Any real changes in trade conditions, labour mobility, etc., will take at least two years to define, negotiate and implement. But negative anticipation and uncertainty have already thrown a wrench into economic conditions.
Stock markets dropped like rocks as investors reacted to the decision by United Kingdom voters to leave the European Union. Then currency markets were hit: the British pound took a beating, followed by the euro and other currencies, including the Canadian dollar. The major exception was the American dollar, which is still the main world currency despite U.S. problems. And investment decisions were put on hold or, in a few cases, made in haste, for fear of what the future might bring.
These impacts were as much about psychology as anything, but the currency exchange rate changes, in particular, have already sparked real economic movement. And this is where Brexit will do most of its damage.
Britain’s depressed pound will make its export products cheaper for its trade partners, and make the country more attractive to visitors. However, it is unlikely that this will be enough to offset reduced access to European markets since more than 40 per cent of Britain’s foreign trade is with Europe. As well, a lower pound also increases the cost of everything the British import, starting with a cup of tea. And that will damage the standard of living.
Europe will face more competition in world markets from Britain and its lower pound, and may face reduced access to British markets (where, for example, one in five cars made in Germany is sold). Business offices, like those in financial services now based in London, have already threatened to seek new homes with more direct access to bigger markets.
In Canada, our dollar has dropped just slightly and our trade with Britain, not large at the moment, may increase as the U.K., with less access to Europe, turns toward old Commonwealth partners.
On the other hand, Britain’s withdrawal from Europe may hurt Canada’s access to the much-larger European markets.
The Comprehensive Economic and Trade Agreement (CETA) that Canada is negotiating with Europe is a pretty good as free-trade agreements go. It will get Canadian businesses easier access to more customers in one of the world’s richer markets and give us better access to more and cheaper European goods and services. It might even take a bite out of the supply management programs that keep the cost of food in Canada way above world levels.
But now CETA is threatened. The kind of people who supported Brexit in Britain exist elsewhere in Europe. They don’t realize that the more connected and open an economy is, the more jobs and income there will be and the better the standard of living. Economies that are protectionist, detached and isolated from trade suffer. Think North Korea and Venezuela, where people are going hungry.
Such European protectionist sentiments may derail CETA and Canada’s trade prospects there, especially since Britain, which strongly supported CETA, will no longer have a voice in the EU.
We don’t know Brexit’s real, long-term impact. But the odds are very high that the standard of living in Britain and Europe will decline.
Of course, time will pass, other changes will occur and the person in Britain who can’t get a job because of less access to Europe won’t blame Brexit. They’ll just blame the government.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.