Measuring Implications of "Brexit"

The victory of Brexit is not too shocking. The struggle of Great Britain ahead of the referendum was worrying, even leading to a fight between life and death. The peak was the fatal shooting of Jo Cox, a Labour Party member of Parliament, during an anti-Brexit campaign.

Poor people, politicians and the media were divided with a relatively balanced power. The exit of Britain from the European Union (EU) was supported by large media like The Sun, The Sunday Times, The Sunday Telegraph, and The Telegraph. Meanwhile, the majority of big economic media outlets like The Financial Times, and well-known public media outlets like The Observer and Mail on Sunday aggressively campaigned against Brexit.

Economic implications

Finally, the Brexit camp won by a thin margin (about 51.9 percent) against those who wanted to remain in the EU (48 percent). And the political process will still continue, both in Britain itself and in the European Union. Discussion is predicted to be lengthy.

Even though the option to leave is unavoidable, integration is a matter of degree. Loosening does not necessarily mean being broken. Possibly Britain will leave politically, but the format of economic integration will still be maintained. At least in the short term, efforts to repair the "leakage" of EU power will be carried out, even with global support.

The political power will also weaken. And, if not shaking the existence of the EU, Brexit will possibly cause a shock to trading block of the 28 EU member countries. And this fact could undermine EU grandeur, which was built from the dust of World War II.

The fastest impact from the Brexit phenomenon is financial market shock that could lead to global uncertainty. The Poundsterling fell substantially to its lowest level within the last 31 years against the euro and other major currencies. Meanwhile, the euro is also under pressure against the US dollar.

On the other hand, for the US economy, the strengthening of its currency will even cause negative effects, especially on exports that are increasingly pressured. If exports fall, economic growth will also weaken. That is why Janet Yellen did not raise the Federal Reserve interest rate at the beginning of June as schedule.

Brexit will become a new source of restlessness for the global financial market. If the financial market is in uncertainty, and growth is low, the balance sheets of companies will be in the red. If the balance sheets of the companies that are going public in the stock market worsen, the stock market will surely be dragged down and there will be capital migration. Its counter effects will hit macro-economic indicators.

A vicious cycle is encircling advanced countries. If the advanced countries weaken, the global economy will also be under pressure. Possibly the revision of the World Bank on global growth from 2.9 percent to 2.4 percent will continue. If global growth diminishes, its impact will also hit developing countries.

For our economy, judging from the financial lines, possibly we can be one of the countries that benefits. The outflow of capital from developed countries will seek new places in developing countries. Taking into account the difference between interest rates and returns on investment results in our financial markets with most developed countries are still large, liquidity will likely flow to our financial markets.

However, from our trade perspective, we will increasingly be pressured by the new development. Despite few direct relations with Britain, trade with Europe is significant. Not to mention the global effects, where global demand will also tend to decline. Our exports to several developed countries, which have just recovered, will fall again.

Meanwhile from the investment perspective, the flow of private foreign investment will also decline. The policy packages one to seven are at risk of not delivering any significant impact. Not because of mistakes in the directions of the policies, but they were delivered at the wrong time.

Weakening integration

The Economist, in its edition a week before the referendum, wrote a special column about the EU. It explained that the establishment of the EU involved a long and complicated process that was unimaginable, even by its supporters, let alone its critics. The column said it would be naive to let the long process of the establishment of EU be undermined by a process that was so short. A referendum is the most democratic process, but it could also be the most irrational. The decision is influenced by emotional factors.

The decision of voters in the referendum of course cannot by separated from the latest development in the European region. The development of immigration issues became an important trigger, especially for older groups. They are not willing to see their ancestral homelands flooded with immigrants. Meanwhile, the young generation is much more flexible.

The situation is similar to when the euro currency was released. The older generation tended to be resistant with a sentimental argument, not wanting the memory of their past to disappear with the loss of pride symbolized by the currency of each country.

The protracted economic crisis in the EU also became an important factor. Since the 2007/2008 crisis, countries in the EU blamed each other as the source of the economic chaos. In the context of the referendum, Britain feels that one of the factors that made it them difficult for them to recover was that the regional dynamics were difficult to control. There is also the fact that the British trade balance experiences a larger deficit against Germany. Asymmetrical economic relations among members of the European Union became a serious obstacle. Not only Britain, but Greece, Portugal and Italy also complained about German economic dominance amid economic adversity in other countries in the one area. In general, European countries in the southern part feel the deficit in their trade balance takes place amid a rising surplus of European countries in the northern part, particularly Germany.

Departing from this fact, the exit of Britain from the EU will lead to long implications, not only in the financial sector, but also in trade and the economy, both regional and global. This empirical fact can also bring about an academic interest in questioning regionalization, regional economic freedom and political unification.

The format of full integration like the EU seems to be no longer popular. Apart from the economy, they also integrate politics and laws so that the headquarters of the EU in Brussels becomes the most important authority in the region. It has not included the European Central Bank, which is considered to be biased toward Germany. Meanwhile, other community groups worry about the integration of military forces.

The development of the ASEAN Economic Community is increasingly complicated toward the direction of integration. The unification of currencies that had previously been considered is no longer relevant. As a result, the policy to adjust the magnitude of our currency value with neighboring countries (redenomination) is losing its relevance.

For our domestic economy, the short-term effects will be slight. However, the medium-term impacts will be more serious, when global growth tends to shrink, and there is a decline in trading and investment activity.

by A Prasetyantoko

source Kompas, Saturday June 25, 2016