One of the most talked about geopolitical development going on at present is Brexit i.e. Britain’s exit from Europe.
So how does it affect India and what we need to know about it?
Let’s go through a bit of history to make up for the background needed to understand this scenario.
After World War II, Europe was a devastated place. The World war not only resulted in a huge loss of life but also of their infrastructure and institutions.
So America took to rebuilding Europe (precisely Western Europe because Eastern Europe was under the USSR). The plan to redevelop Europe was named “Marshall Plan” after the army general who envisioned it. The primary objective of the U.S. was to have a democratic, liberal and capitalistically to confront the Soviet Communist and its allies (The Cold War – 1947 to 1991). The institutions such as IMF, World Bank, WTO have largely shaped the world what it is.
Europe grew rapidly after the world war. However, only Western Europe was under the influence of the US. Some member states got together to form a Union of European Nations. This started in the early 1950s. Slowly and gradually other countries in the continent started joining them. The UK joined the bloc in 1973. The most recent addition in the European Union was as recently as 2013. Even some more countries are in the fray in joining the European Union. The EU is the second largest Economic geography in the world after the United States of America. The EU has created a geographical area with free flow of goods, services and people and has lead to prosperity of the people living in that region. The EU has a very high quality of life and so it attracts migrants from Africa and conflict ridden areas such as Syria/Iraq etc.
Also what happened is some smaller economies like Greece undertook large loans from the union to give such a high quality of life to its citizen which was not tenable. The Greek crisis was due to excessive debt funded welfare measures. The govt. spent too much on human welfare which was not funded from economic productivity but from debt fund. This lead to the Greek crisis and the result relief package and austerity measures. The other member countries had to fund the relief package.
Migration crisis, Greek crisis, border controls, monetary policies and such other issues started to be seen as a hindrance by the U.K. The people there wanted to have independence in such matters. A referendum was thus organized in 2016 in which Brexit was favoured 52:48. The deadline has been fixed: March 2019
At present, the negotiations on the deal are being done. How will the trade relation be between the bloc and the UK after its exit. Britain will also draft its own immigration policies and there will have to be renewed trade deals with other countries in the aftermath of the exit. This will have serious implications on the world economy after all UK being one of the top 5 economies of the world. It is anticipated that in the new immigration policy of the UK India will find a favour. The PM of UK also said in a recent statement that they will not allow others to “jump ahead” of the Indians in immigration matters which was happening due to favour given to Europeans.
The other side of the matter is that it might make UK a bit unattractive in terms of market opportunities. It is being anticipated that a lot of financial services business may move out of London to Luxemburg as the free cross-border flow will no longer be possible after the exit. At present, there is not too much of shifting but companies have got plans and the final draft of the Brexit deal will provide more clarity on the future course of action to be taken by those companies.
Moving out of the low-interest rate regime, the de-globalization prospect and the US China Trade war
Since the financial crisis of 2008 (the sub-prime mortgage crisis), the world is now coming out of the lolow-interestate regime that was brought in to push growth. The interest rates are now moving upwards with the aim of the Central banks across the Western developed world to move towards a stabilized interest rate regime. Infact the US Fed. Reserve is leading the way towards stable interest rate regime from the historical low rates.
Such stable rates are needed so that whenever another recession hits at least the Central banks will have the most important weapon in its kitty ready to be used (the interest rates ofcourse). It has been a decade-long reign of low interest rates.
Trump’s policies may seem irritable to the western media ( Indian media following the suit) and they are mostly unfavourably biased against the trump administration for whatever reasons. But if you actually look at the American economy, you will find that –
- Unemployment rate in the US is at historic lows
- Growth is climbing back and is now in 3-3.5% range as promised by Mr. Trump in his election campaign.
Mr. Trump is delivering on his promises of economic growth which can be corroborated by the statistics of the economy. Whatever the media may say that such growth is shortlived or is temporary and will ultimately result in doom, I don’t think it will be as gloomy as they are painting it. What China did is that they created a factory in their country for the US. The US has a very high trade deficit with China (US $ 500 Bn). And that is what Mr. Trump has now started to reverse by imposing high tariffs on Chinese goods. How will China deal with this is a matter of their great concern. What India needs to do is to get this pie of trade for itself. In this endeavour, its competitor is the Southeast Asia which is also emerging as a cheap manufacturing hub. India also needs to make full use of this opportunity to integrate itself in the global supply chain (i. e last assembling point of products).
The months to come will see a shift in the working of the world order as it has to be seen how the slowing Chinese growth will be countered. Whether the advent of the 4th Industrial revolution will bring some transformative change. How will 5G and AI change the world? As of now, it seems that who will adopt these new technologies will be ahead of the other in the race to economic development and material prosperity. Africa might miss this bus too. It seems as if those nations which are behind (mostly African and South American) are forever doomed to be so because 5G & AI will increase the pace of development in those countries which adopt it first.
Anyways, the future is exciting.
CAclubindia
