Britain’s exit from the EU: The uncertainty continues
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The European Union and German nation flags are pictured before a debate on the consequences of the Brexit vote at the lower house of parliament Bundestag in Berlin, Germany. REUTERS
Britain’s shock departure from the European Union (EU) could trigger turmoil, strengthen right-wing fascist groups thereby weakening currencies in Europe and the process create global uncertainty in trade, finance and investment, economists here said last week. With the EU being the world’s largest trading bloc, any uncertainty will have a huge impact on countries that have close trading ties with that region like Sri Lanka for example, they said. With the EU accounting for the bulk of Sri Lanka’s exports particularly garments, Joint Apparel Association Forum (JAAF) Deputy Chairman Yohan Lawrence told the Business Times that since there is a 2-year exit period (before Britain moves out) the impact would not be immediate adding they were unsure “what the political landscape is going to be.”
But there is cause for concern since over 23 per cent of Sri Lanka’s total exports are to the UK while nearly half (45 per cent) goes to the EU as a whole. While voters in Britain opted to move out of the EU, the result is having a chilling impact in the rest of Europe where right wing groups, under the cover of the burgeoning migration crisis, are likely to demand an exit from the EU though the issues are more related to the Greek financial crisis and rich countries being forced to subsidise the poor in the region. Here are views of local economists on possible impacts for Sri Lanka with the UK exiting the EU and political ramifications within Europe:
Exports: The sterling pound will get weaker and unless Sri Lanka (SL)’s currency strengthens, export earnings would be less. Imports: Imports from the UK would be cheaper and that would be an advantage though it also depends on whether SL imports a lot from there.
Investments: Will be a disinvestment for UK investors to go abroad as they need more sterling pounds. This means less British investments for SL. In terms of Sri Lankan investors to the UK (or others for example) this is the best time to buy UK assets which would be cheaper due to a weakening currency. Chinese businesses for instance which have been buying a lot of assets in the UK may increase buying assets.
Tourism: Britons will find it costlier to travel to long-haul destinations (travel time of over 3-4 hours) and may be forced to take short haul vacations, impacting countries like Sri Lanka where the UK is the third largest source market after India and China. Trade: Sri Lanka would need to negotiate separately with the UK and Europe on the GSP+ concessions, unlike earlier where it was negotiations with the EU.
Migration: Beneficial for Sri Lankans. The new move would ensure a level playing field in the UK where Sri Lanka’s skilled and semi-skilled migrants can compete equally with Europeans who had a head-start earlier in seeking jobs.
Why the exit: Cash-strapped Britain has frozen wages and pruned welfare measures in recent times. Some of the reasons why people in Britain voted to exit the EU may have been because cities in the rural countryside felt the austerity measures were owing to inbound migration and refugees (from Europe and West Asia) and its financial implications (foreigners creating an economic crisis). Economy: For all the above reasons, Britain’s economy will get weaker. Political ramifications and global implications:
- Global interest rates are expected to go up with high risk premiums rising due to the uncertainty, at a time when SL is seeking overseas loans.
- Nationalist movements in EU member states could get greater support from local communities to quit the EU .
- If that happens, Europe could be in turmoil unless the EU and members states are strong enough to ward off ‘quit EU’ demands particularly angry over the inflow of refugees from West Asia
What SL should do (in the short and long term):
- Diversify exports and cement more economic relationships with Asia and the Middle East
- A lot of West Asian riches and investments are parked in the EU. These new developments and anti-Muslim sentiment could scare off Arab investors who would then be looking for non-EU avenues to invest. Good time for SL who attract Arab investors.
- Develop more trade and investment ties with ASEAN and rest of Asia. - (Feizal)