By Ismail Ertürk - The Banking Expert at Alliance Manchester Business School, The University of Manchester.
The immediate verdict of financial markets on the U.K.'s referendum result to leave the E.U. was damning: sterling fell sharply, investors fled some real estate funds threatening their solvency, U.K. banks lost significant value in stock market and the U.K. government lost its AAA rating in bond markets. The economic uncertainty that Brexit has created was magnified by the political risk that the leaders of the Brexit campaign, Boris Johnson and Michael Gove, have amateurishly created by entering into a selfish political infighting that revealed a lack of a vision and plan by the Brexit leaders for the U.K. outside the E.U.
Boris Johnson panicked in the face of unexpected success of the leave campaign that he had led and immediately announced in a newspaper article that Brexit did not mean cutting all ties with the E.U. economically and politically. Michael Gove, then, betrayed Johnson, to whom he originally had sworn allegiance to, by accusing him for not possessing the leadership qualities to lead the Conservative Party and the U.K. for a future outside the E.U. The leader of the opposition, Jeremy Corbyn, too, came under severe attack from the majority of his own shadow cabinet and the parliamentary Labour Party who publicly voiced their distrust of Corbyn's leadership qualities. On top of this English drama a probable Scottish tragedy in the form of a second Scottish referendum to leave the U.K. was conjectured by Nicola Sturgeon, the Scottish First Minister. Of course the U.K. has historically strong political institutions, traditions and elites that are collectively driven by common sense to avoid political drama and to aim normality in domestic and international affairs. But nevertheless the current formidable challenge to navigate the unchartered waters of the referendum result in the short and long-term is enormous and has thrown the U.K. into turbulence.
Against such background of unprecedented economic and political risks the U.K. faces relegation, in unforgiving and yield searching world of global financial calculations, to the asset class league of sizeable emerging economies joining the likes of Brazil, Turkey, South Korea. Such economies regularly experience runs on their currencies due to a mixture of macroeconomic fragilities like high levels of sovereign debt, high current account deficit, weak undercapitalised banks and political infighting. The post-Brexit U.K. exhibits and will continue to exhibit in the near- to mid-term future all of these weaknesses. And there will be new problems. For example there are already anecdotal evidences of food processing and fruit farming suffering from labour shortages due to East European immigrants going back to their home countries. The French Prime Minister has already publicly announced tax breaks and other relevant support to lure bankers from London to Paris. Building a solid post-Brexit economic future for a U.K. outside the E.U. on the weak foundations of structural economic problems and the new political uncertainties is going to be extremely difficult.
Boris Johnson realised this in full horror and therefore he sheepishly ran for cover against Gove's meek betrayal. Sterling, U.K. stocks and bonds, real estate will combine to make the U.K. an excellent asset class for international investors especially the hedge funds who thrive on volatility. Since the demise of the BRICs and emerging economies stories since the second part of 2013 when the U.S. Federal Reserve announced tapering of quantitative easing international financial investors were short of new asset classes to speculate on. In our financialised capitalism the wall of money in international markets continuously search for and create new asset classes to speculate on. In the past we have seen the dot.com companies, Asian Tigers, BRICs, etc. playing such role. An alternative to the U.K. being relegated to the emerging economy league mentioned above is the U.K. initiating the creation of a brand new asset class in international finance.
The U.K. has the excellent qualities of a country asset class with added advantages. Added advantages are the size of its economy, reliability of its market friendly legal and institutional traditions and deep financial markets. Switzerland, Norway, Denmark and Sweden individually and collectively have played such role under the quantitative easing polices of the U.S., Japan and the Eurozone since the 2007 financial crisis. But none of these countries could offer the size and depth that the U.K. can offer. In that sense the U.K. can easily join these smaller Nordic European countries to form a new asset class. And it will not be surprising to see the oncoming elections in countries like France and Holland providing a momentum to this new asset class with speculators betting on the financial consequences of Frenchxit and Dutchxit. Welcome to the new asset class of Saxon-Viking economies© or Viking-Saxon economies©.
The leave campaigners were fighting to take back control from Brussels. In a financialised global economy the only country in the world which takes back control is North Korea. The leaders of the Brexit campaign are already realising the impossibility of having full control over economic and international affairs. The governor of the Bank of England, Mark Carney, has announced in the aftermath of the Brexit that the anticipated financial risks are crystallising. There is going to be much more than negotiating the new trade relations with the E.U. on the plate of the new prime minister of the U.K. Trying to manage the U.K.'s or the U.K. minus Scotland's future as a new asset class in a financialised world economy is very likely to occupy most of post-Brexit political leaders’ time in London. And the technocratic Bank of England is very likely to be the busiest and increasingly more powerful institution in the post-Brexit world trying to keep the U.K. float in turbulent financial markets.
Ismail Ertürk - The Banking Expert at Alliance Manchester Business School, The University of Manchester.
Ismail is a regular commentator in the broadcast and print media. He has taught corporate finance, bank financial management and international finance on both the School’s MBA and Executive Centre programmes. His research interests are in financialisation and financial innovation.