Why Brexit endangers global unions that helped West prosper

AP News
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Posted: Jun 27, 2016 4:31 PM
Why Brexit endangers global unions that helped West prosper

WASHINGTON (AP) — Britain's decision to bolt the European Union means economic pain for the United Kingdom above all. But it also threatens the economic alliances that helped drive decades of prosperity in the West after World War II.

And it could imperil an already wobbly global economy.

The Brexit vote "is just one chapter in a much bigger global story" in which Europe, the United States and other Western nations cooperate less, endure economic gloom and see their role in the world diminish, 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 U.K., 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 the 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.

Cornell University sociologist Mabel Berezin, who has studied European politics, sees Brexit as "is the harbinger of more dissolution to come. Europe as we have known it is on its way out."

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."

Manulife's Greene added, "A splintering of the EU could tip the global economy back into recession."

In part, that's because Brexit seems likely to intensify troubles already plaguing the global economy — from weak investment to faltering world trade. Businesses in rich countries were already hoarding cash and were reluctant to invest in new products, machines and factories.

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 U.S. and U.K. 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.

The EU has called for speedy negotiations. But British Prime Minister David Cameron has announced his resignation and wants to leave the bargaining to his successor, who must be chosen by October.

On the face of it, Britain's economic troubles shouldn't deliver a major direct hit on the U.S. economy. Britain is America's seventh-biggest trading partner, accounting for just 3.1 percent of exports and imports this year through April.

But the Brexit vote has shaken investors. The Dow Jones industrial average tumbled 610 points Friday and 285 more points by mid-afternoon Monday. When Americans see the value of their investments suddenly shrink, they're less likely to feel confident enough to spend.

Brexit has also sent frightened investors rushing for the safety of the U.S. dollar, driving an already high-priced currency to new heights. A stronger dollar makes U.S. goods costlier in foreign markets, thereby squeezing American exports and economic growth.