June 28, 2016

Brexit scenarios, and the surprises still lurking

Futures Strategy Group Principals

FSG scenario planners, like everyone else, are overwhelmed by news, commentary and speculation about Brexit – a term not popularly known before last week’s historic plebiscite in the UK.  Now, everyone wants to know what Brexit is all about and how it will affect them. The problem is, of course, no one knows.  Brexit repercussions will be playing out for weeks, months and even years. Beware anyone who claims to know how it will all shake out.  We certainly don’t. We do, however, have some thoughts about the factors that will determine how Brexit will ultimately go down.  Here is an analytical exercise that FSG routinely does with clients as part of a scenario-development process.  We look at specific high-impact trends and issues  – like Brexit – and examine the factors that could accelerate (or intensify) the trend impact and, conversely, what factors could derail (or attenuate) the trend impact.  This accelerator/derailer exercise is a window into the range of factors that can influence an outcome, as well as the causal relationships between the factors.  It has no predictive value per se, but it does provide perspective and insight into the various drivers that will influence an important outcome. In doing so, the accelerator/derailer exercise illuminates alternative paths forward, positive, negative and otherwise. It helps to identify unintended consequences, wild cards and early-warning signs as well.   

So let’s take a close look at the Brexit case, and the factors that could accelerate or derail its impact.  The trend statement is:

Brexit creates widespread global disruption.

What are the potential accelerators of this trend?

  • Scotland and/or Northern Ireland vote to leave the UK, complicating economics in the British Isles.  Alternatively, Northern Ireland and Scotland might likely remain or reapply separately, eventually helping to shore up the EU.  
  • France and Germany put the screws to the UK in the withdrawal negotiations.  No mercy is shown. The UK’s terms of trade are seriously hurt.  Retaliation ensues, and it spirals downward from there.
  • The UK economy weathers the initial Brexit storm, encouraging Holland, France and Italy to exit the EU. The Union would not likely survive. 
  • Greece leaves the EU and/or euro, ironically, if Brexit proves NOT to have disastrous consequences. (Alternatively, Greece finally succumbs to austerity and decides to leave for reasons of exhaustion, increasing uncertainty and chaos in the Euro Zone and EU.)
  • Putin (and/or ISIS) takes advantage of the post-Brexit instability. Russia moves to grab further territory on its periphery.
  • A new wave of refugees enter across Europe, possibly caused by a widening of the civil war in Syria, further aggravating anti-immigrant and anti-refugee sentiment on the Continent, and fueling other members’ Leave camps.
  • A short-term accelerator, which could turn into a longer-term derailer: A punishing global market reaction (equities, currencies, etc.) to Brexit undermines isolationist/protectionist/nativist currents in the US and across Europe.  Hillary Clinton, a moderate multilateralist, is elected president.
  • A new wave of terrorism in Europe causes further panic regarding immigration and Muslims in the EU (and in the US).
  • The election of Donald Trump undermines the WTO trade regime and broader multilateral (e.g., IMF, World Bank, UN) relations.  

What are the potential derailers of this trend?

  • Markets recover briskly, shrug off Brexit, and confidence spreads all around. Good news feeds upon good news.
  • UK leadership gets on with Article 50 and the negotiations go more smoothly than expected. Uncertainty lifts.
  • The EU decides not to punish the UK severely; separation is relatively amicable. The UK manages to retain some preferential trading privileges with EU and a productive role in the European economy, just not part of the EU.  Damage is contained. Most global companies retain London headquarters.  
  • World leaders, worried over risk of contagion and continued uncertainty across global markets, meet to reaffirm commitment to free trade and integration principles. It’s mostly symbolic, but effective, and a few substantive proposals are agreed to and put into action. Markets applaud this.
  • The new prime minister opts not to enact Article 50 and calls a second referendum. There is already EU precedent for this. The plummeting pound and immediate post-Brexit chaos scares all but the most vehement Brexiters into submission.  This time, the Remain cause wins.  
  • The House of Commons votes against invoking Article 50.  As John Cassidy points out in The New Yorker, this is not out of the question.  After all, Brexit is not technically binding.  Nevertheless, with 17 million votes for Leave, that would raise the undesirable possibility of civil unrest and new political uncertainty.
  • Russia attacks the Baltic states or a similar nation on their periphery, uniting NATO and causing the new British prime minister and other EU heads of state to negotiate differences quickly.

