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| Nigel Farage celebrates Brexit with supporters CREDIT: AP |
PAUL KRUGMAN, NY TIMES
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I’m finding myself less horrified by Brexit than one might have expected – in fact, less than I myself expected. The economic consequences will be bad, but not, I’d argue, as bad as many are claiming. The political consequences might be much more dire; but many of the bad things I fear 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 EU, but it will be substantial. True, normal WTO tariffs (the tariffs members of the World Trade Organization, like Britain, the US, and the EU levy on each others’ exports) are low and other traditional restraints on trade 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, over time, erode trade 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, and so on. 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 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 percent as I write this.
If you were worried that fears about Brexit would cause capital flight and drive up interest rates, well, no sign of that – if anything the opposite.
Now, it’s true that world stock markets are down; so 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 plays out, and I could see CEOs choosing to delay spending until matter clarify.
A bigger issue might be fears of very bad political consequences, both in Europe and within the UK. Which brings me to the politics.
It seems clear that the European project – the whole effort to promote peace and growing 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 the underlying weakness of the European economy, which is a prime candidate for “secular stagnation” – 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 Remain had won. 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 southerners [meaning Italy, Greece and Spain--Esco]; the establishment of free labor mobility among culturally diverse countries with very different income levels, without careful thought about 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 itself 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 in any case.
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Where I think there has been real additional damage done,...is within the UK itself. I am of course not an expert here, but it looks all too likely that the vote will both empower the worst elements in British political life and lead to the breakup of the UK itself. Prime Minister Boris looks a lot more likely than President Donald; but he may find himself Prime Minister of England – full stop.
So calm down about the short-run macroeconomics; grieve for Europe, but you should have been doing that already; worry about Britain.