Whatever the Brexit outcome is, the UK referendum will increase global economic uncertainty, market volatility and economic risk, said Dr Steinbock. He stressed while no final Brexit outcome will happen overnight, all scenarios will prove costly.
Following is the full text of Dr. Steinbock's interview to Mehr News Agency:
How do you think of the idea “Britain outside the European Union”? What are the positive and negative connotations? What are the immediate results till now?
In the past weeks, I have been on a multi-country tour in Europe, including the UK. The referendum outcome was hardly a surprise. It reflects UK’s economic malaise following the global crisis, the European debt crisis, and the Britons’ ambivalence about the EU, the euro and integration.
In the short-term, most economic implications of the Brexit would be mainly negative. In April, the UK Treasury estimated that an exit could cause an almost 10% loss of GDP, substantial plunge of household wealth, falling exports, rising prices and possible recession. Other reports have repeated similar points. However, most Brexiteers, despite their ambivalence about quality jobs and economic stagnation, were motivated by concerns about immigration and security – that is, political and social issues, not just economic concerns.
Unlike Germany, Brussels has urged London to exit soon, but that requires the UK government to trigger the Article 50 of the EU Treaty, which would start a formal withdrawal process. In turn, UK Prime Minister David Cameron has indicated that a new PM must oversee the Article 50 process. So what's likely to follow next are tough discussions in the next EU Summit on June 28. It will parallel with a UK parliament debate which must rule on the new petition that considers the referendum outcome non-binding. As Slovakia takes charge of the EU presidency on July 1, it must deal with the Brexit talks. However, the defining moment belongs to the UK Conservative Party conference in early October when a new prime minister should trigger the Article 50 process.
How do you predict the consequences of Britain's exit from the European Union in its domestic and foreign policies?
The UK referendum demonstrated that most Britons (52%) are currently for a Brexit. However, most members of the parliament favor pro-EU views (almost 70%). In the UK, the sovereign is the Parliament, not the government. So the question is, will the UK follow the views of its citizens or its MPs.
As I predicted prior to the referendum, the UK referendum will foster substantial economic uncertainty, market volatility and political risk, which could lead London and Brussels back to the negotiating deal; to a still another referendum; a different deal; or an eventual Brexit. Despite the referendum outcome, all these options are still viable. If, on the other hand, the Brexit would not undermine the EU, further integration would occur in a more rigid and protectionist bloc dominated by the policies of the largest European economies, particularly Germany and to a lesser degree France.
In the case of an eventual Brexit, the UK would have more geopolitical flexibility than within the EU, or with the US as a critical EU ally. But it would also have less global muscle.
What are the impacts of Britain's vote to leave the EU on other European countries as well as the US?
In the medium-term, much depends on how London would rebuild its global engagement. It could retain its membership of the European Economic Area (EEA), like Norway. Or it could opt for a negotiated bilateral agreement, such as that between the EU and Switzerland, Turkey and Canada. Or it could choose World Trade Organization (WTO) membership without specific agreement with the EU, like Russia or Brazil.
In light of the likely spillover channels (trade, investment and financial linkages), Ireland, Luxembourg, the Netherlands – Europe’s traditionally open, free-trade economies – would be most exposed to the UK spillovers. In contrast, Russia and Eastern Europe, along with France would be least affected by adverse spillovers.
Economically, the US would be significantly more vulnerable to financial-market volatility than a trade breakdown. From the US perspective, an adverse scenario could mean credit tightening, impaired trade finance, and reduced lending by European banks. Politically, the transatlantic relationship would take a hit because Washington would lose its most important ally within the EU.
Is there also possibilities that other EU members would seek to leave the European Union, following Britain’s move?
In the short term, much depends on whether Brussels can contain the economic uncertainty, market volatility and political risk. In the UK, the referendum has energized the pro-EU Scotland, which might try to stop the Brexit and, if that fails, could seek ‘Scotexit’ – that is, divorce from England.
In Western Europe, the Brexit outcome is likely to support Euro-skeptics in countries that have an unfavorable view of the EU, including Greece, where living standards have plunged; France, where President Hollande’s pro-EU socialist government is under fire from both left and right and the National Front's Marine Le Pen is the likely President in 2017; and Spain where the leftist Podemos and anti-system movement have grown into a major political force before the impending elections.
Moreover, several EU economies - including Italy, France, Sweden and Belgium, Netherlands - have already expressed willingness to hold a UK-style EU referendum. If anti-EU forces will win in these countries in the coming months, future history will see the UK referendum of June 24 as the beginning of the end for the EU.
Do you think London will change policies regarding its relations with other countries, especially in terms of trade and economic ties? Is it possible for companies in Britain considering relocation due to the uncertain market conditions caused by Brexit?
If a Brexit will happen eventually, the UK is likely to reassess many of its existing trade, investment, financial and geopolitical ties, even if the substance of its foreign relations is likely to prevail. In the near-term, a Brexit would have a significant impact on many of UK's economic partners. In light of the likely spillover channels, Ireland, Luxembourg, the Netherlands – that is, Europe’s open, free-trade economies – would be most exposed to the UK spillovers. In contrast, Russia and Eastern Europe, along with France, would be least affected by adverse spillovers.
Internationally, the UK’s greatest trade, investment and financial partners would be most exposed to adverse spillovers, particularly its former colonies, Hong Kong and Singapore, South Africa, as well as the US, Canada and Australia. In turn, the US would be significantly more vulnerable to financial-market volatility than a trade breakdown.
In the Middle East and North Africa, the most exposed economies would be Qatar and Turkey. A medium impact would also be felt in the Gulf (UAE, Bahrain, Kuwait) and the Middle East (Israel, Lebanon, Egypt). The UK exposure of Saudi Arabia is relatively lower. Conversely, if a Brexit will eventually take place, some non-European economies could become beneficiaries if the UK must seek new trade arrangements outside Europe.
In the case of a Brexit, most EU-related financial institutions would leave the UK. On the other hand, a continued EU membership would force the UK to conform to EU’s financial sector rules, which London’s City would like to avoid. Certainly, a Brexit would also require most multinationals that operate in the UK to reassess their location benefits, as well as EU’s likely geopolitical evolution in the medium-term.
What about the policy of other countries regarding London? Will they also switch theirs, being concerned over an imminent unstable situation, like China which rely on Britain’s market to access the EU?
Unlike the US, China is significantly less exposed to the Brexit. London has a historical "special relationship" with Washington, which is broad and deep in terms of economics, politics and security; China doesn't. China’s new trading Silk Road initiatives enter Europe through Southern and Eastern Europe, not the UK. And as Beijing has only begun critical financial reforms, it is not vulnerable to British portfolio flows or bank claims in the way that the US. is. In turn, China’s largest trade partners are the US, Japan and South Korea, not the UK.
Nevertheless, China is indirectly exposed. In relative terms, Hong Kong – China’s Special Administrative Region – may be the most exposed country in the world to the Brexit.
It is true that, in the past few years, relations between the U.K. and China have steadily warmed, from Chinese investment in British power and high-speed rail to London’s role in Chinese financial markets and regulation. In spring 2015, the China-led Asian Infrastructure Investment Bank (AIIB) was dramatically boosted by the UK’s participation. In turn, President Xi’s state visit to the UK in October 2015 heralded deals worth over $60 billion.
However, in the final analysis, the UK’s eventual Brexit would be a great economic and political loss to Washington, but only a temporary and partial setback to China.
Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/
Interview by Lachin Rezaian