As often is the case with our accelerator/derailer exercises, some events can serve both as accelerators and derailers of the trend statement in question. Often they can have one effect in the short term, but spur the opposite reaction in the longer term. 

So, what have we learned? For sure, that the Brexit drama could play out along any one of multiple paths. Also, acute short-term instability may not be altogether bad news, if it spurs leaders to make tough  decisions that prevent even harsher Brexit effects. That's the positive spin. The truth is, the way forward is complex and cloudy, and the ultimate Brexit outcomes are far from clear.  Events are moving swiftly, and we may have to re-write all this in another week or two.

In the meantime, we’d love to hear your thoughts on the forces for change that could accelerate Brexit catastrophe or, alternatively, derail disaster for the good of the US and the world.  

Contributors to this blog piece include Peter Kennedy, Patrick Marren, Gerard Smith, Charles Thomas, Charles Perrottet and Robert Avila

Comments  | 

John Kittler
Reassuring and frightening given this reasoned menu of options in this still-waking-up-to-Brexit phase. Thank you and well done.
pkennedy
Thanks for your comment, John. The "still-waking-up-to-Brexit" phase you mention may be lingering longer than we'd wish! Such is the uncertainty now upon us. In this attention-challenged world, I can also imagine complacency setting in, followed by gross over-reaction when it's time for the hard decisions to be made. We'll need to keep our seatbelts fastened throughout this unfolding drama...
Missing from these lists of what-ifs is the unpredictability of Britain’s internal dynamic. That will be central to managing the surprises that follow Brexit. What if Scotland, which voted remain, tries to cut a separate deal with the EU and to do that needs to revisit the independence question? What if Northern Ireland, which voted remain, finds itself unable to continue open borders with the republic down south and decides it needs to do something open about it? The Brexit vote manifests conflict in the British electorate that has been simmering for a decade. Labor and the Tories both understand now that, whatever they’re selling, voters aren’t buying. Trust in “elite” (derisive adjective) leadership is utterly eroded. No one has a big, galvanizing idea rooted in something other than emotion. The coming election will be a time of really tumultuous contention in British elections. Labor doesn’t know what it is, and neither do the Tories. Perhaps the two major parties are neither of the above. Perhaps the two major parties now are young, heterogeneous and outward looking versus young, inward and feeling screwed. Call it London v Sunderland. But suppose the opposite materializes? If one or both of the major parties is able to articulate a vision that makes experiential sense to voters and is still rooted in fact there could be voter realignment more dramatic than the country saw in 1978, when Thatcher changed the conversation for a generation. All of this matters in thinking about the cross impacts above. If alienation obtains, whoever controls the government will be hamstrung in creating a coherent response to the multiple challenges in the FSG list. If the political system responds with imagination and leaders regain legitimacy the result could be transformative, for Britain and for other democracies watching. I think the latter is the arc of history. The question for FSG clients is how long it will take to travel that arc, and how bumpy the ride is going to be. Prediction: very.
pkennedy
Thanks for your thoughtful insights, Kevin, about the internal UK political dynamic. You mention: simmering conflicts in the electorate, distrust of "elites", lack of big, galvanizing ideas from either major party, generational tensions, and a tumultuous election ahead. Why does this sound uncomfortably familiar?
Tom Thomas
Kevin: You offer a well-considered addition - no matter what we "analysts" think of the global factors surrounding this event, it is STILL fundamentally an internal political issue. There may be common motivations across borders, but this move toward fragmentation and isolation will play out in distinct domestic political venues with differing outcomes. Thanks.
Steve Wehrenberg
Regarding derailers: Time reported that within hours of the results, Brits were asking "the Google" what it all means. The second most frequent question was "What is the EU?" Brexit is what happens when you give the keys to someone who has no idea how a car works, nor even its purpose. It may be that buyers' remorse over the next few months causes citizens to question the whole idea. That said, my great fear is that your premise is correct, and that we (the entire developed world) will enter a period of chaos brought about by a failure of governance. Kevin's comments, and Peter's summary, seem right on the mark to me. I'm holding a series of parties and salons to screen the cult classic "Idiocracy." And I'm drinking a lot of Brawndo -- it's not bad with vodka.
