Analistas 05/07/2016

Brexit’s political consequences

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That said, I’m finding myself less horrified by Brexit than one might have expected. The economic consequences will be bad, but not as bad as many people are claiming. The political consequences might be much more dire, but many of these bad things would probably have happened even if “Remain” had won.

Start with the economics. Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects of leaving the European Union, but they will be substantial. True, normal W.T.O. tariffs (or the tariffs that members of the World Trade Organization like Britain, the United States and the European Union levy on each others’ exports) are low, and other traditional restraints on trade are relatively mild. But everything we’ve seen in both Europe and North America suggests that the assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders. Revoking that assurance will erode trade over time, even if there isn’t any kind of trade war. And Britain will become less productive as a result.

But right now, all the talk is about financial repercussions - plunging markets, recession in Britain, and maybe around the world. I still don’t see it.

It’s true that the pound has fallen by a lot compared with normal daily fluctuations. But for those of us who cut our teeth on emerging-market crises, the fall isn’t that big. In fact, it’s not that big compared with recent British historical episodes. The pound fell by a third during the ’70s crisis; it fell by a quarter during Britain’s exit from the Exchange Rate Mechanism in 1992; it’s down about 8% as I write this.

Furthermore, Britain is a nation that borrows in its own currency, so it’s not subject to a classic balance-sheet crisis due to currency devaluation - that is, Britain is not like Argentina, where the fall in the peso wreaked havoc with firms and consumers who had borrowed in dollars.

If you were worried that fears about Brexit would cause capital flight and drive up interest rates, well, there has been no sign of that.

It’s true that global stock markets are down, as are interest rates around the world, presumably reflecting fears of economic weakness that will force central banks to keep monetary policy very loose. Why these fears?

One answer is that uncertainty might depress investment. We don’t know how the process of Brexit will play out, and I could see chief executives choosing to delay spending until matters become clearer.

A bigger issue might be fears of the terrible political consequences, both in Europe and in Britain, which brings me to the politics.

It seems clear that the European project - the whole effort to promote peace and political union through economic integration - is in deep, deep trouble. Brexit is probably just the beginning, as populist/separatist/xenophobic movements gain influence across the Continent. Add to this concern the underlying weakness of the European economy, which is a prime candidate for secular stagnation - or the persistent low-grade depression driven by things like demographic decline that deters investment. Lots of people are now very pessimistic about Europe’s future, and I share their worries.

But those worries wouldn’t have gone away even if voters had chosen to remain in the European Union. The big mistakes were: the adoption of the euro without careful thought about how a single currency would work without a unified government; the disastrous framing of the euro crisis as a morality play brought on by irresponsible Southern Europeans; and the establishment of free labor mobility among culturally diverse countries with very different income levels, without careful thought as to how that would work. Brexit is mainly a symptom of those problems, and the loss of official credibility that came with them. (That credibility loss is why the euro disaster played a role in Brexit, even though Britain had the good sense to stay out.)

At the European level, in other words, I would argue that Brexit just brings to a head an abscess that would have burst fairly soon anyway.

Where there has been real additional damage - damage that wouldn’t have happened but for Mr. Cameron’s policy malfeasance - is within Britain itself.

I am, of course, not an expert here, but it looks all too likely that Brexit will both empower the worst elements in British political life and lead to the breakup of the United Kingdom itself.

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