Global markets and politics are still digesting the profound implications of yesterday’s Brexit vote. Although we won’t know for sure what exactly is going to happen, we do know the results of the UK referendum will be profound. Here are four quick, rather broad impacts to consider when thinking about the influence of Britain’s surprising move:
The British vote to leave the European Union was clearly driven by anti-elite, anti-establishment politics—indeed, prime minister David Cameron and all three major parties in the UK campaigned for Remain. But beneath this ostensible new wave of populism is a (rather old) reversion to an ethnic, demographically-driven nationalism. This ethnic nationalism rejects the “bottom-up’’ dilution of white political, economic and cultural dominance via migration and freer trade as well as the “top down” integration with Europe (i.e. more open borders) which ostensibly drives it. The prominence of immigration as the core issue for most Brexit voters—who themselves tended to be whiter, older and more rural than average—makes this clear.
Similar political and demographic dynamics are at play throughout the West, helping grow euroskeptic politics in the likes of France, the Netherlands, Germany, Austria (as well as southern Europe) and fuel the rise of Donald Trump in the US. Perhaps the only outlier on this front is Canada, where growing migration and social diversity appears to have helped produce a more internationalist government.
It almost goes without saying that these trends look awful for the future of the European Union and the European project in general. The EU is ultimately premised on the ascension of a supra-national European identity and the stable dilution of national borders, but its members are on the front line of a migration crisis which only reinforces popular demands for tighter border controls. Indeed—and ironically—the collapse of meaningful borders in the Middle East and Africa is reinforcing their political appeal and utility in Europe.
These concerns are amplified by the sense that major decisions on migration and trade are being made by “unelected” bureaucrats in Brussels and (for non-Germans at least) Berlin. In response, national leaders try reinforce legitimacy via referenda and “direct democracy”—tools that tend to destabilize and produce economically unsustainable policies even in more coherent polities (just ask Plato). In fact, using direct democracy to try account for Europe’s “democratic deficit” will probably just fuel the fire of European instability.
The prospect of President Trump has long been a “fat tail” geopolitical risk in my book, and the Brexit result certainly makes that tail fatter. The same ethnically-tinged anti-immigrant and anti-trade forces behind the Brexit vote are Donald Trump’s best hopes of upsetting Hillary Clinton in November, and Brexit demonstrates quite clearly how conventional wisdom (which is biased heavily in favor of both Remain and a Hillary victory) can be upset by popular discontent. To be sure, a Trump presidency is still quite unlikely, but the possibility—along with potentially disastrous impacts on American trade and foreign policies—clearly has tailwinds.
One of my biggest surprises in transitioning from academia to the private sector was much markets relied on—and moved on—political polls that very often are not accurate or predictive. Brexit is yet another example, with significant financial consequences in the both the run-up to and following the vote. To be fair, betting and prediction markets were also wrong on Brexit, but they have a better track record overall and do not appear to be followed as closely by market players.