Introduction to the Term:
Brexit is the popular term for the withdrawal of the United Kingdom from the European Union. In a referendum on 23 June 2016, almost 51.9% of the participating UK electorate voted to leave the EU. This marked the shift in economic relations, not just among the European nations, but also among the entire world. As countries like France and Germany are also looking into this matter and deciding on whether it is viable or profitable for them to stay in this partnership or to free themselves from its shackles. In this Article, we shall try to analyze this event’s geo-economic implications and then come to a conclusion of whether this policy of economic nationalism with lead to growth or decline in world’s economy and commerce.
Likelihood of an Economic Slowdown:
Firstly, the Brexit shock increases the likelihood of a global economic downturn. The global economy is fragile due to the sharp slowdown in emerging market growth and persistent weak growth in the US and Europe since the 2008-09 crisis. With public debt high and interest rates at historic lows (and already negative in much of Europe), policymakers have few fiscal or monetary policy options remaining to stimulate growth. Brexit could push this situation into an overdue global slowdown, or even recession. However, the Group of 7 (G7), which includes the UK, stated that it is prepared to respond to market volatility in the wake of the vote.
An Emerging Market Crisis Underway!
Secondly, the Brexit shock increases the likelihood of an emerging market crisis. Emerging market debt – especially private sector debt – was already at historic highs, raising the risk of a crisis. Brexit will force a reappraisal of political risk across Europe and in many emerging markets, and potentially cause financial and currency volatility as positions are unwound. These factors could increase financing costs for emerging market sovereigns and companies.
A Cautious Approach by Federal Reserve:
Thirdly, Brexit is likely to take a US Federal Reserve interest rate rise off the table in 2016. The US Federal Reserve on 15 June already pared expectations of a further rate rise due to uncertainties about the durability of US growth and the threat of Brexit. The reality of Brexit will force the Fed to keep rates on hold until economic impacts begin to materialize – and especially if these impacts turn out to be as negative as most projections.
A Surge in the Prices of Commodities:
Brexit will put a ceiling on the recent rise in commodity prices. Even if underlying supply-demand fundamentals are improving for energy and mineral commodities, Brexit will hit demand forecasts and suppress future prices as the economic situation unfolds. A prolonged period of lower prices will increase the threat of a price shock down the line, due to continued underinvestment in higher-cost supply.
Conclusion: Economic Nationalism and Financial Instability
Overall, by critically analyzing this one case, we can clearly say that the resurgence of the policies of Economic nationalism are a clear threat to the growth and financial stability of the world. The world has seen tremendous change in the 21st century and after the end of the cold war, the process of globalization has led to the increasing interdependency in the states of the world whereby isolationism is has suffered a massive blow in the sense that the only way for the states to survive in this world is to be a part of the global market.
This can be understood by the recent economic crisis in 2008 and 2011. The states were in favor of staying in the global market, rather than leaving the market and protecting their own economies, as the case in the interwar period. Therefore, we can say that the events such as Brexit and the policies of the United States are not a good sign for the growth and stability of the world and eventually this will only lead to chaos and instability in the entire region and worldwide crisis will emerge.