Brexit scenarios, and the surprises still lurking
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