The Brexit referendum, and the fallout from it, will be among the most heavily scrutinized themes of the next quarter. And though it may have been the most visible confirmation of the European Union's disintegration, it was May 1, 2004, that sowed the seeds of London's departure.
On that day, a day that came to be known, perhaps ironically, as the "Day of Welcomes," the bloc admitted 10 countries — the Czech Republic, Hungary, Latvia, Lithuania, Estonia, Poland, Slovakia, Slovenia, Malta and Cyprus — into its ranks. It epitomized an era of unprecedented EU expansion and honored the promise of prosperity that sold the European project to so many countries that were all too eager to buy it, particularly those that for decades had been bridled by the Soviet Union. The European Union now had 10 more members, each with its own set of policy priorities, national identity, rules of law, economic irregularities and methods of regulating them. Their accession created differences that simply could not be reconciled, for no country can be expected to subordinate its own well-being to another's.
Twelve years later, the United Kingdom — a country unique not for its inclusion in the Continental bloc but for the tepidness with which it joined — voted to leave the European Union altogether. It was always clear that it would be among the first EU members to leave, even if it was unclear precisely when it would choose to do so. But leave it will, and the next three months will be messy as the United Kingdom sorts itself out and as a general air of uncertainty impairs the British economy and the European Union at large.
The United Kingdom's departure is Germany's nightmare. Members from every corner of the Continental bloc will submit proposals on how to re-engineer the European Union according to their respective interests. Southern European countries will increase spending and push for deeper financial integration to nurse their structural wounds. Poland and Hungary will lead an eastern bloc of countries trying to repatriate their rights from Brussels. Germany will try to focus its proposals on the uncontroversial aspects of integration, such as security and job creation, to at least give the impression that the union is still in fact a union, but the government in Berlin will be pressured to place tighter limits on financial assistance to the European Union's more profligate members. As divisions deepen and economic panic rises, the Netherlands will gradually nudge Germany away from France and the southern belt.
Russia is one of the few countries that can take delight in Europe's fragmentation. After all, Moscow can more effectively ease the financial pressure against it, advance economic deals and limit Western encroachment on its periphery when Europe is divided and distracted. Russia always meant to leverage its involvement in Syria to strengthen its negotiating position with the United States. This quarter, Moscow will actually have some success in coaxing Washington into a dialogue as the United States tries to clear obstacles in its fight in Syria against Islamic State. The White House will use the common threat of the Islamic State to keep Russia engaged on tactical matters, but it will resist making bigger concessions. (In any case, there is only so much the Kremlin can get out of the White House in an election year.) The United States, moreover, will be counting on a recent reconciliation between Turkey and Russia to deconflict the battlefield, something that will end up giving Turkey more breathing room to hedge against Kurdish expansion in northern Syria.
No major shift in energy markets can be expected this quarter. Iranian oil production will rise more slowly than it did for the first six months of the year, and while some members of the Gulf Cooperation Council could modestly increase output in months of high summer demand, the Saudi-led bloc is still waiting out a gradual market correction with U.S. production in decline. Nigerian oil production will also remain volatile as the government struggles to tame militancy in the oil-rich Niger Delta region.
In the meantime, the markets will continue to be volatile as the world comes to grips with the Brexit. The appreciation of the yen and dollar will apply downward pressure on the yuan, but Beijing still has the means to manage the rate of decline. Its efforts to reduce industrial overcapacity in China will be limited as local governments hold out for central government promises of readjustment aid. China's economic situation may be stagnant, but its political situation is more animated, and the power struggle that underlies it will be something to watch in the third quarter.
There are, however, some signs of encouragement coming from Latin America. In Colombia, the government will proceed to the demobilization phase of its agreement with the Revolutionary Armed Forces of Colombia, and in doing so, will stabilize the country. Brazil will conclude its impeachment saga this quarter and move ahead with austerity measures to rein in spending. Economic forces, meanwhile, are pushing Brazil and Argentina to at least start discussing the easing of trade constraints on Mercosur, South America's free trade bloc. But talks will remain in the rhetorical stage for the next few months as Brazil tries to tie up the impeachment process and as Argentina tries to balance structural reform with social stability. Having Venezuela, which is beset by so many problems and already a polarizing member, chair the bloc will not help things either.