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Tuesday, 28 June 2016 00:02 - - {{hitsCtrl.values.hits}}
By Marisa Wikramanayake
It has been a surreal month in British politics. Not two days after Bob Geldof chased UK Independent Party (UKIP) leader Nigel Farage up the Thames River, left wing politician Jo Cox was fatally shot and stabbed in public by a man linked to the right wing Leave faction of the Brexit issue.
And then on Thursday last week, the British decided by 51.9% to make Brexit an historical reality: they voted in a referendum to leave the European Union and Prime Minister David Cameron resigned.
Nigel Farage and the former Mayor of London, now an MP, Boris Johnson who called for the referendum, are now celebrating a move that within the two hours had cost the UK government a loss of 350 billion pounds as the British pound fell to the lowest it has been in 35 years, since 1985.
It’s the second biggest shock to financial markets across the world that could have been avoided since China’s experiment with the circuit breaker mechanism on the first day of trading in January earlier this year. The global economy could have done without it and now the likelihood of Britain entering a recession is high, making countries across the world undoubtedly nervous.
Britain’s Prime Minister David Cameron speaks after Britain voted to leave the European Union, as his wife Samantha watches outside Number 10 Downing Street in London – Reuters
But how will Sri Lanka be affected?
Over the last few weeks, our Government has called upon British citizens to vote to stay in the EU with Deputy Minister Dr. Harsha de Silva and Minister Harin Fernando both travelling to the UK to speak to the Lankan diaspora on staying in the EU.
We have a good reason for this and it’s the economy. As the Ceylon Chamber of Commerce stated, the UK leaving the EU means we lose half of what we export to the UK. While the US consumes 30% of our exports, the EU as a whole through the GSP+ process consumes 28.8% and within that the UK consumes 11.52% or 40% of our total 28.8% EU export figure. Outside of the EU GSP+ process, we export 10% to the UK directly making the UK receive both directly and indirectly 21.52% of our exports. It’s not a market we can afford to lose and we don’t really have a choice.
Britain’s break from the European Union means that it now has to elect a new Prime Minister and then enter into trade deal negotiations with at least 52 different nations, including Sri Lanka. That’s a lot of legislation and bureaucracy and negotiation for the British Government to now take on. Deputy Minister de Silva has already confirmed that such trade deal negotiations are taking place between the UK and Sri Lanka.
UK’s trade deficits and future spending power and our exports
The exit from the EU has left the UK in a mess of financial uncertainty. The currency devalued by 10% nearly overnight and while Sri Lanka weathered the storm, global stock markets wavered throughout the week leading up to Thursday and after, losing more than $2 trillion in value on Friday. The UK’s credit rating has now been downgraded from steady to negative by the rating agency Moody’s.
The UK has also been battling with trade deficits since the decline of manufacturing in 1998. In 2015 its goods trade gap with the rest of the world had widened by 1.9 billion pounds to a record high of 125 billion pounds according to the Guardian. Most of the countries that were its biggest export markets were all EU members and for it to now be out of the trade bloc makes it harder for the UK to sell goods to those markets. And if it hopes to make up its deficit and tackle government debt, it needs to export goods and it needs trade deals which may give Sri Lanka an advantage at the negotiation table.
But it also points to another issue: a possible recession. The state of the UK’s finances also impacts on other countries which is why everyone has their eyes focused on Europe. The UK no longer gets to benefit from lower prices on goods imported from the EU which can mean higher prices for British consumers and ultimately less spending power to spend on exports coming into the UK from countries like Sri Lanka or even on travelling overseas which will also affect our tourism industry.
As the Ceylon Chamber of Commerce stated: “Britain is a substantial market for other EU countries, and any reduction in their export earnings and overall incomes would affect their demand for imports.” Analysts have already warned that food and clothing prices could rise for British consumers, leading to larger costs for importers.
Wages are unlikely to rise to help compensate and neither are the amount of jobs despite the UKIP party having campaigned on the notion that leaving the EU would ensure that migrants would not steal jobs. Migrants who may now choose to leave will instead leave behind a drop in demand for goods and services as well as gaps in specific skilled professions.