pmarren
Brawndo has electrolytes! In re: Kevin's statement with respect to a leadership vacuum, this morning we hear that Boris Johnson, one of the major players behind Brexit and the supposedly logical candidate to replace Cameron as Conservative Party leader, has withdrawn his name as a candidate. Both major parties seem to be melting down after Brexit, which both parties opposed, prevailed. Meanwhile over here in the Colonies, something similar seems to be happening to our two parties. The disarray among the Republicans is obvious, but is the Democratic Party realy in better shape? It no longer even seriously pretends to want to take over the House of Representatives, in which the Republicans have created a built-in majority via creative redistricting (which some would call "21st-century cyber-driven gerrymandering"). Trump may not win in November (in fact, Nate Silver has said he has a 20% chance of winning - though Silver has misunderestimated Trump at every turn). But American anger at elites made Trump and Bernie Sanders serious candidates, and it is difficult to write a scenario in which a return to "standard" politics on the part of a President Hillary goes down well with those who feel cheated by the current economy. If she does win, she may face a difficult choice: either go against every instinct that has worked for her in the past, and lead a Sanders-style movement against economic inequality and global elites; or do what she is comfortable doing, and probably become a one-term president, followed by who knows what. On this day after the death of Alvin Toffler, though, it is well to remember his caution: “No serious futurist deals in ‘predictions’.... These are left for television oracles and newspaper astrologers.” RIP Alvin.
pkennedy
Thanks, Steve. I confess to having had to look up Brawndo. Now it all makes sense. https://www.youtube.com/watch?v=Tbxq0IDqD04
Robert Avila
I suspect that the Brits are slowly moving from their stiff upper lip phase (Cameron’s “what’s done is done” posturing) to something closer to concern about maintaining respectability (e.g. Boris Johnson’s exit) to the more humiliating position of rectifying a social embarrassment (e.g. calling for early parliamentary election despite having swarm off such actions). With each day the scope and depth of their national stupidity increases, and nothing would please the continent more than having the perfidious Albinos come hat in hand, like an errant spouse, staring down at their feet asking forgiveness. In geo-political terms it has oft been argued that nations are built by conquest not by bureaucratic negotiation and that unity can only be maintained by force (e.g. the US Civil War). We may be witnessing the birth of a true United States of Europe through a more subtle form of conquest. Historians may look back on this decade and say Greece was subdued by financial manipulation and the UK by global mortification.
Tom thomas
Steve: Your thoughts (the serious part of your thoughts!) highlight for me a serious issue - and I loved the car keys analogy. Most of these large and complex international agreements were designed to impact multiple arenas and the serious politicians that designed them knew that.The EU was as much about keeping the European Great Powers relevant AND at peace as anything else. It is like criticizing the TPP as just a "bad economic deal" when it has so many other key political and diplomatic functions. The Great Powers of the globe (and at least the UK used to be one!) sometimes have the responsibility to suffer in one arena to succeed in another.
Jack Clarke
Over here in Germany we are hearing a number of dire possibilities: The threat to NATO is very much a topic. While no one expects any country to leave NATO (quite the opposite) the impression I am hearing is that many kinds of European institutions are now threatened. NATO, OSSCE and some of the agencies of the EU (FRONTEX) may be threatened. There is talk that this is a death blow for the Euro, as its success is predicated on political union. Although the UK is not part of the EURO zone, its departure is thought to be the straw on the camel's back. Austria has just announced that their presidential election was flawed and will be re-done. Look for the right wing candidate to win. EU organs are also in danger. There is a big fight over the free trade agreement with Canada, which Jean Claude Juncker, the President of the Commission has declared will be approved without the agreement of the national legislatures. This is thought to prove that the EU is high-handed. On the other hand, much of the talk has already died down. There is a belief on the part of many that somehow the UK will not really withdraw.
Michael Perrottet
