Britain seems stuck in a comedic Charles Dickens novel. At this point in time the chances that the U.K. will remain in the European Union appear slim, and the economic consequences of Brexit appear bleak.
Our story begins in 1963, when the U.K. seeks to join a European free-trade zone that is to become (in 1993) the EU. Fearing English will become the dominant language in the community, French President Charles de Gaulle rejects their application. The U.K. enters the European free-trade club in 1973, three years after de Gaulle’s death. In a 1975 referendum, two-thirds of U.K. voters support remaining in the free-trade zone.
Over the years many problems have surfaced. Heated arguments have arisen regarding whether the U.K. contributes more than its fair share to EU operating expenses. There have been disputes concerning rules protecting labor, the free movement of people from continental Europe to the U.K., and regulations on exports from the U.K. to other EU nations. There was a decades-long disagreement about whether British chocolate could be sold in Europe as chocolate because it was made using vegetable oil. People generally dislike being told what to do by others; so, over time, U.K. sentiment became more negative toward the EU.
Enter Conservative Prime Minister David Cameron, playing the role of the pompous Mr. Bumble (of Oliver Twist fame). In 2015 Cameron promised a national vote on whether the U.K. should remain in the EU if, following upcoming national elections, he remained Prime Minister. Cameron got his wish and then kept his promise. A vote was held in June 2016. “Leave” beat “Remain,” 52 percent to 48 percent, even though Cameron favored remaining.
Following the vote, the British pound and British financial markets both tanked. Cameron resigned as Prime Minister and was replaced by Teresa May, who had the unenviable job of making good on Brexit. In March 2017, she gave notice that the U.K. wanted to withdraw from the EU. Negotiations then began for a separation scheduled to begin in March 2019.
There is neither historical precedent nor a British constitution to look to for advice concerning what happens next. There are many possible endings; most of them are not happy.
The EU and Prime Minister May signed separation papers this past November. These lay out the parameters of a new relationship between the EU and the U.K., forecast to begin in 2021. May called for an up-or-down vote in Parliament on December 11, but with a decisive defeat looming, she subsequently deferred the vote indefinitely until a compromise could be reached. Unfortunately, the politics of Brexit make this also unlikely—Labor generally opposes Brexit, and the Conservatives are split between those who just want out (dubbed “hard Brexit”) and those who support the May plan. There is neither historical precedent nor a British constitution to look to for advice concerning what happens next. There are many possible endings; most of them are not happy.
One possibility is that an eventual No vote on the May plan will result in a renegotiation of the separation agreement. The EU, however, has stated it is not willing to do this. And given the splintered Conservative Party, approval of any revised agreement appears unlikely.
A hard Brexit is another distinct possibility, with the U.K. leaving the EU at the end of March and then negotiating future trade deals and regulations with the EU. The immediate result of this would be greater tariffs on British goods throughout Europe, making it harder to sell products made in the U.K. There will also be border checks on goods entering the EU from the U.K. to ensure they adhere to EU regulations. British chocolates may soon have to be called something else in Europe.
A No vote will also create political problems. Prime Minister May could resign and/or face a leadership challenge.
And even if Parliament votes Yes, the story does not end. A Yes vote only approves the separation agreement. The truly difficult part, negotiating the details of the impending divorce, then begins in earnest. As with any divorce, nothing will be easy. The specifics are to be worked out by December 31, 2020, although both parties can agree to kick the proverbial can down the road and remain longer in a state of limbo.
Where does all this leave the U.K.?
No matter what form Brexit takes, the U.K. will have to negotiate new trade and regulatory agreements with other countries—not only EU countries. At the end of November, the United States and the U.K. agreed on a separate deal that would allow flights to continue between the two countries since the existing EU–U.S. deal would not be effective once the U.K. left the EU. Many more such deals must be made.
A more serious problem concerns lost income. According to the U.K.’s National Institute of Economic and Social Research, Brexit—leaving the EU—will reduce per capita income in the U.K. by 2 to 4 percent compared to staying in the EU (depending on whether it is the May agreement or a hard Brexit). This loss occurs over 10 years, making the annual loss 0.3 percent—the equivalent of around $540 per year for a family of four making the equivalent of around $60,000 per year.
A bigger concern is the uncertainty overwhelming the U.K. Not knowing what will happen and fearing the future, everyone hoards money. When consumers don’t spend, and firms won’t invest, economies fall into recession. Jobs and incomes are both lost. These costs could be substantial, and recovery could take a long time. Any political problems will generate even greater uncertainty that, in turn, will exacerbate the economic problems facing the U.K.
One response to uncertainty at the national level is to seek peace of mind abroad. Firms will flee Britain for more stable countries; money will likewise go elsewhere. This will push down the value of the British pound, making imports more expensive and pushing up the cost of living. And as foreigners leave the U.K., home prices will drop.
The United States will not escape unharmed. Economic problems in one country have a bad habit of infecting other nations. A recession in the U.K. will reduce our sales there, slowing U.S. economic growth. A weaker pound will make the U.K. more competitive (and the United States relatively less competitive) around the globe. Last but not least, sharp market downturns can spread quickly from country to country. If the U.K. were a small country like Greece, the impact on the United States would be comparatively small. However, the U.K.’s economy is the size of California’s, and the impact of an economic crisis there would have large repercussions here.
Such an outcome is not inevitable. Another possibility is that politicians go to sleep one night, dream of the future, and see the error of their ways. This opens the door for some sort of redemption, as in Dickens’ beloved A Christmas Carol. A happy ending would require another Brexit vote, with “Remain” winning. “Bah! Humbug!” could then be said to Brexit—a policy with bad economic consequences and put up for a vote based on an awful political miscalculation.
Steven Pressman is professor of economics at Colorado State University, author of Fifty Major Economists, 3rd edition (Routledge, 2013), and president-elect of the Association for Social Economics.