The Real Reason 'Brexit' Has World on Edge
JUNE 23, 2016
WALL STREET JOURNAL
The biggest, least understood risk in a British exit from Europe isn't to the U.K. itself, but to the wider Western world. It is the risk that investors are blind to greater changes afoot in society.
For markets, a “Brexit” vote could signal that current monetary policies are failing and near exhaustion and that investors everywhere should prepare for a series of inward-looking governments more willing to take protectionist measures that would restrict international flows of trade and finance. That would likely have a debilitating effect across economies and markets.
There is a school of thought that says a Brexit vote signals a higher probability that Donald Trump becomes president of the U.S., that the right-wing and euroskeptic AFD party in Germany gains greater influence and that Marine Le Pen’s National Front party does the same in France. Italy’s anti-establishment 5-Star party has already this week won powerful mayoral posts in Rome and Turin in what has been seen as a blow to the reformist national government of Matteo Renzi. Italy is Europe’s fourth-biggest economy and still has many problems to solve—it could be the eurozone’s biggest weakness.
Markets will react badly to evidence of populism because lenders and investors, the people who run institutional money, will worry they have misread the extent of frustrations and hardships of many people and underestimated what that means for the political climate.
Investors’ willingness to take on risk could diminish further. What faith they have left in the policies being pursued by monetary authorities may be further undermined. Quantitative easing has preserved the financial system and protected asset values. In the U.S. and U.K. it has even restored jobs. But it hasn't bought the economic growth and improved productivity that makes everyone feel they are benefiting.
If current policies aren’t working, establishment parties and institutions risk losing their mandates to those who offer simple sounding answers in throwing up walls against job and welfare competition from immigration and wider economic competition from free-trade. The World Trade Organization said this week that instances of new trade restrictive measures increased in the period since October to the highest monthly average since it began regular monitoring in 2009.
The biggest risk of Brexit is that it is a signpost along a road toward declining international trade, less free movement of capital and a continuing global economic cooling. Some will welcome this. International financial markets will greatly fear it.
MSN -> Source