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Brexit / Trump…
Rob Carnell
…implications for Europe and the World
November 2016
Photo source: Somodevilla/Getty Images
BrexitWhat it means for the UK and Europe
The people of Scotland and Northern Ireland voted clearly to remain in the EU. What they voted against is clear… But what they were voting for was not.
Article 50 will only be triggered once the UK’s position has been decided. This is unlikely to be before 1Q17.
Europe is exposed to the Brexit risks. A weaker UK growth outlook and weaker sterling means exporting to the UK will become more difficult. The political uncertainty is likely to hit growth.
Key Themes
2
Photo sources: Getty Images
The world was taken by surprise over Donald Trump’s victory at the US
presidential election. However, the policy stances Trump actually takes
remain the great unknown
US politics has changed radically and for good. A Trump victory represents a
vote for change, but exactly what is unsure
Markets hate uncertainty, and the near term represents a potential period
of heightened risk aversion. The election result is not the end of the
process, but the beginning
TrumpHow did it all happen?
4
Total
Men
Women
White
Black
Hispanic
18-29
30-49
50-64
65+
Postgrad
College grad
Some college
HS or less
Ge
nd
er
Eth
nic
ity
Ag
eE
du
cati
on
Clinton
Trump
What makes a Trump supporter? (1)Education / age / ethnicity / gender …anger!!!
• It is not surprising that Trump is less popular with Hispanic and Black voters…• …or his apparent misogyny did not warm the hearts of many female voters
Source: Pew Centre for Research
5
What makes a Trump supporter? (2)Angrier
0
10
20
30
40
50
60
70
80
90
Falling behind Staying even Going up faster Falling behind Staying even Going up faster
Trump supporters Clinton supporters
Perc
eption o
f fa
mily
incom
e r
ela
tive t
o c
ost of
livin
g,
%
$75000 ormore
$30000 -$74999
$30000 or less
Family Income:
• In all income groups, more Trump supporters feel they are falling behind the cost of living; angrier yes, but not necessarily poorer – WAMO (White, Angry, male, older)
How do you feel about your financial condition?
Source: Pew Centre for Research
7
Trump: Who is this guy?S
oft
Ha
rd
Loose Even looser
Po
liti
cal
Macro policy
Tough Trump Trump Democrat
Home TrumpTrump-Lite
Deflation Stag - deflation
Modest expansion Inflationary
Mega-trade deals in trouble
TPP TTIP RCEP
AustraliaEuropean
UnionAustralia
Brunei Darussalam
United States
Brunei Darussalam
Canada Cambodia
Chile China
Japan India
Malaysia Indonesia
Mexico Japan
New Zealand Lao PDR
Peru Malaysia
Singapore Myanmar
United States
Philippines
Vietnam Singapore
Thailand
Vietnam
9
Trump’s fiscal pledges – Debt Ranges - estimates
60
70
80
90
100
110
120
130
140
150
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
% o
f G
DP
Trump Range Current Law Trump Central Estimate
Projections on national debt ratio - central estimate and ranges
• Given incomplete, and in some cases contradictory statements, these estimates are not to be taken too literally…
• …they also may inadequately incorporate any GDP growth effects…• …even so, Trump has a much bigger impact on national debt than Clinton
Source: CRFB
10
Nato….challenged
0
0,5
1
1,5
2
2,5
3
3,5
Ice
lan
d
Lu
xem
bo
urg
Hu
ng
ary
Be
lgiu
m
Ca
na
da
Cze
ch R
ep
ub
lic
La
tvia
Slo
ven
ia
Alb
an
ia
Lit
hu
an
ia
Slo
vaki
a
De
nm
ark
Ge
rma
ny
Ne
the
rla
nd
s
Sp
ain
Ita
ly
Bu
lga
ria
Ro
ma
nia
No
rwa
y
Cro
ati
a
Po
rtu
ga
l
Est
on
ia UK
Fra
nce
Tu
rke
y
Po
lan
d
Gre
ece U
S
Defence spending (% GDP)
• Brexit has damaged the EU…
• EU defence spending has been a victim of austerity
• Trump has been courting Putin and sounding negative on NATO
• Russia may feel emboldened
1. What are the aims of the Brexit negotiations:
Constraints on migration and a trade deal that is as close
to single market access as possible
2. When to trigger Article 50 and start 2-year clock on
negotiation a deal: After agreeing on the UK’s position,
so sometime in 1Q17, but European elections could
complicate the situation – as could recent High Court
decision.
