The immediate verdict of the financial markets on the UK’s referendum result to leave the EU was swift and damning: sterling fell sharply, investors fled some real estate funds and thus threatening their solvency, UK bank stocks lost significant value and the UK government lost its AAA rating in the bond markets.
The economic uncertainty that Brexit created was magnified by the political risk that the leaders of the campaign — Boris Johnson and Michael Gove — amateurishly created by entering into selfish political infighting that revealed a lack of a vision and planning.
Johnson panicked in the face of the unexpected success of the Leave campaign that he had led and immediately announced that Brexit did not mean cutting all ties with the EU, economically and politically. Gove then betrayed Johnson, to whom he had previously sworn allegiance.
Meanwhile, the leader of the opposition, Jeremy Corbyn, came under severe attack from his own Labour Party, which voiced its distrust of his leadership qualities. On top of this English drama, the spectre of a ‘tragedy’ in the form of a second Scottish referendum to leave the UK, was raised by Nicola Sturgeon, the Scottish First Minister. Of course, the UK has historically had strong political institutions, traditions and elites collectively driven by common sense to avoid political drama and to ensure continuity in domestic and international affairs. But the formidable challenge to navigate unchartered waters in the short and long-term post-referendum is enormous and has thrown the UK into turbulence.
Against this background of unprecedented economic and political risks, the UK faces ‘relegation’ (in the unforgiving and yield-searching world of global financial calculations) to the league of emerging economies, joining the likes of Brazil, Turkey, and South Korea. Such economies regularly experience runs on their currencies due to a mixture of macroeconomic fragilities like high levels of sovereign debt, high current account deficits, weak undercapitalised banks and political infighting.
The post-Brexit UK exhibits all these weaknesses and will continue to exhibit them in the near- to midterm. And there will be new problems.
For example, there is already anecdotal evidence of the food processing industry and fruit farming suffering from labour shortages, due to East European immigrants returning to their home countries. The French Prime Minister has publicly announced tax breaks and other relevant support to lure bankers from London to Paris. Building a solid post-Brexit economic future for a UK outside the EU, based on the weak foundations of structural economic problems and new political uncertainties is going to be extremely difficult.
However, the sterling, stocks and bonds and real estate will combine to make the UK an excellent asset class for international investors — and especially for hedge funds that thrive on volatility. Since the demise of the BRICs and emerging economies story — starting in the second-half of 2013 when the US Federal Reserve announced the tapering of quantitative easing — international financial investors have been starved of new asset classes on which to speculate.
In our world of financialised capitalism, the wave of money in international markets continuously searches for and creates new asset classes to speculate on. In the past we have seen the dotcom companies, Asian Tigers, BRICs, etc playing such a role. An alternative to the UK being relegated to this emerging economy league is the UK initiating the creation of a brand new asset class in international finance.
The UK has excellent qualities of a country asset class, with many added advantages. These include the size of its economy, reliability of its market-friendly legal and institutional traditions and deep financial markets. Other economies such as Switzerland, Norway, Denmark and Sweden — individually and collectively — have played such a role under the quantitative easing polices of the US, Japan and the Eurozone since the 2007 financial crisis.
But none of them offer the size and depth of opportunity the UK could offer. In this context, the UK could easily join these smaller Nordic European countries to form a new asset class. And it would not be surprising to see the forthcoming elections in countries like France and Holland providing a momentum to this new asset class, with speculators betting on the financial consequences of Frenchxit and Dutchxit.
Welcome to the new asset class of Saxon-Viking economies or Viking-Saxon economies.
The ‘Leave’ campaigners were fighting to take back control from Brussels. In a financialised global economy, the only country in the world which takes back control is North Korea. The leaders of the Brexit campaign are already realising the impossibility of having full control over economic and international affairs.
In the aftermath of the Brexit result, the governor of the Bank of England, Mark Carney, announced that the anticipated financial risks of Brexit are already becoming apparent. For Theresa May, the new Prime Minister, there is going to be much more on her plate than negotiating the new trade relations with the EU.
The post-Brexit political leaders in London will spend most of their time trying to manage the UK’s (with or without Scotland) future as a new asset class in a financialised world economy. And the technocratic Bank of England is very likely to be the busiest and, increasingly, more powerful financial institution in the post-Brexit world, as it tries to keep the UK afloat in turbulent financial markets.
— The writer is with Manchester Business School.
