Brexit: The comedown effect

12:02 pm on 25 June 2016

OPINION - The comedown from an explosive event like the United Kingdom's vote to exit the European Union will take some time to emerge, writes business journalist Rob Hosking.

Obviously, the first result is instability and uncertainty.

Monitors display exchange rates in Paris, Tokyo, Sydney and Amsterdam after Britain's vote to break out of the EU.

Monitors display exchange rates in Paris, Tokyo, Sydney and Amsterdam after Britain's vote to break out of the EU. Photo: AFP

Financial instability: the currency markets responded with the largest sell off of the UK pound ever, before something of a rebound.

Political instability: the resignation of UK prime minister David Cameron, and immediate speculation that UK Labour leader, Jeremy Corbyn, will shortly face a challenge.

Fears over immigration and anger over economic inequality behind the vote - Rod Oram

That is only the start of the political instability.

Of greater moment is the flow on to the different parts of the UK: Scotland pressing for a second referendum on staying in the United Kingdom, and Ireland now suggesting that because Northern Ireland is part of the UK, and will not be part of the EU, there should be another look at union of Ireland.

Scotland's First Minister and Leader of the Scottish National Party (SNP), Nicola Sturgeon, reacts as leaves after voting at a polling station at Broomhouse Community Hall in east Glasgow, on June 23, 2016,

Scottish National Party leader Nicola Sturgeon placing her vote. Photo: AFP

The combination of those issues will devour huge amounts of political energy and time, and media and policy-making bandwidth, over several years. The opportunity cost involved, had that effort gone into other matters, is probably incalculable, but it will not be small.

The recent Scottish referendum was just one example of how much such an issue will tie up an entire political system, and a second run there will probably be small beer compared to the large, frothy and turbulent Guinness that will be stirred up by any re-negotiation of the current Irish settlement.

And finally, economic uncertainty. This will take some time to play out.

In the run up to the vote the Organisation of Economic Co-operation and Development (OECD) suggested in a policy paper that a vote to leave would "be akin to a tax on GDP, imposing a persistent and rising cost on the economy that would not be incurred if the UK remained in the EU".

By 2020, the UK's GDP would be a little more than 3 percent lower than if the country remained in the EU, the OECD calculated.

Those figures seem suspiciously precise.

As for opportunities?

For New Zealand, there has been much talk of what might happen if the UK returns to closer ties with former dominions like us, Australia and Canada.

That's a possibility, and there may be more of a chance for New Zealand, but that argument looks more hypothetical than real, at least as far as trade goes.

The argument - or rather, assumption - that the UK will take more New Zealand produce seems to ignore the fact the UK now exports quite a lot of meat to the EU, and if it is no longer doing so it is more likely to require less, rather than more, animal protein from New Zealand.

Meat at a butcher's shop

Photo: 123rf

There is also the fact the UK will be looking, in the wake of Brexit, to form some pretty "big ticket" trade deals quickly. It will need to.

And New Zealand just does not have the size which would put us at the front of any queue.

The UK vote is not surprising. The EU appears deadlocked, unable to solve its problems, and in any case the UK - well, the English part, anyway - has always been a reluctant continental.

But it comes at a time the world can ill afford any more global economic instablity.

*Rob Hosking is a freelance journalist specialising in economic, tax, financial and superannuation issues, and regulatory/legal matters. He is a regular contributor to NBR.

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