Brexit: The Day We Entered the Eye of the Maelstrom

By Thomas Palley

In years to come, the Brexit referendum may come to be seen as the day we entered the eye of the maelstrom that now promises enormous destruction. The immediate consequence looks to be a possible financial crisis, but even if that is avoided the other costs of Brexit will not be.

The European economy was already on the outer circle of the maelstrom. Brexit has swept it into the eye, accelerating the process whereby social alienation and bad economic outcomes produce bad political outcomes, and bad political outcomes produce worsened economic outcomes and further social alienation.

Economic implications

The leading edge of events will be financial markets. Even if an immediate financial bloodbath is contained, the reasonable expectation is for significant downside turbulence over the coming months that will ripple into the real economy. Moreover, a bloodbath now would not be panic. Instead, it can be rationally justified by the economic and political outlook and the fact that asset markets were already richly valued.

British financial markets and the British economy will be the epicenter. The shock to London’s stock market will hit wealth and household confidence, negatively impacting consumer spending and the United Kingdom (UK) real economy.

Britain’s real estate market (especially London) was already highly priced, and it is now very vulnerable to reduced local and foreign buying. British banks are financed in sterling and a lower sterling exchange rate has unpredictable negative implications for them and their counter-parties.

Business will cut back further on investment in the UK because business dislikes uncertainty. Big ticket investments will be placed on hold until the status of the UK’s access to European markets is clarified.

All these impacts will ramify outward, hitting other economies, including the US. The mechanisms are financial contagion, currency turbulence, and uncertainty, all of which generate negative aggregate demand effects that are then multiplied via the contraction process. The first port of call will be European economy, which is already in a fragile condition and is most integrated with the UK.

Political implications

Bad as the economic news is, the political shocks to come may be worse.

The Brexit electoral outcome map shows all of Scotland voted to remain. That means the UK’s constitutional crisis regarding Scottish independence is likely back on.

In Spain, there is the long-standing issue of Catalonia’s demand for independence, which Brexit further mainstreams and encourages. Now, Italy’s Northern League, which is politically powerful in the rich northern half of the country, is calling for an EU exit referendum.

In effect, Brexit is a green flag for separatisms of all stripe. That has adverse implications for the euro, which is already under the threat of Grexit. Consequently, sterling’s weakness stands to be accompanied by a weakening of the euro, providing an additional currency channel for spreading Brexit’s shockwaves into the global economy.

With regard to US politics, negative economic fall-out from Brexit will injure the incumbent candidate Hillary Clinton and benefit Donald Trump.

Beyond that, Brexit carries vital political lessons for the Obama administration and Clinton campaign, both of which must not give reason for US voters to further disdain the establishment.

Brexit has structural similarities with Trump’s rise. It is the logical outcome of the Conservative Party’s political strategy of the past twenty years. Conservatives used the European Union (EU) as a whipping boy to help smuggle in their “Thatcher – Reagan” neoliberal economic policies. The Labor Party spoke out in defense of minorities, but it did not defend the EU and nor did it adequately confront neoliberalism.

In the US, Trump is the analogue “exit” candidate. His rise is the logical outcome of thirty years, during which Republicans used dog-whistle racism and the culture war to smuggle through their neoliberal economic agenda that has wrought the destruction of shared prosperity. Democrats resisted racism and the culture war, but were complicit in the promotion of neoliberalism.

The lesson for the Clinton campaign is it must move beyond rhetoric criticizing neoliberalism and adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope. Neoliberalism is the ultimate cause of the establishment’s rejection. Racism, immigration and nationalism may be the match for the anti-establishment fire: wage stagnation and off-shoring of jobs are the fuel.

As regards the Obama administration, the lesson concerns the Trans-Pacific Partnership (TPP). On all sides, the US electorate has rejected the TPP, but the Obama administration keeps pushing it. That further discredits the establishment and benefits Trump who is the outsider candidate. Clinton is the insider who has openly touted her links to President Obama, and she still lacks credibility on her opposition to TPP because of her past endorsement.

In this environment, the Obama administration’s pushing of the TPP is recklessly irresponsible politics that send us nose down, into the eye of the maelstrom.

Mike-Frank Epitropoulos on SYRIZA Victory

See also Mike-Frank Epitropoulos’s pre-election piece, A Second Demonstration Project for Greece. Patti Smith’s song People Have the Power has been adopted as SYRIZA’s anthem.  SYRIZA’s twitter feed posted another YouTube version of the song (as reported by the New York Times), but that version can’t be viewed in the United States.

Anti-Austerity SYRIZA Wins Big—Now the Clash with the Crisis

The left, anti-austerity SYRIZA party scored a decisive victory in the Greek elections on Sunday, with margins exceeding those of most polls.  This is the first time that a left party has won Greece’s national elections, and Europe’s and the world’s attention is focused on how SYRIZA will combat the economic and humanitarian crises that the country faces in the wake of Troika-imposed austerity programs.

SYRIZA is projected to have won 149 of the 150 seats needed to secure a parliamentary majority (with 36-37% of the vote).  Party officials have indicated a willingness to work with any democratic, left, or anti-austerity forces, and have joined with the center-right anti-austerity party the Independent Greeks (ANEL) to form a government, since SYRIZA did not secure an outright majority.

The out-going New Democracy (ND)-led coalition government of Antonis Samaras garnered 27-28%, while their partners in PASOK brought up the rear in seventh place with about 4.5%.

The neo-Nazi Golden Dawn party left its mark as well, finishing third overall with just over 6%.

There is much discussion about how SYRIZA’s margin of victory exceeded expectations, including the notions of “hope” and “desperation” of large percentages of Greeks, especially the youth.  A subplot might well be that the unprecedented outside pressure and interference from some world leaders and financial sector institutions led to a backlash by the Greek citizens.

SYRIZA’s results represent a clear mandate, and its leader, Alexis Tsipras, made clear that the hard work for Greece starts tomorrow.  He made sure to put Greece’s elite and oligarchs on notice about changes that are likely to follow, including crackdowns on tax-evaders, increases in taxes on the higher strata, and a more active social state.

Tsipras also emphasized what any spectator of the celebrations of SYRIZA could see—a conspicuous presence of other left, anti-austerity parties from across Europe, including Spain’s, Podemos, and groups from Italy, Portugal, and other countries.  This is precisely the symbolic threat that the SYRIZA victory represents: the beginnings of networks of other anti-austerity, left groups connecting on an EU-level to fight the neo-liberal forces in the EU and the Troika.

Immediate reactions to SYRIZA’s victory, ranged from euphoric optimism and relief to cynicism and vicious attacks from other parliamentary parties.  Government hardliners of ND and PASOK warned that SYRIZA’s project would fail quickly because—they claim—“there is no alternative” to market discipline imposed by the financial sector.

But it’s clear that the Greek people did choose an alternative: democracy over the dictates of the markets. 

The Troika’s prescription of austerity and privatization was tragic for Greece, and the debt is insurmountable as it stands.  Now comes the hard work for SYRIZA and Greece.  It will require them to stick to their guns, to not succumb to mainstream pressure, and to keep the needs of the people at the fore.

Mike-Frank Epitropoulos teaches sociology and is the director of the Pitt in Greece and Pitt in Cyprus programs at the University of Pittsburgh.  He spent three years teaching in both private and public-sector higher education in Greece before returning to the United States in 2007.