Will other countries follow Brexit example and shun globalization?

Thursday’s successful Brexit vote holds great consequences for economies worldwide, with some analysts warning that departure from the EU could plunge Britain back into a recession that might in turn spread to other countries. For more on the financial implications of Brexit, Hari Sreenivasan talks to David Wessel of the Brookings Institution and Diane Swonk of DS Economics.

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    Now a look at the potential economic ramifications of Brexit.

    Many financial markets took an outright beating during a global sell-off today. The Euro Stoxx Index, a broad measure of stocks in the Eurozone, fell by almost 8 percent. London's FTSE Exchange lost 3 percent. And the Japanese Nikkei dropped by nearly 8 percent.

    American markets took big hits too. The Dow Jones suffered its largest loss of the year and gave all of its gains for 2016. It was down 611 points, or nearly 3.4 percent. The Nasdaq dropped 202 points, or 4 percent, and the S&P fell 76 points, or 3.6 percent.

    Hari Sreenivasan has this part of the story from our New York studios.


    Some analysts suggest that leaving the E.U. could plunge the U.K. back into recession, and the consequences could potentially spread into the wider global economy.

    We look at the concerns here and abroad with two who watch this closely, Diane Swonk, the founder of her own firm, DS Economics, and David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution and contributing correspondent for The Wall Street Journal.

    Diane, I want to start with you.

    The markets in the U.S. were down 611 points. The markets in Europe and Asia, some of them suffered even greater percentage losses. What's the core worry for the world here? Why these ripple effects?

  • DIANE SWONK, DS Economics:

    Well, the real worry is not only will the U.K. perhaps slip into recession — it's about 2.5 percent of the global economy — but that there could be domino effects throughout the European Union, as other countries come to the same verdict and want to opt out of the European Union.

    Remember, this is an area where many companies got a lot of efficiencies by the fact that there was free trade and people could so easily move between countries. Now that those trade — those barriers are going to be much higher, that will cost companies a lot more money. And also many companies will have to move their location out of London, to perhaps Ireland, Dublin, or Frankfurt.

    And I think that's where the concerns are coming, is, what is the bottom line for profits, not only in terms of growth and exports, but also what is it going to mean in terms of additional costs for those companies as they operate on a global basis?


    David, how does this impact companies doing business in the U.S.?

  • DAVID WESSEL, Brookings Institution:

    Well, I think, generally, it means that American companies will sell less stuff abroad.

    The U.K. is a very small part of American exports, but Europe as a whole is about a quarter of all U.S. exports. That's a lot. The less well their economy does, the less stuff they will buy from us. That means fewer sales, fewer profits and fewer jobs here.

    But I think the reason the markets are reacting goes beyond that. One is that the value of the dollar has gone up a lot. And as people freak out about what's going on in Europe, the dollar foreign exchange value will go higher. That means it will be great for people who are going to vacation in Europe, but that makes it even worse for American exporters. It acts like a brake on the U.S. economy.


    Diane, outside of today, then, what are the impacts on the U.S. companies?


    Well, I think, on net, it is a dampening effect on the U.S. economy, not enough for us to take down our forecasts yet, because of the uncertainty surrounding it.

    There is the near term. As David mentioned, it's now cheaper to go to Europe. It's also going to be easier to get a — refinance your mortgage at a lower rate. And the Fed is now on the sidelines to try to support the economy. All those are meant to cushion the blow of what David really accurately pointed out, that stronger dollar harder on manufacturers, insult to injury to a part of the economy that's already been suffering a lot.

    And so, on net, a minor negative, but overall the U.S. economy should be able to weather the storm coming from Europe. The problem is the uncertainty. And I think that is what you're seeing roil markets is, we just don't know how far this could — the domino effect could be beyond the initial U.K. vote.


    David, there is that old adage buy on the rumor, sell on the news.

    Having the actual act happen today, doesn't that add some certainty, or as Diane is saying, we don't know exactly what the next shoe is and when it's going to drop?


    Well, I think the markets were a little surprised by the news. That's why there was such a big reaction.

    There isn't much certainty, other than Europe is — the U.K. is pulling out of the European Union. But I think there is a broader thing going on here. This is a bunch of people in a democracy voting to repudiate trade, globalization, immigration, all those things that a lot of people think have been important in the growth of the world economy.

    And I think the concern is that this is a symptom of a broader malaise. It's true on the continent of Europe and it's also true here in the United States. And so people are thinking is the whole approach to world trade, to globalization, grappling together with global problems through these institutions, is that now all being called into question?


    Diane, how much is this a referendum on the free trade policies that the world has been pushing for the last few decades?


    Well, I think David is exactly right about that.

    This is a backlash to globalization and to really the post-World War II era. They have been in for 43 years, remember, in the European Union, the U.K. had. And I think this really is a global situation, a global backlash to that.

    And what concerns me and what concerns I think financial markets as well is that it's a backlash to institutions and to all the warnings as well. There is a will break. And it's going — it is global in nature in terms of the socioeconomic, how the vote went down, the younger people wanting to stay in, more educated, higher — and wealthier people wanting to stay in the European Union, similar things, and seeing immigration as a positive instead of a negative.

    Similar things are going on here in the United States. We're seeing the backlash to free trade, the backlash to immigration, the desire to build walls, instead of open borders. And that really is a breakdown of what we knew as a post-World War II prosperity. And I think that should rattle markets.

    This is a — could be a paradigm shift, if it's not contained. And that's where the uncertainty is, is, we don't know how far it's going to go because it isn't just one country. It's many countries that are experiencing the same thing. And we just don't know how far the reaction function is going to go.


    David, what about the idea of containment? Even if the Bank of England stands there today and says we will do what we have to, to prop up the British pound, what about these other countries now that are saying maybe this is our license to walk out of the E.U. ourselves?


    Right. I think that's a big issue.

    Look, the central banks and the finance ministries will try and manage the shifting markets, the turmoil to make sure that we don't have some breakdown, some bank failure or some disorderly trading.

    But I think that you're pointing out this is a symptom of a much bigger thing. Will the Dutch think about leaving the European Union? Is this basically the end of an era of European integration? I think it puts a real pressure on global elites in business and academics, politicians who believe in globalization, who believe that we have to make international agreements to solve global problems, to find a way to address the anger of people who felt left out, whose wages haven't gone up, who, like, don't trust the government and the experts anymore.


    All right, Diane Swonk, David Wessel, thanks so much for joining us.


    Thank you.


    You're welcome.

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