All this doesn’t bode well for trade deal negotiations. Will we swap concessions on pricing for a chance to set up better conditions for visas and migrations and a chance to keep our second export market open a while longer? The Ceylon Chamber of Commerce points out that we may need to wait till we see how the UK negotiates a trade deal with the EU before we can do so ourselves.
Geert Wilders and the stability of the EU itself
The UK’s exit from the EU has caused political tension. Geert Wilders and Marine Le Pen, both right wing nationalist politicians, have called for the Netherlands and France respectively to withdraw from the EU as well. Many are concerned that Vladimir Putin’s strongest opponent in the EU is no longer a member.
This calls into question the stability of the European Union as a whole. It has been widely considered to be a success not just in terms of being a trade bloc but as a means of maintaining political stability in Europe, almost a sort of mini version of the United Nations, by those who remember that the League of Nations and the United Nations were meant to be solutions to prevent a repeat of World War I and II. And while many feel it may be useful for Greece with its economic woes to withdraw from the EU, the concept of the UK withdrawing makes people question the usefulness of the EU to its member states.
EU leaders have been quick to reassure the public that the European Union will continue to be stable and function as a trade bloc and has asked the UK to leave as quickly as possible to prevent financial uncertainty and instability but many of the changes will have to be negotiated and some effects of the exit will play out over the next few years.
The possibility of Scotland’s secession providing a new market
In the UK, referendums are not binding but this one has been accepted. And even though over 1.5 million people have signed a petition for a second one, it is unlikely to be taken on. Prime Minister David Cameron has announced his resignation.
Politically, there are more questions as the UK’s territories such as Gibraltar who wanted to stay with the EU now face a decision of sticking with the UK, economic woes and all or taking up Spain’s offer of sovereignty and EU membership. The decision means a shift in the geographical reach of the UK’s empire and similar decisions are being faced by Scotland and Northern Ireland, both of whom wanted to stay in the EU but are bound by the UK’s decision as long as they remain part of the UK.
Should Scotland rethink secession as it threatened to do so two years ago before voting to stay with England for what some foresaw then as economic stability, it means England will lose major agricultural and manufacturing industries central to its domestic consumption. But for Scotland, staying in the EU means more access to markets for its goods. The empire could indeed shrink.
Should secession occur, Sri Lanka has another option for an export market. As reported by the Guardian yesterday, Scotland’s First Minister Nicola Sturgeon has already stated that another referendum on secession is “highly likely” with her cabinet endorsing a decision to prepare for such a referendum and is currently canvassing support within the EU for Scotland remaining a member. She told the Guardian that:
“It is a significant material change in circumstances. It’s a statement of the obvious that the option of a second independence referendum must be on the table and it is on the table.”
She will host a summit of European diplomats at her official residence in Edinburgh within the next few weeks to discuss how Scotland can remain within the EU.
The Ceylon Chamber of Commerce has already underlined the need for Sri Lanka to diversify into several export markets and states that the global economic downturn forecast by the Brexit results proves how vulnerable Sri Lanka’s economy is to international market forces. This was highlighted by PM Ranil Wickremesinghe earlier this year as he warned British citizens in the iNews publication that pulling out of the largest trading bloc in the world would affect over 80 countries that traded with the EU: “We in Sri Lanka – as well as many other Asian countries – cannot afford further financial turbulence and another global economic downturn.”
Scotland’s leading exports include food and beverages, chemicals, engineering and financial services but it also trades in textiles and renewable energy services and there is an opportunity here for Sri Lanka to obtain another export market either through Scotland being part of the EU via the GSP+ scheme or via its secession.
If anything, Brexit has been a lesson to not just those who ticked the ‘Leave’ box at the polls last Thursday but to all the onlookers across the world over the last few months that our decisions, whether based in ignorance or knowledge, whether driven by ideology or not, do not exist in a political and economic vacuum. Over the next few months, the whole world will feel the implications and consequences of the Brexit referendum including the possibility that the nationalism so hard fought for by the UKIP party may ironically be undone by their efforts if Scotland does end up seceding.
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