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Welcome to the world after Brexit

July 05, 2016 10:17 IST
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A woman wearing a vote remain T-shirt reacts, following the result of the EU referendum, in London. Photograph: Neil Hall/Reuters

The prospect of a sustained global crisis looms large

Like their counterparts elsewhere, Indian businesses with significant interests in the United Kingdom would have done some contingency planning on the consequences of Brexit well before the historic June 23 vote.

Inevitably, much of this would have focused on the importance of establishing a foothold on the continent for their goods and services once easy access via the United Kingdom closes two years down the line.

Encouraging managers to learn German, French and Italian in readiness for this new challenge is, however, only one small (and perhaps facetious) dimension of the challenge.

Brexit is, in the parlance of the financial community, a 'risk-on' development.

It needs to be viewed not as a one-off event but as a process with wider, long-term outcomes that are unlikely to be positive for the world economy.

So business leaders would be doing their shareholders a signal disservice if they take a short-term view of the crisis on the assumption that its impact will be limited to Europe and the uncertainties in the financial markets will abate once the road map for disengagement is worked out.

The European Union is not just the world’s largest economy, it is India’s largest trading partner, accounting for about 13 per cent of this country’s exports.

Britain accounts for only about three per cent.

Both entities are likely to be hit by the termination of the tariff-free trade in 2018. By some estimates, the UK’s GDP growth could fall by 1.4 to 2.9 per cent and the EU’s by 0.75 to 1.5 per cent.

This contraction, endangering a fragile recovery since 2014, will have multiple impacts.

The knock-on effect of shrinking demand on India’s struggling exports, which have declined for 18 consecutive months, will be disastrous.

A UK/EU recession will inevitably have an impact on global business sentiment, which, in turn, can be expected to impact inflows from foreign institutional investors and foreign direct investment.

The weakening of the pound and euro is also not a geographically limited event either.

A steadily strengthening dollar could well encourage China, for instance, to consider devaluing the renminbi more sharply as a solution to its own slowing growth, impacting the competitiveness of Indian exports even further.

These dismal assumptions are predicated on a united EU post-Brexit.

But centrifugal pressures are being exerted by some of the Union’s major countries -- including France and Italy.

A break-up of the EU poses the prospect of “unknown unknowns” of alarming proportions. And finally, there are the political consequences of a fragmented EU.

It is no secret that the EU’s arrangement for asylum for refugees fleeing the West Asian crisis is at the heart of the continent’s disunity and overt xenophobia.

A fragmented Europe can be guaranteed to down the shutters and the blowback from the resultant turmoil is all but guaranteed.

Brexit, thus, is not just Europe’s problem but the world’s and the sooner businesses and policymakers prepare worst-case scenarios, the better for their survival.

Image: A woman wearing a vote remain T-shirt reacts, following the result of the EU referendum, in London. Photograph: Neil Hall/Reuters

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