Faculty from across the Global Network for Advanced Management spoke with Global Network Perspectives about the decision by voters in the United Kingdom to leave the European Union on Thursday and the impact it could have on countries from Chile to South Africa.
JÖRG ROCHOLL, PRESIDENT AND EY CHAIR IN GOVERNANCE AND COMPLIANCE, ESMT
Today is black Friday for Europe and constitutes the most dramatic event since the end of the Cold War. The strong negative reactions of the financial markets are only a harbinger for the longer-term economic impact, particularly for the UK. In the short term, only the central banks will be able to appease the situation. Therefore, everyone is waiting for their reactions with great suspense.
The European Union stands politically at a crossroads, with the risk of further exits. Therefore, it is more important than ever that the result of the referendum be analyzed calmly and carefully. The European Union is and remains the main guarantee of peace and prosperity in Europe. It is also clear that the image of the EU has suffered in recent years. Premature calls for further integration could exacerbate this negative feeling rather than help to bring Europe permanently together.
With Britain’s exit, Germany loses one of its closest allies within the European Union and faces the risk that the balance of power in the European Union will clearly move to this country’s disadvantage.
JÉRÉMY GHEZ, AFFILIATE PROFESSOR OF ECONOMICS AND INTERNATIONAL AFFAIRS, HEC PARIS
Note to all Europeans panicking today (including on financial markets): Just stop it… This is not Armageddon. It might not even be a crisis. It is just a clarifying moment that might prove life-saving for the EU in the long run. So now is not the time to overreact.
Here’s the paradox: the entity that is at risk of disintegrating is the United Kingdom, not the European Union. As argued here, London’s attitude towards the European project has never been short of ambiguous. It seems that the only thing that ever mattered to the UK was maintaining access to the Single Market and the supremacy of the City in the continent. Beyond that, it was about looking for ever-growing exceptions that were untenable. Now that the main threat against the European Union’s overall cohesion is gone, it is time for European leaders to bounce back and to reinvent this whole project all together.
FERNANDO FERNÁNDEZ MÉNDEZ DE ANDES, PROFESSOR OF ECONOMICS, IE BUSINESS SCHOOL
Spain has a particular relation with the UK and not simply because of Gibraltar. Both countries have been allies on many issues in the European debate and share a strategic interest in offsetting the French-German axis. They adhere to a more free market, less interventionist approach to economic policy making, and were clearly both in favor of TTIP, the trade agreement between the US and Europe. Probably, because of that shared economic vision, and also because of difficulties in access to other continental markets, Spanish multinationals targeted Great Britain as their preferred destiny after successfully expanding throughout Latin America.
Many British people may think of Spain only as a place to retire or watch good soccer. They probably overlook the fact that they likely have a mortgage or place their savings with a Spanish bank (Santander), get their electricity from a Spanish company (Iberdrola), or talk on their mobile thanks to a Spanish network (Telefonica). Even when they leave the country, they do it through a Spanish owned airport (Ferrovial owns a controlling stake at Heathrow). This used to be one of the strengths of the Spanish economy and its companies, its risk diversification into presumed mature, stable markets. Not any more, investors seemed to be saying; the results of the Brexit referendum sent the Spanish stock market to its worse ever sell off in one single day.
Rodrigo Cerda, Director of the Center of Social and Political Economy at PUC-Chile
Chile has a limited exposition to the UK: Just 1% of 2015 Chilean exports had the UK as final destination; less than 1% of Chilean pension funds are invested in that country and direct investment from that country is 3% of the total stock of international investment in Chile.
Does it mean that Brexit has no effect on the Chilean economy? Certainly not, Chile is a small open economy and volatility and other long run effects on the international economy have direct impacts. In the short run, negative outlook in commodity prices might depreciate the Chilean peso and accelerate domestic inflation. In addition, Chile has sovereign funds of 9% of GDP that could be used if the international scenario becomes too volatile and shows signs of recession. In the long run, potential deterioration on international trade in the European Union might impact Chilean exports and potential growth, but as exports to the European Union account for 13% of total exports, the impact might be mild.
JEAN-PIERRE LEHMANN, PROFESSOR EMERITUS AT IMD BUSINESS SCHOOL
The Brexit results also reflect the rising tide of deglobalization. When globalization erupted in the years after the fall of the Berlin Wall, there were two assumptions: first, that globalization would spur global economic growth; and second, that growth would be the rising tide that lifts all boats. The first assumption prevailed until the financial crisis of 2008, since when economists and policymakers intone that the “new normal” is low/stagnant global economic growth. The second never managed to convince. Some boats rose, indeed to dizzying heights, some stayed forlornly on the shore, many sank.
Brexit is a British/EU phenomenon, but with clear broader global implications, illustrations and lessons. As with the EC/EU failing to create a community, so globalisation has succeeded in developing a far more globalised market – albeit one currently in some degree of retrenchment – but not a global community. The “h” word, hate, plagues the planet. For the sake of the coming generations, it must be replaced by another “h” word – humanity. How to make humanism the prevailing “ism” is the urgent global challenge of the 21st century.
