British politics brace for Brexit fallout. EU leaders discuss post-Brexit steps. Australia heads to the polls. European and US central bankers meet. All in The Week Ahead.
Brexit fallout continues across British political spectrum
Perhaps unsurprisingly, by far the most significant political event for the week will be the ongoing fallout from the decision by the people of the United Kingdom last Thursday to secede from the European Union by a margin of 52-48. Also unsurprisingly, this caused total chaos in financial markets, and drove down the value both of the euro and pound, leading to possibly a significant degree of buyers’ remorse.
The political ramifications of this vote are staggering and only beginning to be fully unpacked. Prime Minister David Cameron, who placed his premiership on success in this referendum, has announced he will step down by October (though whether this means that new elections will be held or a replacement will be selected remains to be seen). The selection of a replacement for Cameron, rather than a new election, could be fraught; pro-Brexit Conservative MPs have suggested that they would be comfortable with Cameron staying or possibly London mayor Boris Johnson replacing him, and many pro-Remain MPs would likely prefer anyone but either of those candidates. Chancellor of the Exchequer George Osborne looks as though he will also be a political casualty. Additionally, many within the Labour Party are furious over Leader Jeremy Corbyn’s half-hearted efforts to maintain the UK position within the EU (a survey conducted days before the vote suggested that as much as 20% of Labour voters were unaware of their party’s position on Brexit). A parliamentary vote of confidence in Corbyn is likely upcoming.
Further afield from the houses of Parliament, the parliamentary bodies in Holyrood and Stormont are abuzz, and in some cases, reeling. In Scotland, which firmly voted in favor of remaining in the EU, talk of another independence referendum is spreading like wildfire. In Northern Ireland (which also voted to remain in the EU, though with a less pronounced majority than in Scotland), voters and political figures are beginning to unpack the gravity of establishing trade barriers and the loss of common market status with the Republic of Ireland. Northern Ireland, the only part of the UK that borders another EU member state, is likely to be hit particularly hard by the departure of the UK from the EU, which may be why Sinn Fein leader Martin McGuinness called for a referendum on the unification of Ireland and the reopening of discussion of the secession of Northern Ireland from the UK.
EU leaders discuss steps ahead
The confusion over the implications of Brexit aren’t confined to the UK. Meetings across Europe will gather EU leaders to discuss the path ahead. On Monday, German Chancellor Angela Merkel will host EU President Donald Tusk in Berlin to discuss the implications of Brexit, followed by meetings with President Francois Hollande and Italian Prime Minister Matteo Renzi. The latter meeting will end with a press conference.
Looking ahead, European governments will need to weigh an array of competing interests, both internally and across borders. Countries with major EU separatist political parties could face significant conflicting pressure both to make Brexit as difficult as possible (to discourage the strength of separatist support in their own countries) and to hold their own independence referenda. Pressure to hold an in/out vote in places like the Netherlands, Denmark, France, and Italy could destabilize the economic and policy agendas of the elected officials in these countries and could further bog down traditional left and right political parties by populist impulses. On the flip side, countries without major separatist movements could move to provide the UK with as smooth an exit as possible to maintain the fragile economic growth of the EU and stability of both the euro and the European project.
Additionally, where to place Brexit among a whole host of pressing political and economic issues, including the Greek bailout regime, monitoring the Polish government’s questionably undemocratic measures, the European Digital Single Market initiative, TTIP negotiations, and sanctions against Russia, will be complicated and could push many (if not most) of these initiatives on the back burner at least in the short term.
Australia votes in parliamentary elections
On Sunday, Australians will head to the polls to determine the 226 people who will represent them in Parliament, including the 150-seat House of Representatives, 76-seat Senate, and as a result, the position of Prime Minister. Although polling has showed the government Coalition and opposition Labor about neck-in-neck, it appears that Labor isn’t performing well enough in marginal districts to retake the House, though support for minority parties could complicate matters.
Prime Minister Turnbull has argued that the UK decision on Brexit should prompt Australians to seek stability in times of global uncertainty (which was rejected by Labor leaders as a distraction from Australian issues in healthcare and education). Labor has moved to elevate healthcare as an important major issue, with Labor leader Bill Shorten arguing that new fees and increasing medicine costs have raised healthcare costs for Australian citizens. Another flashpoint in the campaign has been on the issue of same-sex marriage. Although polling has suggested that Australians broadly favor same-sex couples marriage rights, and Prime Minister Turnbull has indicated his intent to hold a plebiscite on the issue should his party be maintained in government, his recent announcement that he would ensure that the subsequent vote in Parliament would be a conscience vote (meaning that a majority vote in favor of same-sex marriage could be overturned by Parliament) was harshly criticized by the Labor Party as a $160 million non-binding opinion poll.
Forum on central banking to bring together European and American central bankers
On Monday, the European Central Bank will begin its 3-day Forum on Central Banking in Sintra, Portugal. In addition to the attendance of ECB President Mario Draghi, participants will include Federal Reserve Chair Janet Yellen, Bank of England Governor Mark Carney, and Deutsche Bundesbank President Claudia Buch. Although the major points of discussion are slated to include central bank independence, below-zero interest rates, and financial regulatory regimes, the event will likely be swamped with conversations about the economic implications of Brexit.
Central banks from Washington to Tokyo will need to quickly explore a number of questions as they grapple with a way forward: will the Bank of England raise interest rates in order to stabilize the value of the pound, or perhaps flirt with negative territory in order to boost an economy that may be on its way to recession (or maintain rates at all costs to illustrate stability)? Will London’s position as one of the two great financial powerhouses of the West diminish considerably as attention turns to Berlin, Paris, and Brussels as centers of commerce within the European family? What European financial regulations will be maintained by the British government as it negotiates its separation from the EU? Will a potential Scottish independence referendum (which appears increasingly likely) affect financial operations in Edinburgh, or, if it is able to become independent while remaining in the EU, will banking concentrations shift from London to Scotland? And how will any of these actions affect the credibility and stability of the euro?
The Week Ahead provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, The Week Ahead presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.
The Week Ahead is written by GRI analyst Brian Daigle.
