Uncertainty, volatility and correlations have crept into advanced economies giving rise to a dangerous mix of political risks and social upheaval typically reserved for emerging markets. According to Ian Bremmer, one of the early pioneers of political risk consulting, an emerging market is a place where politics matters nearly as much as economics. By this measure, the whole world is an emerging market. Decision makers must now contend with this reality developing an entirely new yardstick for how they navigate their organizations through turbulent times.
The improbable Brexit outcome is but one large scale example of politics mattering nearly as much as economics. In this case, many stalwart British firms, including the global risk leader, Lloyd’s, are confronted with a high degree of uncertainty. In Lloyd’s case, like other UK-based financial services firms, the prospect of losing access to the EU’s 28 country common market, including pass porting rights for products and services, represents a strategic and operational setback.
In the best case, investments will be made in securing regulatory concessions over the coming years as the UK’s new Prime Minister, Theresa May, aims to invoke Article 50 as soon as March, 2017 hastening the UK’s exit.
In the worst case, which looks increasingly likely, Lloyd’s may have to uproot parts of its operations from the City of London, as it has intimated, to find alternate markets granting a more favorable and predictable operating environment. This is notable because since Lloyd’s was founded in a London teahouse in 1688, it has withstood virtually every shock of the modern era while remaining staunchly British. There is nothing to suggest that a decidedly global Lloyd’s will not weather the Brexit storm just as well.
Brexit, however, is not the only example of the emerging market paradox affecting advanced economies. Well before the Brexit vote, the U.S. lost its vaulted AAA credit rating and has yet to regain it due to bitter partisanship and political point scoring at the expense of the economy.
