The febrile behavior of financial markets ahead of the UK’s referendum tomorrow on whether to remain in the EU shows that the outcome will influence economic and political conditions around the world far more profoundly than Britain’s roughly 2.4 percent share of global GDP might suggest. There are three reasons for this outsize impact.
First, the “Brexit” referendum is part of a global phenomenon: populist revolts against established political parties, predominantly by older, poorer, or less-educated voters angry enough to tear down existing institutions and defy “establishment” politicians and economic experts. Indeed, the demographic profile of potential Brexit voters is strikingly similar to that of supporters of US Republican presidential hopeful Donald Trump and French adherents of the National Front.
Opinion polls indicate that British voters back the “Leave” campaign by a wide margin, 65 percent to 35 percent, if they did not complete high school, are older than 60 or have “D, E” blue-collar occupations. By contrast, university graduates, voters younger than 40 and members of the “A, B” professional classes plan to vote “Remain” by similar margins of 60 percent to 40 percent.
Illustration: Mountain people
In Britain, the US and Germany, the populist rebellions are not only fueled by similar perceived grievances and nationalist sentiments, but are also occurring in similar economic conditions. All three countries have returned to more or less full employment, with unemployment rates of about 5 percent. However, many of the jobs created pay low wages, and immigrants have recently displaced bankers as scapegoats for all social ills.
The degree of mistrust of business leaders, mainstream politicians and expert economists is evident in the extent to which voters are ignoring their warnings not to endanger the gradual restoration of prosperity by upending the “status quo.” In Britain, after three months of debate about Brexit, only 37 percent of voters agree that Britain would be worse off economically if it left the EU — down from 38 percent a year ago.
In other words, all the voluminous reports — by the IMF, the Organisation for Economic Co-operation and Development, the World Bank, the British government and the Bank of England — unanimously warning of significant losses from Brexit have been disregarded. Rather than trying to rebut the experts’ warnings with detailed analyses, British MP Boris Johnson, the leader of the Leave campaign, has responded with bluster and rhetoric identical to Trump’s anti-politics: “Who is remotely apprehensive about leaving? Oh believe me, it will be fine.” In other words, 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 Brexit polls. However, only after the votes are counted will it be known whether opinions expressed to pollsters predicted actual voting behavior.
This is the second reason why the Brexit result will echo around the world. The referendum is to be the first big test of whether it is the experts and markets, or the opinion polls, that have been closer to the truth about the strength of the populist upsurge.
For now, 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. Analysts and investors have consistently assigned low odds to insurgent victories: Late last month, betting markets and computerized models put the probabilities of Trump’s election and of Brexit at only about 25 percent, despite the fact that opinion polls showed almost 50 percent support for both.
If Leave wins, the low odds accorded by experts and financial markets to successful populist revolts in the US and Europe would immediately look suspect, while the higher probabilities suggested by opinion polls would gain greater credibility. This is not because US voters would be influenced by Britain; of course they would not be. However, in addition to all the economic, demographic and social similarities, opinion polls in the US and Britain now face very similar challenges and uncertainties, owing to the breakdown of traditional political allegiances and dominant two-party systems.
Statistical theory even allows us to quantify how expectations about the US presidential election should shift if Brexit wins in Britain. Suppose, for the sake of simplicity, that we start by giving equal credibility to opinion polls showing Brexit and Trump, with almost 50 percent support and expert opinions, which gave them only a 25 percent chance. Now suppose that Brexit wins. A statistical formula called Bayes’ theorem then shows that belief in opinion polls would increase from 50 percent to 67 percent, while the credibility of expert opinion would fall from 50 percent to 33 percent.
This leads to the third, and most worrying, implication of the British vote. If Brexit wins in a country as stable and politically phlegmatic as Britain, financial markets and businesses around the world would be shaken out of their complacency about populist insurgencies in the rest of Europe and the US. These heightened market concerns would, in turn, change economic reality. As in 2008, financial markets would amplify economic anxiety, breeding more anti-establishment anger and fueling still-higher expectations of political revolt.
The threat of such contagion means a Brexit vote could be the catalyst for another global crisis. However, this time the workers who lose their jobs, the pensioners who lose their savings and the homeowners who are trapped in negative equity would not be able to blame “the bankers.” Those who vote for populist upheavals would have no one to blame, but themselves, when their revolutions go wrong.
Anatole Kaletsky, a former columnist at the Times of London, the International New York Times and the Financial Times, is chief economist and cochairman of Gavekal Dragonomics.Copyright: Project Syndicate
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