Richard Nesbitt is CEO of the Global Risk Institute.
There you have it – or do you? With just 52 per cent voting for Leave and 48 per cent Remain, the Brits have really come to no conclusive decision at all on their future ties with Europe. As Canadians – and especially Quebeckers – know all too well, without a clear majority vote one way or another, the debate will rage on for some time. In fact, some in England are now questioning whether Leave supporters actually understood the impact of their votes and are calling for a second referendum.
What is certain, however, is that the Brexit vote adds yet another layer to the risk pressures that are building in the global economy in general, and Europe in particular. These pressures are bound some day to cause a fracture, in much the same way as pressures within the Earth's tectonic plates at some point result in a major earthquake.
Sadly, the Brexit result shows how easily these fractures can be torn open by emotion rather than well-researched facts. Warnings from almost every serious economist that a leave vote would mean turbulent financial markets, job losses and lower living standards fell on deaf ears. This is an era, after all, where being an expert is often more of a liability than an asset, certainly in political campaigns. "People are sick of experts," ran one of the Leave side's favourite lines. Much the same phenomenon is driving the U.S. presidential campaign.
Jean Charest, the former Quebec premier, used an apt metaphor at a meeting in Toronto more than a decade ago. He noted that divorce is never a financial win for either spouse. Both husband and wife end up being worse off. And yet that sobering fact hasn't stopped couples from untying the knot and bearing the financial burdens. The lesson is clear: Never assume that economic realities will drive the decisions of people who feel that they are better off apart than together.
The uncertainties created by the Brexit non-decision have compounded a very real crescendo of risk that has been building up for some time in financial markets. An explosion of debt caused by low or negative interest rates is sowing the seeds of the next financial crisis. Worldwide debt taken on by consumers and their governments has soared by $57-trillion since 2007. Debt-to-GDP ratios are up in virtually every country, in some cases by more than 50 per cent. China's debt has more than quadrupled in the past eight years.
Europe is a mess. Not a single country in Europe has begun to rein in its sovereign debt. Layer onto this an array of other problems – low growth, aging population, low productivity, fiscal strains in countries such as Greece, uncurbed immigration and a fresh outbreak of terrorism, to name some of them – and you have to wonder how long it will take before the entire superstructure of the global financial system cracks under the strain.
Brexit marks the opening of yet another crack, and a big one at that. Will that crack be big enough to precipitate the next financial crisis? As with so much about the consequences of Thursday's vote, we just don't know.
Brexit's impact on Canada may be muted, at least for now. But it will surely not be positive. Even before Thursday, the EU-Canada free-trade agreement, known as CETA, was facing resistance in some European countries.
The European passport system which allows a bank located in one EU country to operate across the continent, is at risk. Most foreign banks, including Canada's Big Six, have up to now chosen London as the base for their European operations. That thinking may change once Britain leaves the EU, and perhaps even before. Moving people and assets may not be as easy in future as it is now.
But the location of banks' European offices is hardly the most serious risk posed by the Brexit vote. It could get much worse. The shudder in financial markets is a pointer to slipping business and investor confidence, not just in London but around the world. As one commentator put it after the vote, "It's entirely possible the people of Britain have just become the first in history to vote for a recession."
Canada will not be immune. Britain is our third-biggest trading partner. Worse, a recession would again put the skids on oil and other commodity prices, bringing further pain to a big slice of our economy. The strengthening U.S. dollar is bad news, at least in the short-term, for many U.S.-based exporters, and thus for the Canadian companies that supply them.
For now, the Brexit vote raises many more questions than answers. And that is precisely the problem. With uncertainty comes risk, and more risk is what the global economy needs least right now.