Quick Thoughts on Brexit

My colleague Alan Renwick has a nice post covering the legal logistics surrounding Brexit. What about the economic implications?
The domestic economic implications of Brexit began to play out while votes were still being tallied, as the British pound dropped rapidly in a depreciation reminiscent of Black Friday, eventually settling at a level not seen in three decades. Uncertainty over the exit negotiations with the EU, where the UK holds a fairly weak hand (one fact the Leave campaign conveniently ignored), means that investment and employment will be suppressed; these will, in turn, suppress consumption. The weak pound, at least, will stimulate tourism and exports, but the cost of living within the UK will increase. Perhaps ironically, the regions and groups of voters (typically less educated, older, outside London or Manchester) who were the strongest supporters of the Leave campaign are going to be hit hardest by recessionary forces over the next few years. This should make things interesting for the incoming administration, particularly since Boris Johnson will have to go on TV to apologise for promising no recession (if he keeps to that; Leave has been quickly renouncing the lies and false promises they made prior to the referendum, such as spending £350 million saved on EU transfers on the NHS).
Politically, the distributional effects of the recession will be profound. David Cameron has already resigned as prime minister, and the Tories are far from free of internal strife. Labour faces a massive shake-up as well. Both the Lib Dems and SNP appear to be relatively unscathed, despite the Remain campaign’s failure. Instead, a second Scottish independence referendum looks likely to happen in the next couple of years. There’s similar pressure in London for a city-state-like exit from Britain. The generational divide between Leave and Remain supporters is particularly salient: Baby Boomers denying to Millennials the opportunities from which they themselves benefited; this seems to be a bit of a global phenomenon (there is certainly a lot of room for more research on the political implications of employment life cycles). At the supernational level, there are clear divides between the key Leave voices and EU officials over just about all essential issues, not the least of which is the preferred timing of Britain’s exit. The EU would like Britain’s exit negotiations to begin and end as soon as possible (the official lines read something like ‘GTFO’) to minimize uncertainty and volatility; Leave’s voices would prefer a lengthier timeline.
It will be interesting to watch UK negotiations with the EU over trade, investment, and migrants. All of this will take years to resolve, and the end result will not be the unfettered access to the common market without unrestricted migration that Leave promised. A number of fledgling British industries, like watch manufacturing, will suffer greatly from decreased access to inputs. The financial sector and multinationals with large employment bases in the UK will be watching closely; jobs will probably be lost along the way as risk-averse businesses move to the Continent. There will be a great deal of political pressure on the UK government from these sources, which will counteract the populist, nativist and xenophobic elements that led to Leave’s success.
With respect to UK relations with countries outside the EU, there is actually a bit of a silver lining. Without requiring all EU member states to be party to trade agreements, the UK should have less difficulty successfully navigating negotiations. With the US, this may lead to an alternative to TTIP, which has attracted significant popular criticism (although this seems a bit unlikely for now). With China, the greater flexibility may make agreement on a deal more likely to happen when compared to the delays in resolving issues in the proposed EU-PRC FTA. However, these agreements and others are unlikely to make up for the hit to economic growth that will result from loss of access to the common market.
One thing is for certain: it will be a bumpy ride.
Quick Thoughts on Brexit

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