Brexit and the challenges of living with political instability

We're not all in it together

Voters' rejection of mainstream politics – from Brexit and the election of Donald Trump in 2016, to the success of illiberal and nationalist parties across Europe - is arguably an emotional and irrational response to a rational analysis. Globalisation lifted hundreds of millions of Chinese people out of poverty, but for decades did little for those on middle and low incomes in Western economies. In the north east of England, as one example, many found their manufacturing jobs replaced by 'zero-hours' contracts in retail or call centres, if they were replaced at all. Meanwhile, a new breed of technology companies grew to become the world's most valuable firms, without creating the meaningful jobs for millions of their industrial forebears, while simultaneously evading tax.

In the UK, a productivity collapse worsened income stagnation. We are currently living through the longest period of stagnating living standards since the Industrial Revolution. After the financial crisis, central banks stepped in to stave off economic collapse, but their solution – quantitative easing – exacerbated the problem, inflating asset prices, notably property and shares, and exacerbating inequality. This enlarged wedges between the asset-rich older generation and the struggling young, the prosperous south-east and the faltering north east.

Brexit voters – the strangest coalition in history

Two discrete and very different groups of people voted for Brexit. The first were older property owners in the 'shires' (or suburban and rural regions outside London) who had always resented the EU for how it eroded what they saw as the sovereignty of Britain. The other group of Brexit voters were low earners and the unemployed, who equated the EU with a globalisation that had robbed them of hope for a better life. After the vote, UK Prime Minister Theresa May pledged to dedicate her premiership to improving the lot of the low paid, but too little has been done, because one of the tragedies of Brexit is how it has crowded out government initiatives unrelated to the fearsomely difficult task of navigating the UK out of the EU.

The 'least worst' option

It is impossible to forecast the final Brexit destination. A troika of options, no-deal, a version of Mrs May's deal and no Brexit at all (via a referendum), remain possible. All would bring economic, social and political risks for the UK. The nation - in parliament and more widely - should be engaged in a rational debate about which are the risks we wish to take. We may not have that luxury.

Please note that Robert Peston’s views and opinions are his own and not necessarily a reflection of those of the Lombard Odier Group.

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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