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Economy

Peter Tasker -- Anarchy in the UK, four questions for the post-Brexit world

It feels like the political equivalent of the coming of the punk rock era. Britain has voted not just against European Union membership, but has also voiced a snarling rejection of the national and global elite. Those advising Britain to remain in the EU included leaders of all the major British political parties, all living former prime ministers, the business and finance establishment, the overwhelming majority of economists, the respectable media, and bevvies of celebrities such as footballer David Beckham, physicist Steven Hawking and chef Jamie Oliver.

From abroad appeals to "Remain" came from U.S. President Barack Obama, Japanese Prime Minister Shinzo Abe, Chinese President Xi Jinping, Indian Prime Minister Narendra Modi, the International Monetary Fund, the Organization for Economic Cooperation and Development, leading investment banks, Greenpeace and 300 prominent historians. The response of the British public was the political version of giving the two-finger salute. At the same time, it directed a ball of spit at the pollsters, bookmakers and financial markets that had all forecast a win for the status quo. The outcome was a four-point margin of victory for "Leave" on a turnout of 72%, six points higher than the turnout in last year's general election. Of the 12 regions in the U.K., only three -- Scotland, Northern Ireland and London -- voted to stay.

It will take months, if not years, to absorb fully the implications of this extraordinary turn of events, but answers to the following questions should gradually emerge as time passes.

How serious will the financial contamination be? The crucial issue is the potential for a disorderly breakup of the eurozone, which would overshadow the collapse of Lehman Brothers in terms of a shock to the global financial system. The focus of attention will be on France, which is due to hold a presidential election in the spring of 2017. Marine Le Pen, leader of the right-wing National Front, is already using the hashtag "#frexit" on Twitter and has stated that France has "1,000 times more" reasons to quit the EU than does the U.K.

In normal times, the mainstream parties in France have the collective strength to defeat even a popular extreme right candidate, as they did when Le Pen's father stood in 2002. But these are not normal times. These days French Euroscepticism extends well beyond the extreme right. "Rock star philosopher" Bernard-Henri Levy recently predicted that France would vote to leave if given a choice. "This Europe is not desired anymore," he stated. "And it does not create desire."

Will the U.K. lead a move away from the politics of austerity? The Brexit vote revealed a nation polarized by class. According to the YouGov polling organization, the managerial and professional classes favored remaining in the EU by 62% to 38%, whereas the working classes supported Brexit by 63% to 37%. The new Brexit governing team which is soon to replace the administration of outgoing Prime Minister David Cameron will need to address the concerns of the people that supported them. That could well mean junking the policies of fiscal austerity associated with Cameron and his Chancellor of the Exchequer, George Osborne.

Problems of inequality and social exclusion exist to a greater or lesser extent throughout the developed world. Without a doubt the economic policy settings adopted after the global financial crisis -- quantitative easing coupled with fiscal retrenchment -- have exacerbated them. With borrowing costs for governments at historical lows almost everywhere -- indeed negative in many countries -- the case for spending on public infrastructure has never been easier to make.

How much damage will the U.K. economy suffer? Predictions of an imminent economic crisis in the U.K. are rife and it is true that the current account deficit of 5% of gross domestic product is unsustainably high. Furthermore, the EU decision-makers are likely to make life as hard as possible for the U.K. to discourage other defections. Even so, there are compensatory factors in place. Specifically with the pound hovering at 30-year lows versus the U.S. dollar, the manufacturing economy should be extraordinarily competitive. Are Japanese and other foreign companies really going to uproot complex manufacturing operations and relocate them to a eurozone whose future is increasingly uncertain?

Brexit in Asia

What are the implications for Asia's two big players? Strangely so far, one of the biggest victims of Brexit has been Japan. The yen retains its status as a safe haven currency and any increase in global tensions causes it to appreciate. Thus the Brexit furor has contributed to a 15% rise in the yen this year, which has been the most significant factor behind the dive in the Japanese stock market. For an economy struggling to emerge from 20 years of deflationary stagnation, this is a significant setback. Currency appreciation of this scale is equivalent to a tightening of economic policy and needs to be offset by, preferably, a combination of fiscal and further monetary loosening. With 40-year bond yields at 0.3%, Japan has an opportunity to fund infrastructure upgrades at the lowest borrowing costs in human history.

The implications for China are more complex. Over the last few years, the U.K. has followed a strongly pro-China policy, as symbolized by President Xi's ride to Buckingham Palace in Queen Elizabeth's royal carriage last October. The U.K. was the first country to sign up to the Asian Infrastructure Investment Bank, the China-sponsored rival to the Asian Development Bank, and has actively solicited Chinese investment in crucial national infrastructure, such as nuclear power plants and the High Speed 2 rail link connecting London to the Midlands. Rather than resulting from a consensus of the U.K.'s policy establishment, these initiatives are associated with Osborne, a Sinophile who traveled through China in his "gap year" between school and university. The Brexit vote means a sudden fall from grace for Osborne, who at the least will spend several years in the political wilderness. The next administration is unlikely to be so firmly pro-Beijing and China's delight at splitting the U.S.-U.K. axis may turn out to be premature.

The U.K. referendum was highly successful in political terms. All parts of society were engaged. The result was not what was expected and certainly not what the establishment wanted, but the message delivered was urgent and necessary. The result may be a little anarchic, but anarchy has been given an unfairly negative image over the years. Anarchy simply means "no no hierarchy." Many of the most successful systems in existence are anarchic, in the sense that they are self-governing, not ruled from above. Language is anarchic, as are free markets, as is life on earth itself. At this point in history, the U.K. needs a little more anarchy -- and it is not alone in that.

Peter Tasker is an analyst with Tokyo-based Arcus Research.

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