The world economy is nearing what international policymakers fear could be a dangerous turning point, as populist uprisings in the United States and Europe threaten to unravel decades-old alliances that have fostered free trade and deepened economic ties.
The tension has reached boiling point in Britain, which in two months will vote on whether to leave the European Union. The International Monetary Fund, which wrapped up its annual meetings this weekend in Washington, warned that a so-called Brexit is a “real possibility,” one that could usher in a new era of uncertainty and undermine the already fragile global recovery.
But the unrest is not limited to the United Kingdom. Anti-EU parties are gaining steam across the continent, particularly in France and Germany, while U.S. presidential candidates Donald Trump and Bernie Sanders are railing against America’s signature trade deals.
Fueling the furor are blue-collar workers on both sides of the Atlantic who feel left behind by international competition. Their frustration has given rise to political movements condemning the principles of globalization -- free trade and open borders -- that have been heralded as pathways to prosperity since the end of World War II.
“Trying to go back in time, trying to safeguard the achievements of the past will backfire. Because we cannot do that,” said Hans Timmer, the World Bank’s chief economist for Europe and Central Asia. “If countries step away from globalization, we will see a very negative economic backlash.”
At a minimum, disentangling long-standing economic relationships is almost certain to be messy: Ending Britain’s 43-year membership in the EU would trigger renegotiation of trade, financial and social welfare agreements with the rest of Europe. The mere prospect of Brexit sent the pound plunging to lowest levels in seven years. Recent polls show residents roughly split over the decision, with a sizeable faction still undecided.
Financial markets are bracing for a wild ride. Investors are betting London’s major stock index could swing by as much as 6.5 percent around the Brexit vote on June 23, according to an analysis by Macro Risk Advisors. This month, the Bank of England warned that departure could lead to another drop in the pound, cause credit to contract, and send interest rates higher for consumers and businesses.
The volatility alone could be enough to undercut current economic growth, though the true impact of a vote to leave would not be clear for years as Britain and the EU negotiated the terms of departure. A recent analysis by think tank Open Europe found that in a worst-case scenario, a bumpy exit could lower UK growth by 2.2 percentage points in 2030, although it said a well-executed departure could boost growth in the long-run.
The report also does not factor in the potential for Brexit to invigorate nationalist movements across Europe and the economic ripple effects. In France, the far-right National Front party has vowed to hold a referendum on EU membership if it comes to power in the nation’s presidential elections next year. An offshoot group in Germany has become the country’s third-largest party.
“What we’re basically facing is a very protracted period of uncertainty in which we don’t know what the world looks like,” said Colin Ellis, an analyst at Moody’s Investors Service.
The IMF this month lowered its outlook for the global economy this year from 3.4 to 3.2 percent -- the fourth time it has been downgraded -- and even that may be too optimistic. Officials said the risks to its forecasts are growing, and pointed to rising nationalist sentiment among them.
“There is a risk that middle class families and the poor actually remain behind, which would embolden the voices of protectionism and fragmentation,” IMF Managing Director Christine Lagarde said.
Economists have long argued that the benefits of globalization far outweigh the costs to workers who might be displaced by those half a world away. The IMF, along with the World Bank, are products of the post-war consensus that deeper economic integration can not only help end political strife, but also lead to mutual growth.
In many ways, it has worked. Economists often point to low prices on clothing and computers as evidence: Consumers in developed countries enjoy cheap products, while workers in emerging markets benefit from employment. The World Bank estimates that the number of people living in extreme poverty fell below 10 percent of the world population last year, down from more than a third in 1990.
The bank has set a goal of ending extreme poverty -- defined as living on less than $1.90 a day -- by 2030, and World Bank President Jim Yong Kim warned that shifting political sentiment could endanger that mission.
“This movement toward isolationism and the movement away from trade is very bad for poor people,” Kim said last week in Washington.
But many supporters of the nationalist movements in Europe and in the U.S. are older blue-collar workers who feel they have been shoved to the bottom of the economic pecking order. Manufacturing employment in the UK has plunged by about a third since 2000, according to the Organization for Economic Cooperation and Development, while U.S. jobs have fallen by about 20 percent.
David Autor, an economist at the Massachusetts Institute of Technology, analyzed the job market in American towns where businesses competed with Chinese imports. He found that unemployment remained high for at least a decade and workers suffered from lower income throughout their lives.
“There’s a sense that it hasn’t delivered,” IMF chief economist Maury Obstfeld said. He then added, “The problem is that trade creates winners and losers. And we haven’t figured out how to adequately take care of the losers.”