Great points and an interesting read. The DISRUPTION caused by Brexit is fast becoming a litmus test for EU RESILIENCY. Regarding Accelerator #5: "Putin (and/or ISIS) takes advantage of the post-Brexit instability. Russia moves to grab further territory on its periphery." ...And Derailer #7: "Russia attacks the Baltic states or a similar nation on their periphery, uniting NATO and causing the new British prime minister and other EU heads of state to negotiate differences quickly." ...I'm particularly interested in how both NATO and Russia will react around the Stulwalki Gap, the 64 mile border between Poland and Lithuania that extends from the Russian exclave of Kaliningrad to Belarus. That said concern over such a move described in Derailer #7 has been of particular interest to NATO commanders since Russian annexed the Crimea back in Match of 2014. Since then, a renewed focus has returned to that region in many forms such as large scale exercises like Anakonda 16. More disconcerting to me is an emboldened Russia calculating advantage in the present circumstances and subsequently annexing territory in an area where NATO is not (inclined or required) to act. #Brexit #Scenariostrategy #SulwilkaGap #FuturesStratGrp
pkennedy
Thanks to both Jack Clarke and Michael Perrottet for pushing our Brexit thinking deeper into the NATO realm (including the "Stulwalki Gap!). Doubtless, Brexit adds urgency to the upcoming July 8-9 NATO meeting in Warsaw. John Andrews, writing in Project Syndicate [https://www.project-syndicate.org/print/nato-after-brexit-by-john-andrews-2016-06], reminds readers that both Estonia and Latvia have large Russian minorities. Many feel "considerable residual sympathy, if not loyalty, to their kin state." While NATO is boosting boots on the ground in Poland and the Baltic countries, it's worth wondering if NATO (especially the U.S.) is willing to interpret NATO's Article 5 -- an attack on any member state shall be considered an attack on all -- militarily. As NATO tries to sort out the many issues on its plate, let's hope Article 5 response remains an academic question and not a live, strategic one.
John Hollwitz
Among other interesting complications: What if other states (France, say, or Spain, in addition to Greece) elects to leave the EU?
pkennedy
Thanks for your thoughts, John. Everyone wants to see EU reforms, but European commentators seem to think that France, despite Ms. Le Pen and her ilk, is not at risk to "Frexit." Le Monde editor Sylvie Kaufmann wrote in the NYT earlier this week [http://www.nytimes.com/2016/07/04/opinion/why-frexit-wont-happen.html] that the French people are still largely EU supporters, even more so after the initial Brexit turbulence. Also, Spanish voters, perhaps similarly spooked by Brexit, have kept centrists in power, thus rejecting the potentially more radical economic policies of the far left. Of course, all of these situations are fluid, but there's perhaps a stronger measure of hope for EU survival today than there was after the initial shock of the Brexit referendum.
Martin Jacobson
The meaning of Brexit will depend heavily on the terms and conditions of the agreement(s) potentially available to the UK after Brexit negotiations with the EU, and with other countries as well. This referendum may turn out to be just one of a series of decisions, however taken within the UK, with respect to its external relations. So I see a potential derailer being the mitigating influence of actual or potential agreements with the EU and other countries, however those agreements may be adopted within the UK. Brexit could stand as a formal matter perhaps, but the substantive end result may be far from a true exit.
pkennedy
Thanks, Marty. Agreed that the ultimate meaning of the Brexit vote will depend on he sum total of all the UK's coming negotiations, with the EU, and with third countries. As far as the EU exit goes, I keep wondering if expectations that Germany, France, etc. would take a hard line vis the UK may be overstated. Given structural fragilities in the global economy, maybe it's in everyone's best interest to assure a soft landing.
This is a scary list and so all the more helpful for that. Strange how democracy, of which the referendum should be a good example, turns out to prejudice many parts of society. The consequences are so unpredictable, not least due to the political instability which has resulted. That was not so easily foreseen and is set to go on through the summer. The highest hope is that the EU itself reforms to respond to growing concerns over bureaucracy and offers the UK the chance to work with a new EU, but that will require political stature of the highest order.
pkennedy
Richard, thanks for your contribution. The Brexit referendum, it seems, is but one of the unsettling political surprises that has erupted in the West over the last 12-18 months. If as you say, Brexit inspires urgently needed EU bureaucratic reforms, then maybe there is a silver lining. But I keep thinking of the metaphor of trying to change the tire of an automobile traveling at full speed!

Thoughts?