3. What to do to mitigate the negative short-term
economic impact of Brexit: Emergency budget with
lower corporation tax, VAT cuts, infrastructure spending.
BoE to loosen monetary policy further
4. How to keep the UK together: Greater devolvement,
more autonomy, extra money for regions. Another
Scottish independence referendum looks unlikely in the
near term – terrible fiscal numbers & low oil price
5. How to re-engage with the angry and alienated: Relax
austerity measures, action to boost access to housing.
12
The Prime Minister’s inbox
13
Life outside of the EU: Some of the UK’s options
EEA Membership (Norway)
Unilateral Model (e.g. Hong Kong)
United Kingdom
Potential Exit Routes
Bilateral Agreements (Switzerland)
Customs Union (Turkey)
Free Trade Agreement (Canada)
WTO Membership (default option)
Transition state?
• Nissan had warned that future car production in the
UK was under threat due to potential tariffs
• However, government “support and assurances” led
to a change of heart and two new models will be produced in Sunderland
• UK may be going for an industry by industry deal structure (A Switzerland plus model?)
14
Cars and the City
• The City is the other huge concern
• Thousands of firms, £billions of
revenue (12% GDP) all resting on the
issue of “passporting”
• The EU will oppose “cherry picking”
• The UK may be looking at a long
transition period – ongoing access to
the single market so long as it obeys the rules
Implications for Europe - trade
• The US is the UK’s biggest trade partner, but US-UK trade is small as a proportion of the US
economy so the US will probably agree a trade deal quickly
• Belgium, Ireland & Netherlands’ exports to the UK are far more important for their
respective economies – accounting for 7.5-11.3% of their GDP
0
2
4
6
8
10
12
Exports to the UK (% of each country's GDP)
services
goods
* Irish exports to the UK by value are equivalent to 11.3% of Irish GDP
Implications for Europe – financial costs
• The UK is a net financial contributor to the EU budget
• Big net contributors, such as Germany the Netherlands and Belgium, may be asked to pay more to the EU
• Or net recipients may get less money
• Will Europe become more interventionist if the UK is no longer a member?
• French & Spanish banking losses given high exposure to the UK?
• BUT Europe could benefit on the FDI front as businesses move away from the UK in favour of continental Europe
-1
0
1
2
3
4
5
6
Sw
ede
n
Denm
ark
Ge
rma
ny
UK
Neth
erlan
ds
Belg
ium
Austr
ia
Fra
nce
Fin
land
Ita
ly
Lu
xe
mbo
urg
Cro
atia
Ire
land
Cyp
rus
Spa
in
Slo
ven
ia
Ma
lta
Slo
vakia
Cze
ch
Re
pub
lic
Port
uga
l
Gre
ece
Rom
ania
Pola
nd
La
tvia
Bulg
aria
Esto
nia
Lithu
an
ia
Hung
ary
Net receipts from EU (% of Gross National income)
19
Political uncertainty unlikely to disappear
Brexit
New elections?
Referendum
Rerunpresidential elections
Referendum
Presidentialelections
Elections
Elections
23 Juneaverted
2 Oct
4 Dec
Apr/May
Mar
Autumn
• Both the Trump votes and Brexit can be boiled down to a rejection of the status quo – these were not votes “for” something, but “against”
• Are the people of Europe so satisfied with what they have now, the the same will not happen somewhere here?
• If the answer you have is “yes”, did you think that Brexit would happen, or that Trump would be elected?
• Is your answer still the same? (angry people more likely to vote)
• What can governments do to stave off the same in their own countries?
• It won’t be easy to devise solutions, but the problems are clear: • Unhappiness about immigration• Unhappiness about jobs / wages• Unhappiness about inequality• Unhappiness with establishment (politicians, banks, institutions (EU / EZ))
20
Radical change vs more of the same