The febrile behavior of financial markets ahead of Britain’s EU referendum shows that the voting on June 23 will influence economic and political conditions around the world far more profoundly than Britain’s share of 4% in global GDP might suggest. This outsize impact has at least three explanations.
Firstly, the Brexit referendum represents a global phenomenon: populist revolts against established political parties, predominantly by elderly, poor or under-educated voters angry enough to tear down existing institutions and defy the “elite” politicians and economic experts who warn against leaps into the unknown. The demographics of potential Brexit voters are strikingly similar to American Trump voters and French supporters of the National Front. Opinion polls report that British voters back “Leave” by a 65-to-35 margin if they did not complete high school, are over 60 or belong to the “D, E” blue-collar social classes. By contrast, university graduates, voters under 40, and “A, B” professional classes plan to vote “Remain” by margins of 60-40 and above.
Not only are the populist rebellions against privileged cosmopolitan elites fueled by similar perceived grievances and nationalist sentiments, but they are occurring in similar economic conditions, at least in Britain, the U.S. and also Germany (see The Brexit Vote As A Harbinger Of A Populist Age, Or Not). All these countries have returned to more or less full employment, with unemployment rates of around 5%. But many of the jobs created pay low wages and immigrants have recently displaced bankers as the scapegoats for all social ills.
The populist voters in Britain, America and Germany also need to overcome similar resistance. Business leaders, previously trusted politicians and expert economists all warn voters not to endanger the gradual restoration of prosperity by suddenly upending the status quo. Yet voters, at least in Britain, have chosen to completely ignore these expert warnings. After three months of Brexit debate, the polls show only 37% of voters believing the statement that “Britain would be worse off economically if we left the EU.” That is fewer than the 38% who believed that a year ago.
In other words, all the voluminous reports produced by the International Monetary Fund, OECD and World Bank, the British government and the Bank of England, which were unanimous in warning of big losses from Brexit, have been disregarded. The Leave side has not tried to rebut these expert warnings with their own detailed analyses. Instead, Boris Johnson, the Brexit leader, has responded throughout the campaign with bluster and rhetoric identical to the anti-politics of Donald Trump: “Who is remotely apprehensive about leaving? Oh, believe me, it will be fine…The so-called experts were wrong in the past and they are wrong now.”
This kind of frontal attack on political elites has been surprisingly successful in Britain, judging by the latest polling on Brexit. But it will only be after the votes of June 23 are counted that we will know whether populism has worked, as opposed to voters merely expressing opinions to pollsters. This is the second reason why the Brexit result will echo around the world. The voting in Britain will be the first big test of whether the experts and markets or the polls have been closer to the truth about the strength of the populist upsurge.
At present, political pundits and financial markets on both sides of the Atlantic assume, perhaps complacently, that what angry voters tell pollsters does not reflect how they will actually vote. Financial markets and political analysts have consistently put low odds on the insurgents winning—in late May, betting markets and computerized expert models gave both Trump and Brexit win probabilities of only around 25%, despite opinion polls showing both Brexit and Trump with almost 50% public support.
If the Leave camp wins on June 23, the low odds accorded by experts and financial markets to successful populist revolts in North America and Europe will look complacent while the higher probabilities suggested by opinion polls will gain credibility. This is not because American voters will be influenced by Britain, which of course they will not be, but because, in addition to all the economic, demographic and social similarities, opinion polling in the U.S. and Britain now face similar challenges and uncertainties due to the breakdown of traditional political allegiances and dominant two-party systems.
Statistical theory even allows us to quantify how expectations about the U.S. election should shift if Leave wins in Britain. Suppose for simplicity that we start by giving equal credibility to opinion polls, which showed Trump and Brexit with almost 50% support, and expert opinions, which gave them only a 25% chance. Now suppose that Leave wins on June 23. A statistical formula called Bayesian Theorem then shows that belief in opinion polls would increase from 50% to 67%, while the credibility of expert opinion would fall from 50% to 33%.
Which leads to the third, and most worryingly, the implication of the British vote. If voters back Brexit in a nation as stable and politically phlegmatic as Britain, financial markets and businesses around the world will be shaken out of their complacency about populist insurgencies in the rest of Europe and the U.S. These heightened market concerns will, in turn, change economic reality. As in 2008, financial markets will amplify economic anxiety and that, in turn, will breed more anger against established politicians, leading to still higher expectations of political revolt and giving the vicious circle another twist.
The threat of this contagion between financial markets, economics and politics mean that a Brexit vote could be the catalyst for a global crisis comparable to 2008. This time, however, the workers who lose their jobs, the pensioners who lose their savings and the homeowners who are trapped in negative equity, will not be able to blame “the bankers”. Those who vote for populist upheavals will have no-one to blame but themselves when their revolutions go wrong.
A version of this article will appear in newspapers around the world in the Project Syndicate network.
Reproduced by kind permission of Gavekal Research.
[Source: Gavekal Research - by Anatole Kaletsky - June 15, 2016]