Is Globalization Finished?

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The shock of Great Britain’s vote to leave the European Union has already thrown global financial markets into disarray and cost Prime Minister David Cameron his job, but it will take years before the geopolitical impact of the Brexit referendum fully materializes. The political uncertainty generated by the “Leave” vote will reach far beyond 10 Downing Street, potentially into Scotland, Northern Ireland, Eurozone capitals, and beyond. It may even mark the beginning of the end of globalization itself.   In Britain, choosing Cameron’s successor will be the first order of business. Cameron has said he wants a new prime minister in place by the Conservative Party’s conference in September. In any event, Credit Suisse’s Global Markets team say that after such a divisive campaign, the country’s next leader will likely find themselves leading an unstable government with a small majority in the House of Commons. He or she might even be vulnerable to losing a vote of no confidence, according to Neville Hill, co-head of Credit Suisse’s Global Economics and Fixed Income Strategy group. And it’s not just the Tories facing fractiousness within their ranks: The Labor party passed a non-binding vote of no confidence in leader Jeremy Corbyn, following a flurry of resignations from the shadow cabinet in the days after the Brexit vote.   Cameron has said he will leave it to his successor to invoke Article 50, the law that sets off a two-year clock for conducting exit negotiations with Europe to leave the EU. While there is no set deadline for when the new leader must do so, and the country’s Parliament could even vote against leaving the EU, the decisive margin of victory makes that politically unlikely, according to Michael O’Sullivan, Credit Suisse’s Chief Investment Officer for International Wealth Management. Delaying the official notice to the EU would also be tricky, as European leaders are impatient to reduce uncertainty hanging over their economies.   Regardless of the timing of the invocation of Article 50, British leaders will surely be engulfed in very difficult negotiations with Europe after doing so. Though the European Union could technically try to entice Britain back before a formal notification with a sweeter membership deal, they have so far shown no intention of doing so. In fact, the European Parliament has passed a resolution saying that the United Kingdom must officially notify the body of its intention to leave the union before any new relationship arrangement can be made. German Chancellor Angela Merkel said that she sees no way to reverse the U.K. vote. On a call with Credit Suisse investors on June 24, former Prime Minister Sir John Major pointed out that the EU is keenly aware of the euroskepticism building elsewhere in Europe, and will be loathe to offer other countries hope that they might be able to negotiate concessions by threatening to leave.   Ironically, the United Kingdom itself could soon face separation battles from Scotland and Northern Ireland, both of which voted by wide margins to remain in the EU. Despite the failure of the 2014 referendum on Scottish independence, Scottish National Party leader Nicola Sturgeon has promised to push for another, with Scotland to apply for membership as an individual state if the measure succeeds. And Northern Ireland’s First Deputy Minister Martin McGuinness has already called for a poll to establish a “united Ireland.” Major pointed out that residents of Northern Ireland would lose the right to travel without a passport to Ireland, an EU member with whom the region shares a border, if Britain exits the European Union.   European leaders outside the U.K. also face the possibility that the Brexit vote will bolster euroskeptic parties in their own countries and possibly even trigger copycat referendums. The first test of that notion came on June 26, when Spain held general elections for the second time in six months. The first contest in December produced a fractured legislature that could not form a government. No party won an outright majority in the June elections, either, but the center-right ruling People’s Party won more seats than it had in December, while an alliance of far-left populist party Podemos and other left-wing groups won only two more seats than they had in December. The results suggest little in the way of political contagion from the Brexit vote, according to Credit Suisse’s Global Markets team.   More worrisome is an upcoming constitutional referendum on parliamentary reforms in Italy. The measure has been a cornerstone of Prime Minister Matteo Renzi’s structural reform agenda, and the Italian leader has said he will resign if it doesn’t pass. The Brexit vote could conceivably turn a contest on a constitutional amendment into a referendum on the technocratic center-left administration – especially given the growing popularity of comedian Beppe Grillo’s populist, euroskeptic Five Star Movement.   Finally, there’s the potential for Brexit to embolden far-right euroskeptic parties such as the National Front in France or the AfD party in Germany. Both countries hold elections in 2017. As for the possibility of more referendums, French, Italian, and Dutch politicians have all alluded to a desire to hold them since the British vote. What the growing anti-Europe din really represents, Credit Suisse’s Global Markets analysts observed after the vote, is a growing rejection of globalization in the Western world. Should Brexit shift the long-term trend toward a more interconnected world to one that prizes economic isolationism, it will have profound – and negative – effects for corporate profits and economic growth all over the world.