SUMRU ALTUĞ, PROFESSOR OF ECONOMICS, KOÇ UNIVERSITY
Could we envisage a scenario which helps to produce agreements for both Great Britain and Turkey that are better than the alternatives that are currently available? Judging from the hardline speeches that are emanating from the current EU authorities toward Great Britain, this seems unlikely at the moment. But Brexit itself together with the refugee crisis and the issue of immigration more broadly have shown that the current EU structures are themselves brittle and subject to great external stresses. Great Britain is currently the second largest economy in the EU and has vast reservoirs of strength in finance, trade, and soft power. Likewise, Turkey is an emerging mid-power, and is unique among its regional and cultural peers in terms of possessing a diversified and industrialized economy, a dynamic and relatively well educated young society, and stability that comes from a history of institutional development and reform stretching back at least 200 years. Could the existence of such potentially powerful yet unique partners lead the EU to devise new forms of association that increase the benefits for all concerned, and that account for the changing configuration of global economic and political power? The answers to such questions will undoubtedly be a topic of strong debate in future months and years.
SELVA DEMIRALP, ASSOCIATE PROFESSOR, KOÇ UNIVERSITY AND DIRECTOR, KOÇ UNIVERSITY-TÜSİAD ECONOMIC RESEARCH FORUM (EAF)
Regardless of last week’s outcome, this is not the end of the story for Britain and the EU. The referendum was not itself legally binding and there is a long way to go before Britain formally leaves the EU. If Britain does stay in the EU, the future of its relations with the EU will be a major topic in the country’s agenda. And if Brexit really does become a reality, Britain will not instantly severe its relations with the EU wholesale. Many issues, from the rearrangement of existing trade agreements to the status of EU citizens living in Britain will have to be dealt with in the years to follow. In the short term, a possible exit is likely to cause significant turbulence in global financial markets, and many countries, including Turkey, will be moderately influenced by the waves of negativity that spread. But in the long term, an exit is not expected to cause much chaos for Europe. Therefore, Turkey’s export markets will not see a significant effect.
KEITH HEAD, HSBC PROFESSOR IN ASIAN COMMERCE AT THE UBC SAUDER SCHOOL OF BUSINESS
It is a mistake to imagine that Brexit would have a major effect on Canada’s economy in the short, medium, or long run. Canada’s main export to the UK is gold and it’s unlikely that Brexit will have any material impact on British demand for Canadian gold.
Canadians should, however, care about Brexit because of what it says about the way politics and economics will evolve in the future. The use of referendums to decide critical policy issues must surely be drawn into question. We need to think about issues of how 52% of voters can change everything even for people who very much preferred the status quo.
Thus I think it is silly to pose the issue parochially as how does this affect Canada when the question we all ought to be asking is how does this affect the political and economic world we live in.
JOHN RIES, SENIOR ASSOCIATE DEAN OF RESEARCH AND HSBC PROFESSOR IN ASIAN BUSINESS AT THE UBC SAUDER SCHOOL OF BUSINESS
Given Canada’s strong orientation towards business with the United States and Asia, the economic impact on Canada will be limited. In the short run, the threat of contagion to national movements in countries Scotland, France, and the Netherlands will generate uncertainty and market volatility. In the longer run, the prospects of slightly increased trade barriers between Britain and the EU may shift trade, investment, and immigration towards Canada and other countries.
Alberto Trejos, Professor and Dean of Faculty, INCAE Business School
For South America, this could have a fairly bad effect. If there is a recession in the United Kingdom – and a smaller deceleration in the European Union – it could have a kind of impact on the growth rates in the rest of the world. In the northern part of Latin America, Central America, the Caribbean and Mexico, it’s not a region that’s as rich in commodities, but on the other hand it is a region that exports services, including but not limiting themselves to tourism and manufacturing goods. Therefore, this is not only an economy that relies on the health of the global economy, but also on the ability to co-produce with the world economy, to integrate into complex value chains, to be able to move back and forth easily while producing these goods.
The European Union companies are going to need to rethink how they are organized with their manufacturing now that the United Kingdom is no longer a part of them. This co-production with other regions of the world is going to be affected.
