Long and Short-Term Consequences of Brexit

The vagaries of European politics have been shaken badly by the Brexit vote. Deep in their hearts, nobody in the EU really thought the Brits would go through with it.

Like a husband coming home to his wife greeting him at the door with “I want a divorce,” it’s no longer a threat, but now it’s a reality.

What does that reality mean? Aside from the markets reacting negatively as money managers reposition their assets and currency traders make their plays, the short-term effects are basically nil. The markets will recover and capital will position itself accordingly.

David Cameron will leave as PM and likely Boris Johnson will replace him. The celebrations (and horror from some) will die down. Then the nasty business of disentangling the U.K.’s economy, laws, labor, and politics from the EU will begin.

It will be a slow, arduous process, with minutiae of negotiating points on every possible issue. It will take years (there’s a technical two-year deadline in Article 50, but no real timeline, and negotiations could extend far beyond two years).

Triggering Article 50, formally notifying the intension to withdraw, starts a two-year clock running. After that, the Treaties that govern membership no longer apply to Britain. The terms of exit will be negotiated between Britain’s 27 counterparts, and each will have a veto over the conditions.

It will also be subject to ratification in national parliaments, meaning, for example, that Belgian MPs could stymie the entire process.

Over those 24 months, companies will react faster than governments–as my London-based college friend told me. Companies with business in the EU who maintain offices in England will trim staffs and move to continental-based operations. That means U.K. employees will lose jobs. Brits working on the continent will see their opportunities for advancement start to dry up.

There will be a period of wailing and gnashing of teeth as the reality of divorce sinks in. Divorce sucks, for anyone who’s ever been through one.

But this was a political choice, not an economically rational one. The U.K., in the long run, should be better off divorced from continental politics. The island nation has never really fit in with the polyglot culture across the channel. There’s more Indian culture in England than French or Flemish or Walloon. Britain had her empire, and those Commonwealth ties are stronger than the legal continental strings that Brits just voted to break.

It’s going to be tough for a while, but if Johnson and the other Conservatives who favored leaving the EU do the right thing and open up innovation, capital will flow in. There’s no shortage of smart people in England, and the stiff-upper-lip culture has much to be proud of. The boogeyman of xenophobia will not manifest itself as the fear-mongers in the Remain camp pitched, because Brits are very aware of their place in the world (much more so than Americans).

The big unanswered question is: Will continental EU now finish their move toward a completely socialist, integrated polity, or will Germany be the next country to chafe at its outsized responsibility of playing Atlas? The next immigration crisis may move that to the front of the line faster than the pin-striped lawyers in London and Brussels can dot their i’s and cross their t’s.

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