Brexit, two weeks out

As expected, the last two weeks following the UK’s EU referendum have been marked by significant political and economic volatility. Both major English political parties are in a state of upheaval: within Labour, Jeremy Corbyn dramatically lost a vote of confidence, yet refuses to resign (it recently appeared that he would retain popular support in a leadership election, although it is impossible to say how the recent swell in Labour membership registration would impact this; Corbyn assumes it will add to his support); among the Conservatives, Theresa May now appears to be the front runner for David Cameron’s replacement, after enough in-fighting among the Leave campaign’s leaders to make British politics appear to be a modern-day recreation of Game of Thrones. Leave’s wall of false promises came tumbling down remarkably quickly, and all of its most prominent leaders have disappeared from the scene. Scotland has begun to negotiate its status with both the UK and the EU.

Economically, the pound sterling has dropped even farther from its initial post-referendum plunge, hitting lows against the US dollar that have not been seen in three decades. Unsurprisingly, importers (particularly in the tech sector) have begun to increase prices on products sold in the UK. Property prices have dropped, while the Bank of England has been very active in implementing its post-referendum plans (perhaps the only government body to actually have one). One aspect of this has been to loosen regulations covering bank lending, which may promote consumption and investment, but also runs the risk of further weakening the financial positions of the banking sector, reducing resiliency in the face of another shock (such as, say, the actual triggering of Article 50).

Looking ahead, obviously a great deal of uncertainty still remains. What is clear, is that if the British government does begin to move forward on the task of disentangling its laws and regulations from those of the EU, the task will require the hiring of a large number of skilled workers, most of whom will have to come from outside the UK, potentially increasing net immigration.

Two recent political developments are especially noteworthy. First, a lawsuit has been filed with the aim of ensuring the government abides by constitutional rules which would require full Parliamentary debate over triggering Article 50. Most MPs favor remaining in the EU, so many will face the issue of balancing personal ideologies with electoral concerns (particularly in districts with heavy Leave support), along with lobbying interests. Business lobbies are heavily skewed towards remaining in the EU and broadly represent the most internationalised and productive industries in the UK, so while little regulatory oversight applies to these activities, their influence cannot be underestimated. The financial sector can be expected to publicly pursue both voice and exit options, balancing demands to retain access to EU markets with threats (at the very least) to move staff and positions to the continent. It is likely that if Parliament votes against triggering Article 50, it will have to come with policies along the lines of implementing the concept of embedded liberalism: improving the lot of globalisation’s losers through policies aimed at improving job training, infrastructure, and attracting investment to British cities outside of London and Manchester, many of which have experienced significant economic decline over the last several decades. If Parliament does trigger Article 50, then the pound is likely to fall farther, and the British economy will face a very extended period of little or no economic growth.

The second is the emergence of May as potential PM. As a (somewhat tepid) Remain supporter, she is better positioned to negotiate effectively with EU officials than anyone associated with the Leave campaign. This may be partly down to The logic of two-level games in international bargaining may apply here, but the application is a bit messy (or not as set out in the seminal research on the topic). If there is a second referendum (unlikely), the expectation of a slight majority of Leave votes places May in a relatively good position to extract concessions from the EU (Britain’s negotiation position overall is fairly weak). It is more difficult to predict the potential impact of Parliament as a veto player, as the weights placed on constituent support versus overall welfare or lobbying support by individual MPs (or the average of these across Parliament) is something that, for now, can only be guessed.

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Brexit, two weeks out

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