BusinessDay 22 Jun 2017

Thursday 22 June 2017
32 BUSINESS DAY
Harvard
Business
Review
Global Business Perspectives
CONNECTING THE WORLD ONE BUSINESS AT A TIME
A British election delivers a new shock to the uncertain global economy
To a global economy
already amply stocked
with anxiety-provoking
variables, Britain added
another with its recent
election.
A vote designed to bolster
the government’s mandate instead
yielded fundamental confusion
over who is in charge as
the nation prepares for fraught
negotiations in its pending divorce
from the European Union.
Prime Minister Theresa May
had called the election on the assumption
that her Conservative
Party would emerge stronger, solidifying
her negotiating position.
Instead the electorate’s stunning
rebuke of her leadership has left
her relying on the support of a
small, socially conservative rightwing
party in Northern Ireland in
order to form a government, intensifying
uncertainty about future
commercial dealings across
the English Channel.
Investors took the latest turmoil
in Britain as a prompt to unload
the British pound. As European
markets began trading on
the day after the snap election,
the currency slipped as much as
2% against the dollar. The country’s
benchmark stock index,
however, gained around 1%. Analysts
said that the rise occurred
because many of the companies
that make up the index do a majority
of their business overseas
and therefore benefit from a
cheaper pound.
It may also have been because
the shocking electoral
outcome has the potential to
diminish the looming economic
costs of Britain’s exit from the
European Union, commonly
known as Brexit. It has enhanced
the possibility that a chastened
government led by May will now
take a less confrontational approach
to Europe and seek a way
to keep Britain within the bloc’s
large single marketplace.
As Britain prepared for its
face-off with Europe, the prime
President Donald Trump and British Prime Minister Theresa May walk along the
West Wing Colonnade at the White House in Washington.
minister was adamant that her
country would impose strict
limits on immigration, a posture
seemingly enhanced by recent
terrorist attacks. However,
limiting immigration appeared
certain to cost Britain inclusion
in the European single market,
a swath of the globe holding
some 500 million relatively affluent
consumers.
European authorities consistently
have emphasized that
Britain’s continued inclusion
in the single market would require
that it abide by the bloc’s
rules — not least, a provision
that people be allowed to move
freely within its confines.
In the parlance of the moment,
Britain appeared destined
for a so-called “hard Brexit,” in
which it would sever itself from
the single marketplace, raising
the prospect that ultimately tariffs
might constrain trade across
the English Channel.
This redrawing of the basic
geography of European commerce
was playing out just as
President Donald Trump was
disavowing regional trade deals
across the Atlantic and Pacific,
while variously threatening
trade hostilities with Canada,
China, Germany and Mexico.
The results of this election
could change that trajectory,
however.
It is unclear how long May’s
government will hold together.
Even with the support of the
Democratic Unionist Party from
Northern Ireland, it retains only
a narrow majority in parliament.
However, the unexpected new
political configuration might
compel Britain to relinquish its
pursuit of immigration limits in
an effort to keep itself within the
single market.
In short, the election has
complicated the assumption
that Britain is headed irretrievably
toward the exits, producing
a moment in which seemingly
everything may be up for reconsideration.
Perhaps counterintuitively,
however, the election results
also appeared to increase the
possibility of an unruly Brexit in
which Britain crashes out of the
European Union absent a deal
governing future interaction.
May formally initiated the divorce
proceedings in March, setting
the clock ticking on a twoyear
negotiating window within
which Britain and Europe must
settle financial terms and strike
an agreement on trade. That was
always going to be complicated,
being subject to the influence of
domestic politics in each of the
other 27 members of the European
Union.
Now the talks are to unfold
in an atmosphere in which May
must tame an unruly party
whose fiercest advocates for
Brexit may be emboldened by
her narrow majority, with the
prospect of still another election
later this year. All of this heightens
the possibility that the twoyear
clock may expire without a
deal, a scenario known in Brexit
vernacular as “going over the
cliff edge.” As the metaphor implies,
it could get ugly.
Britain now sends nearly
half its exports to the European
Union, a flow of goods that
would be impeded by its departure
from the single market.
London’s future as a dominant
global financial center
also would be imperiled. Global
banks have established regional
headquarters in the city, relying
on so-called passports that allow
them to serve clients across
Europe as if the bloc were one
country, with a single set of regulators.
If Britain abandons Europe
without a deal, the banks
would have to satisfy regulators
in multiple countries. Many of
the transactions they now handle
in London for European clients
would be effectively illegal.
Worries about the economic
impact of Brexit have
been weighing heavily on the
pound, which plunged after the
June 2016 referendum that unleashed
Brexit. With Britain at
risk of suffering barriers to trade,
it has lost some of its considerable
luster as a place for companies
to invest, making its money
a less desirable currency to hold.
2017 Harvard Business School Publishing Corp. Distributed by The New York Times Syndicate
The British election has
played out even as other sources
of uncertainty have gnawed at
the global economy.
Beyond his bellicose threats
of confrontation on trade, President
Donald Trump has revoked
American participation in the
multinational Paris Accords to
combat climate change, heightening
a sense that a global order
long shaped by American engagement
now is fundamentally
uncertain.
Perpetual existential threats
to the euro, the currency shared
by 19 European countries, were
eased last month by the election
in France, which saw the defeat
of right-wing candidate Marine
Le Pen, who had threatened to
pull her nation out of the common
currency. However, elections
due in Italy later this year
or early in 2018 may elevate the
Five Star Movement, which has
been gaining strength in part
because of its talk of scrapping
the euro.
Add to the list of variables the
fact that now Britain is scheduled
to sit down with European
leaders to haggle over Brexit
only days after its leadership
suffered a major setback at the
polls.
The key question is whether
this latest wave of uncertainty
marks a step back from Brexit,
one that could restore a sense of
calm, or whether it means more
chaos at a time when the world
craves capable leadership.
“The outlook for Brexit is
now very unclear,” said Mujtaba
Rahman, managing director for
Europe at Eurasia Group, a risk
consultancy, as the sun rose over
London. “The odds of a softer
Brexit have increased as a result
of the outcome last night. At the
same time, it also does increase
the odds of a cliff-edge Brexit.”
(Peter S. Goodman is a London-based
economic correspondent for The New
York Times.)