse if the US abandons decades of support for global trade, a position that has become far more mainstream in US political debate. Most Americans would find themselves paying significantly higher prices for many goods, meaning their wages will buy much less.

No one knows what the vote means for the UK in the long run. Even if it causes a recession in the short term, it is always possible the alternative would have been worse. Remember that Gordon Brown, as chancellor of the exchequer, was vilified by some for maneuvering to keep the UK out of the euro even though it had joined the EU. Years later, as the euro crisis unfolded, he began to look like a genius. Maybe the same will happen to the Leave campaigners, although that point has not yet arrived.

Regardless, one cannot be happy about the way the EU has reached this point, and we can only hope that if other European nations follow the UK’s lead, they will put more checks and balances. One fears, however, that this will not happen. Instead, opportunistic politicians who aim to disrupt the system for ideological reasons or personal advancement will seize on referendums as the option that sets the lowest hurdle.

Global stock markets have chosen to ignore Brexit with a probable conclusion that Brexit might be bad for the UK, but for the rest of the world it’s close to a non event. However, policymakers should understand the magnitude of the economic risks. There is certainly no room for complacency.



About the author: Sudip Bandyopadhyay
Sudip Bandyopadhyay
Sudip Bandyopadhyay is currently the Group Chairman of Inditrade (JRG) Group of Companies. He sits on the Boards of a number of listed and unlisted companies. His area of expertise includes equity, commodity and currency markets, wealth management, mutual fund, insurance, investment banking, remittance, forex and distribution of financial products. During Sudip’s 16 years stint with ITC as Head of Treasury and Strategic Investments, he managed investments in excess of $1.5 billion. He was responsible for the acquisition of strategic stakes in EIH, VST and several other companies, by ITC. Post ITC, he was the Managing Director of Reliance Securities (Reliance Money) and also on the Board of several Reliance ADA Group companies. He was instrumental in leading Reliance Anil Dhirubhai Ambani Group’s foray, amongst others, into Equity and Commodity Broking, Commodity Exchanges, Gold Coin Retailing, and Money Transfer. Afterwards Sudip was the Managing Director and CEO of Destimoney, promoted by New Silk Route, with over $1.4 billion under management. Sudip has significant presence in business media through his regular interaction on leading business channels, business newspapers and magazines.Author can be reached at [email protected]

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