The strangest thing about Brexit is that, of all the members of the European Union, Britain had the weakest case that it would be better off leaving.
Britain had managed to get itself a deal where it got only the good bits of the EU – free trade and an integrated market, and free movement of people within the union – while keeping its own currency and its own passport controls. The British relationship with Europe was a model for what a slimmed-down, good-parts-only EU should have come to look like.
If anybody should have wanted to leave, it’s Greece, which has been forced into fiscal and monetary policies that are impoverishing its populace. Or Germany, which will be on the hook indefinitely to repeatedly give Greece just enough money to stave off political collapse.
Instead, Britain is leaving, while Greece commits to mass unemployment essentially forever.
You may have noticed a theme in my writing recently: Maintaining a flawed status quo can be preferable to radical change, especially when that change is in an uncertain direction. Just because the EU is deeply flawed does not mean leaving it will make things better for Britain – especially when the worst part of the EU (the euro) will still be there, hobbling Britain’s trading partners, even as Britain’s own economy falters because of uncertainty and new economic barriers.
The reaction from financial markets has been swift and negative, a fact that matters a lot for ordinary people, not just those who are invested in British stocks or had bets on exchange rates.
Stock prices are falling because Brexit makes business investment in Britain less appealing. That will mean fewer jobs and less wage growth. Homebuilder stocks are much lower because fewer people are going to be able to afford to buy homes in Britain. The weaker pound will mean higher prices in Britain almost immediately for gasoline and other goods that trade on global markets; in other words, ordinary British people’s real incomes have already fallen because of this vote.
Stock markets are lower around the world because Britain’s exit from the EU is likely to reduce global economic output.
There are silver linings: The falling pound is a symptom of reduced economic prospects for Britain, but it is also a stabilizing device that will make British exporting firms more competitive, helping to offset a likely decline in domestic demand.
- Thomson Reuters
Tourism is an export, and Donald Trump is right that a lower pound would induce more foreigners to come play at his Scottish golf course, so long as they’re not turned off by the Trump name. This is a good time to book a vacation to London.
But as Larry Summers notes, Brexit will also cause economic harm on the continent, which will not be offset by a similarly sharp weakening of the euro (which has weakened today against the dollar but strengthened against the pound).
This will make the economic situation even more dire in southern Europe, with increased political instability likely to follow. The rush by investors out of the pound and into the yen will hamper efforts to inflate and stimulate the economy in Japan. Instability in Europe also means a stronger dollar, which would hurt American exports.
If all this instability were likely to change the EU for the better in the long run, it might be worth it. But Brexit does nothing about the two biggest problems in Europe: the unsuitability of the euro for many of its members, and public dissatisfaction with the failure of European governments to control migration into Europe.
The not-so-secret idea behind the euro – that fiscal integration would come later, whether the public wants it or not, because it is necessary to make the eurozone work – was foolish, because European countries lack the political will to support each other fiscally at great, ongoing expense. It has become a cliché to say that monetary union is impossible without fiscal union, but the eurozone countries seem determined to find out how long it is possible to go on with one but not the other.
Fiscal integration is very expensive for the rich bits of a fiscal union. Connecticut sends several percentage points of its GDP every year in fiscal transfers (that is, federal taxes that exceed federal spending into Connecticut) to support poorer states like Mississippi. Connecticut has several reasons for putting up with that – being part of the US raises productivity overall, there is a sense that we are all Americans in this together, and we’ve been doing it for over 200 years – but I have no expectations that German and Dutch voters would ever willingly sign up for a similar deal with Greece.
Because a eurozone breakup is unthinkable and European fiscal integration is unpopular, the unsustainable status quo in the eurozone is likely to be sustained for a long time, causing great misery in countries like Greece and Spain. Brexit does nothing to fix it – and ongoing economic weakness on the continent will continue to be contagious to Britain.
On the migration question, Britain already has the passport controls it needs to keep unauthorized migrants out. The Brexit vote reflected a desire to reduce authorized immigration, but it’s not clear it will achieve that end – lots of legal immigration is already from outside the EU, and Britain is likely to have to agree to free movement from EU countries if it wishes to maintain its trading relationship with them, as Switzerland and Norway have done.
Basically, Brexit was a tantrum. Britons looked at an institution that was flawed and unresponsive and did a thing that doesn’t fix the flaws and hurts Britain’s own economy.
This vote reflects the error of direct democracy: The British public made a bad choice, and there’s a reason we usually have voters delegate decision-making to informed elected officials instead of deciding policy on our own. But the vote also reflects the errors and hubris of European political elites, who gave voters an institution so flawed and so allegedly irreversible that they felt compelled to act out in whatever way was available to them.
The acting-out options available to voters on the continent – far-right parties like the National Front – may be worse than Brexit.
The best case scenario is that Brexit leads to a rethink in Brussels and an effort to produce an EU that is more accountable and leaner – and ultimately to find a way to unwind the euro, which will never work well without a fiscal union, which the people of Europe will never want. But I am not holding my breath for that.
The likelier outcome is more muddling through, more economic stagnation, and more voter anger – all of which will have to be managed without Britain as a partner.