Cry my Beloved Country

published in the South China Morning Post:   After the break-up.

Vote Leave narrowly won the Brexit referendum and “regained control over the economy”. Control over the stock markets (which have crashed), control over the Gilt markets (UK 10 year bond yields plumbed an all time low of less than a percent), control over the currency (weakest for 30 years), and control over investment (with projects delayed and plummeting credit card spending).

The value of the UK’s stake in the banks RBS and Lloyds has fallen a neat £8 billion – exactly the same as a year’s membership of the EU. Predictably Scotland is again agitating for secession, this time plausibly – Little Englanders may end up with a very little England.  

Shocks of historical proportions have a nasty habit of setting off a chain reaction like a propagating crack; lining up with other cracks until the whole edifice of the economy collapses. There is no better example of this than the global financial crisis – what was thought of as a little local bad borrowing in provincial USA, exposed cracks made by excessive debt levels around the world. How much of a permanent impact is this shock likely to have?

The pound had risen 6% in the prior week on positive expectations and the shock came as hopes were suddenly dashed, causing a complete turnaround in sentiment. The currency fell 3% – in the first 15 minutes; after two hours, it was down nearly 6%, and it ended the day off nearly 12% (as forecast in these columns two weeks ago).

A bad shock is exacerbated by the likelihood of a further drip, drip of bad news stories over the next few days, pointing to the unknown. How much will global economic activity suffer? Is this the start of the breakup of the European Union? Will Britain become a vassal of China, Russia, or the U.S?

Britain’s Independence Day looked less like the Trooping of the Colour and more like the falling buildings and exploding helicopters of the movie. Not only do future expectations look dire but also the country is leaderless on both sides of the aisle. However, it may be enough for now that asset values have slumped and markets may well be content at these lower levels.

Optimists point to the FTSE 100 being just 6.2% down over two days (compared to 11% for Europe) forgetting that that the fall in the pound means an 18% decline to a dollar investor. The more domestic FTSE 250 index fell 14% in two days – a whopping 26% in dollar terms. This may well delay much-needed U.K. infrastructure projects, such as HS2, the £42 billion rail project, Heathrow Airport’s third runway, the Chinese-funded nuclear plant, and the steel bailout. The Institute of Directors find that 36% of their firms are shrinking investment, 22% are not hiring, and 5% expect jobs cuts.

At its contagious worst, Brexit would be the last grain that collapses the sand castle built with overly cheap debt. Any slowdown in the world’s sixth largest (fifth-largest last week) economy must impact the fragile European economic recovery. Europe is China’s largest single export market so a slowdown would impair the Chinese economy recovery. Hong Kong will take its share of the damage. Brexit is hurting Japan as the yen surges as a safe haven.

The British vote appears to be born of protest by an angry electorate, like that in Greece that brought the Syriza Party into power. They had a nationalistic mandate but the markets had other ideas and sky-high interest rates reminded them of their folly. Ironically, Britain in Europe has created more jobs, paid down more debt, and lowered inflation and interest rates to unprecedented levels, while maintaining the highest economic growth of any major European country.

Prime Minister David Cameron’s political miscalculation in allowing a simple majority, rather than the two-thirds or three quarters usually required for a major constitutional change, means that the vote is not a mandate – not while almost 50% of the country disagrees. Amid this omnishambles there is an increasing chance that Britain will not Brexit, but Brejoin. Article 50 of Europe’s constitution, the Lisbon Treaty, is the resignation letter that will be submitted by Cameron’s successor in November.

Or will it? By then a much-enhanced deal (along the lines that Cameron negotiated in February) that gives a swathe of opt-outs to Britain is likely to be tabled for referendum. For politics is about the art of the possible – and compromise is something Europe really is good at. The only real Brexit may well be the ignominious exit of England’s football team in Euro 2016 to tiny Iceland.