Last month, the world woke up to find that the British actually voted 51.9 percent for an exit from the European Union.

World stock markets lost over $3 trillion in market value, with the credit rating agencies downgrading the U.K. from “AAA” to “AA,” making it more costly for British companies and government to raise funds. The pound sterling depreciated sharply to its lowest level in years. 

What will happen next?

Brexit was technically a referendum on whether the United Kingdom wanted to remain in or leave the EU. The referendum was not a legal necessity, but arose from an election promise by Prime Minister David Cameron because his party was split on this issue.  But once the U.K. voted to leave, Cameron had to resign, throwing up a leadership crisis in the Conservative Party.

Two contenders are emerging after Boris Johnson, the former Mayor of London who successfully led the “Leave” movement, opted out.  Simultaneously, the opposition Labour Party is also in disarray because its Parliamentary members successfully passed a no-confidence vote against leader Jeremy Corbyn for weak leadership. 

Brexit was such a shock that everyone has an opinion, often very funny ones. Jean-Claude Juncker, President of the European Commission lamented, “The British vote has cut off one of our wings, as it were, but we’re still flying”.  One wit from Scotland commented that instead of Britannia rules the waves, “Britannia waives the rules.”

Confusion rules, because Brexit is a divorce. Brexit was only a declaration of intention to divorce, but divorce papers have yet to be filed — technically a formal notice to leave under Article 50 of the EU Treaty. Only the new Prime Minister, to be elected by September, can file the divorce papers and start negotiating how to split the family jewels, if any.

Can the divorcee survive on its own? 

Brexit was not a rational economic decision. Britain pays annually roughly 0.5 percent of its gross domestic product into EU coffers, but gets benefits back to the tune of roughly 1 percent of its GDP.  London, which overwhelmingly voted “Remain,” because of its key role as financial center for the euro, would be a huge loser. If Britain is out, then Paris and Frankfurt would happily take over the euro business. London jobs and property prices will be at stake.   

So far, European reactions reflect those of different family members in the divorce. German Chancellor Merkel was more cautious, preferring to wait for the next British move. French President Hollande called for an early exit. And Italian Prime Minister called for more EU aid for ailing Italian banks.

The remaining Europeans have two main choices — one is to remain cautious and muddle through. The other is to treat Brexit as a wake-up call and complete all the reforms that would bind Europe more firmly together. Muddling through is not an option, because there are huge urgent problems of Ukraine, immigration, imbalanced and anemic growth, plus fragile banks. Small wonder that fund manager George Soros simultaneously placed a short-sell bet against Deutschebank shares and is going public on his worry about whether after Brexit, Europe is on a path to disintegration. 

What are the implications of Brexit for Britain, the world and Asia?

In the immediate future, Britain will be very busy renegotiating trade agreements all over again with its trading partners. Despite worries, London remains the world leader in legal, accounting, financial and digital services, helped also by a cheaper pound. Indeed, cut free from the slowness in decision-making in Brussels, London may evolve more market-friendly financial regulations that enhance its competitiveness as a financial center. 

Europe on the other hand is being caught between rising tides and hard rocks. The departure of Britain removes a counterweight between Germany uber alles (above all) and weaker France and the southern partners. The fundamental issue is huge disagreements on the need for major reforms to complete a single banking union and to align fiscal policies to address major needs for public infrastructure, funding for social needs to cope with defense, regional imbalances and inward migration of more than 1 million annually. 

For the world as a whole, Brexit exposed an important social fault line. In 2001, London University’s professor Guy Standing identified the rise of an angry, global underclass called the “Precariat,” so called because it comprises people who are precariously living at the edge of poverty, unemployment and feeling socially exposed to the forces of globalization, immigration and robotization of jobs. The Precariat is the class that has voted in Donald Trump of the U.S. and Nigel Farage of the U.K. Independence Party, and now Brexit. They mistrust the establishment and have deep fear of others — namely foreigners and migrants.

For Asia, Brexit meant that global uncertainty is on the rise.  If as large and rich a ship as Europe is wobbling, and there are chances that some others might follow, what chances are there for Asian regional integration? The biggest threat is that the Brexit shock will cause both the euro and pounds (two out of the four reserve currencies) to devalue relative to the dollar. For the euro to depreciate is odd, because the eurozone is now the world’s largest surplus grouping, with current account surpluses around 5 percent of GDP. In contrast, the dollar and the yen are both appreciating as “safe haven” currencies. My own concern is that Brexit raises another signal that the world is slipping into global deflation, which I shall explain in the next article.

In the end, Brexit can only be understood within the long span of history. The great French historian Ferdinand Braudel in his monumental “History of Civilization” said that when Europe is dissected, the one operative problem was “liberty.” The last British Gov. to Hong Kong Chris Patten called Brexit “A Tragedy in One Act.” To me, Brexit starts as a comedy of errors, in which the audience has spoken — they did not like the script. The British chose instead their primordial right to liberty. Whether the new European drama unfolds as a tragedy, farce or new Game of Thrones, we Asians will watch it with breathless anticipation.

By Andrew Sheng

Andrew Sheng is a distinguished fellow at the Asia Global Institute, University of Hong Kong. — Ed.

(Asia News Network)