16th Feb 2016

How Brexit Could Shake Apart the UK

As February unfolds, the British political strata is deepening the UK discussion over Brexit - the idea that Britain could, should or might exit the EU. While economists and businesses weigh the downstream impacts and citizens consider the idea, scenarios are emerging that portend unintended consequences for the UK if it were to happen.

First and foremost, the business community does not do well with uncertainty. The prospect of the UK being forced to renegotiate trade agreements with dozens of countries while enforcing new border passage rules for its own citizens and visitors to Britian, along with a cloudy future for exports to the UK's single largest market, Europe, are already having a chilling effect on the business climate in the country. Should an exit become reality, a drop in foreign investment into the UK and a multi-year effort to rethink Britain's role in the world, and the price at which it participates at large look inevitable. For a market absurdly dependent on foreign investment and housing in particular, that's not good.

Within the UK, an exit raises the tensions surrounding national identity considerably. The country survived the Scottish independence referendum vote in 2014, which featured a high 84.6% voter turnout with a 44% minority aiming to leave the UK. Scotland is a net beneficiary of EU related funding and social investment, and losing that funding as a result of Brexit could result in harder fiscal realities in the northern country. The loss would be substantial enough to set in motion a set of hard economic incentives that would result in Scotland devolving from the UK in favor of EU membership on its own.

In Northern Ireland, the situation is similar. Over ten years into a fragile peace, Nothern Ireland's net welfare gains from the UK and EU Structural and Investment Fund Programmes would be diminished by Brexit. Without EU financial support of Northern Ireland and in the wake of a Scottish departure from the UK, the case for Northern Ireland's reunification with Ireland, fraught with historical animosity but dictated today more by financial considerations, becomes more real. From a financial viewpoint, Northern Ireland and Ireland together as part of the EU makes more sense to some analysts than Northern Ireland and the UK outside of EU.

So that leaves Wales and England, anchored by London, as an emergent and hyperbolic city-state on the global stage. Such a scenario would have significant impacts on the viability of London itself as a global financial center and may serve to amplify its reputation as a neo-urban area - the kind of place that exists between nations, not so much as a nation.

Singapore, Hong Kong, Dubai... today's centers of financial operations and leading magnets for the creative class thrive because they contain 'advantages' over 'normal' countries, with a set of objectives and economic activities well suited for 21st century operations: mobile and highly educated populations, a lack of geographic baggage, and the ability to compete for global resources on a nimble basis, magnified by their human density and a propensity to trade taxe rates for business consideration.

These micro-nations wield outsize influence but compete on efficiency and market dynamics for the attention of the global business community. Part of the reason they succeed is because they are rare - and they depend in turn on security alliances and bargains with traditional national powers.

For London this could feel like a liberating advantage, but such scenarios work best in times of peace and security and there is no guarantee such eras will remain indefinitely. They also tend to benefit corporations at the expense of the electorate and convergent income equality at large. As Europe heaves and splinters under the stresses of its own making - refugees, economic blight, currency imbalances - all the things that argue for individual members to exit or find another way, outsiders find benefits and strategic advantage in this weakness.

Without the UK, Europe is certainly reduced, but UK influence would be reduced even more. Without Europe, the UK strengthens the hands of those who benefit from western bloc incoherence.

In a world where chaos stalks the outer edges of the European experiment, that's a reduction in influence either can ill afford.