Brexit, And Geopolitical Risk

By Michelle DiGruttolo

August 18, 2016

The extent to which so many economists, political pundits, and financial advisors bet incorrectly that the “Bremain” faction would prevail in a referendum vote that became a subtext for issues much larger than frustration with the EU, underscores the need for disciplined and independent geopolitical analysis for businesses and investors with international interests.

Brexit’s slim margin of victory might suggest that even a large number of voters who were skeptical on the question of European integration perhaps decided that the risks associated with Brexit did not in fact, outweigh the benefits of the departure. However, even though some analysts correctly forecasted the departure, many failed to seriously consider what a vote to withdraw from the EU would mean until it had happened.

The Brexit vote is clearly significant for a host of reasons, but its consequences fluctuate widely depending on variables such as industry, location, and sector. It would be imprudent to suggest the worst is over, and that it was merely a bump in the global economy with few repercussions. Rather, the outcomes will only become clear over time.

For example, the upcoming negotiations will fundamentally and enduringly revise the UK’s relationship with not only the EU, but potentially with other trade, investment and political partners as well. Moreover, the referendum has accelerated popular pressure in other EU states to add comparable ballots in their own upcoming elections, and has given nationalist and anti-refugee candidates across Europe additional credibility and momentum.

Clearly Brexit foreshadows a spectrum of variable outcomes for businesses and investors alike, and there is no single forecast that fits all. Analysts cannot compare the potential outcomes of Brexit to other black swans like the recent terrorist attacks in Europe or the coup attempts in Turkey, but these events are not completely unrelated when analyzed in a strategic context or within a political stability framework. Uncertainly leads to instability, which in turn results in marketplace volatility.

It would be a mistake then to be lulled into a false sense of security as the negotiations slowly unfold. Instead, analysts should observe and evaluate the political forces shaping the platforms and rhetoric of elected officials, candidates, and key negotiators.

The subtexts of the referendum that include economic stagnation, refugees and sovereignty will continue to drive political rhetoric in Europe and will intensify tensions among EU members. This will likely increase the potential for further secessionist movements, and might also result in European voters installing new governments that advocate similar withdrawals for comparable objectives. Greece, Italy, Spain, France and the Netherlands are already generating public discourse on the topic.

Why does an accurate assessment of the current and future geopolitical landscape matter? Uncertainty leads to volatility, where clarity can create stability. Clarity comes from understanding. Good geopolitical analysis makes connections and creates context for investors and businesses. Understanding why global economic growth has slowed to a crawl, putting the soaring levels of indebtedness and joblessness, into context, and connecting popular dissatisfaction with rising expectations that lead to events like Brexit (or in the US Trump’s success) all serve to help us make better business and investment decisions. Understanding motivations, and correlating geopolitical risks and opportunities with social and political behavior, in conjunction with quantitative econometric pattern and trend analysis help us to make more informed business decisions that achieve positive outcomes.