María de Lourdes Dieck Assad, Dean, EGADE Business School
Post Brexit, global financial markets responded swiftly and Latin America is not unaffected in the short-term, nor will it be immune to the potential secondary impacts of Brexit. The immediate reaction to the UK’s decision to leave the EU was a sharp fall in the Mexican peso, falling by 7.1% against the dollar to a record low of 19.50 to $1 overnight before levelling off at 18.94 to $1 by the end of the day Friday last. In a joint press conference on Friday, the Mexican Treasury Ministry and Mexico’s Central Bank, Banco de México (Banixco) provided reassurances that Mexico has the necessary financial resources to defend the peso from speculators and will use them as required and that a decision on whether to increase Mexico’s key interest rate will be made at the June 30th board meeting following an analysis of the impact on inflation. Mexico’s Treasury Secretary announced a cut in federal spending by 31.7 billion pesos ($1.6 billion dollars) as a stability measure. The federal spending cut is the second this year after officials reduced the federal budget by 132 billion pesos in February. Whilst the Treasury Secretary diminished the impact of the Brexit decision on Mexico, given the relatively unimportant trade flows between Mexico and the UK1, there seems to be little doubt that Mexico will be not be unaffected by the secondary effects of Brexit. Given an uncertain global context, a flight by investors from emerging markets to safer assets can be expected. In Latin America this means slower and scarcer inward investment flows and that affects our economic outlook. Mexico will likely be affected by various indirect impacts of Brexit, in terms of global financial market impacts, weaker foreign direct investment inflows from the UK, Europe and importantly the impact of Brexit on the US, Mexico’s key trading partner.
SEAN GOSSEL, SENIOR LECTURER APPLIED FINANCIAL ECONOMETRICS UCT GRADUATE SCHOOL OF BUSINESS
Ironically, South Africa (as one of the six countries in the Southern African Development Community (SADC)) has just signed the EU-SADC Economic Partnership Agreement (EPA) with Brussels, which could mean that the country will now enjoy greater access to the European Union than its close neighbour, the United Kingdom. However, the reality is that the positive impact of declining UK and EU trade will be outweighed by the negative sentiment and market volatility as investors withdraw from emerging markets back to safe havens. Hence, this is likely to be just another factor that will hamper South Africa’s economic recovery and increase the likelihood of a credit downgrade in December.
David Bach, Senior Associate Dean for Executive MBA and Global Programs & Senior Lecturer, Yale School of Management
The AP had a great quote that Britain jumped and is now looking for the parachute. That’s right on. Very little thought went into what would come after Brexit. A separation like this has never been done before. These economies have grown together over 40 years. Three million EU citizens live and work in the UK, and 1.5 million UK citizens live in Europe. There are business, family, legal, constitutional, and political issues because the European Union has to think, on the one hand, about how to manage this exit in a way that protects the interests of the stakeholders in the 27 continuing EU countries, while at the same time not being overly accommodating and perhaps then encouraging others to exit.
My sense is that in the UK there is going to be a vacuum now. The Prime Minister [David Cameron] has said he is going to resign and there is no immediate successor. It also seems that the leaders of the “Leave” camp aren’t exactly sure what to do.
One thing that I would note—and it gives me a lot of pause—is that there are really at least three different groups within the “Leave” camp. You have conservative, neo-liberal types around Boris Johnson and others who feel that EU regulation was stifling business and want to control their own sovereignty. The second camp is around Nigel Farage and the UK Independence Party—the nativists who are anti-immigration. And then you have a third group, trade unionists who felt that Europe was too pro-business, and they want to go back to a model of greater protection. Now there will be an intense battle inside Britain about what the future of the UK is going to look like, against the backdrop of the UK dealing with its own separatists, potentially in Scotland and Northern Ireland. The complexity is just enormous.
Andrew Metrick, Deputy Dean and Michael H. Jordan Professor of Finance and Management
I don’t have short-term concerns. Although I’m someone who worries a lot about financial crises, I don’t think that this is the type of event that is going to be destabilizing in the short run. We would expect it to affect markets. And we’ve seen stock markets fall, with banks getting hit particularly hard, long-term interest rates fall, the pound getting hurt badly. All of those things are to be expected, but a crisis leading to bank-runs—where people are worried about the fundamental soundness and viability of financial institutions—that’s not the case.
The bigger concerns are long run. The main thing that this does is political in that the European Union experiment really has only been going in one direction and that’s towards more union, more integration. There are some very important and noble goals for this project, which came on the heels of two horrible world wars and a desire to bind together the nations of Europe more tightly so that they would have no incentive to do that again. With the UK exiting, it’s the first time we’ve seen any significant pullback from this project, which had mixed success, but certainly kept alive its noble ideals.
The biggest uncertainty now is, who else will leave? And to what extent will Euro-skeptic parties across the union be emboldened by what just happened? A lot of the European Union project is unambiguously good—open borders, lower trade barriers, freer movement of goods and capital. That part now, I think, is in some danger.
Marcos Fernandes Gonçalves da Silva, Professor of political Economy, FGV ESCOLA DE ADMINISTRAÇÃO DE EMPRESAS DE SÃO PAULO
In the mid-term, if Brexit is taken as a sign of a more widespread reaction against globalization, we could see more protectionism. This is bad news for “us and them.” Nevertheless, it is very difficult now to say anything about eventual gains in terms of sectors. For the Brazilian economy, Brexit came in a bad moment, in part because we are designing a new trade policy. Bad things come together. This is the fourth consequence of Brexit for Brazilians, but Brazil can improve the debate over changes in the Mercosur, forcing multilateralism, and integration in the global value chain. Surprisingly, this is good news.