With Brexit, uncertainty is the only certainty

We don’t know what Brexit means. That’s what’s so scary.

Advertisements

In a high turnout referendum which took place on Thursday, June 23, the United Kingdom (U.K.) voted to leave the European Union, a decision dubbed “Brexit” by the press [1]. The move could spell the beginning of the end for one of the world’s most important economic unions—or it might not.

For those unfamiliar, the United Kingdom is made up of four largely autonomous countries: England, Northern Ireland, Scotland, and Wales. These countries are analogous to states in the United States in the sense that each country in the U.K. has the power to set policy in matters not legislated by Parliament, just as each state in the United States may make policy decisions not already established in federal law.

On Brexit, the decision of these separate countries in the U.K. was split, with a majority in England and Wales voting to leave the E.U. and a majority in Scotland and Northern Ireland voting to remain. This split reveals a deeper fissure within the U.K. which the Brexit may make permanent. As recently as 2014, Scotland held a referendum of its own to determine whether or not to leave the U.K., ultimately deciding to remain [2]But with its E.U. membership now in peril, Scotland may decide to split from the U.K. in order to remain in the European Union. The First Minister of Scotland—the political leader of Scotland—has already floated this possibility, saying “the option of a second referendum [to leave the U.K.] must be on the table, and it is on the table.”  [3]

The result of the referendum to leave the E.U. is not legally binding, but when David Cameron, the U.K.’s leader, steps down once and for all in October, a new chapter for the U.K. and for the world will begin. The United Kingdom will trigger Article 50, beginning the process of leaving the European Union. At this point, the true consequences of this referendum will become known [4], but we have never been here before. There is no precedent to guide us through these dark waters.


Many people spend their entire lifetimes researching very specific government policy proposals—such as increasing the number of police on the street—with the hope that their efforts will create a better society. They will study if their idea will work to achieve a desired outcome and then spend time tracking down when, how, and under what conditions it might work. They will then confer with policymakers to explain the possible benefits of their idea as well as its risks and harms. Risks and harms always come with policy change.

Globalization, technology, and changing cultures make studying policy and recommending changes all the more difficult, as the unpredictability of these factors produces an inherent uncertainty in evaluating policy. The rational response to dynamics like these is to manage our risk as best we can. This is why government operates so slowly. If taxes need to be raised to pay for more police officers, taxes will be raised slowly and the economy watched carefully by government officials. If a doctor gives you a powerful medicine that you have never taken before, she might keep you overnight in the hospital or raise the dose over a few weeks, depending upon your progress.

The Remain campaign failed to produce a meaningful discussion about this uncertainty. Brexit has not even happened, but world markets are already in turmoil [5]. The pound—the U.K.’s currency—lost nearly 20 cents of its value relative to the dollar in the hours following the vote. For a well-established currency, this is a massive change which one would not expect to see over the course of a year, let alone a few hours. Stocks plummeted across the globe, with one U.K.-heavy stock index plunging seven percent on the 24th. Although my suspicion is that this first jolt will re-correct a bit and that global economic conditions will stabilize, I have no idea of the short or long-term consequences.

And nor does anyone else. No one is sure what will happen in the U.K., the E.U., Japan, the U.S., or the rest of the world as a result of Brexit. Even among economists, there is no consensus as to what will happen from this point forward [6]. The uncertainty involved in this situation is enormous, far larger than that of typical policy proposals.

With Brexit adding uncertainty to the worldwide economy, investors may be afraid to invest, and the global economy may slow. The U.K. is California’s 10th largest export destination, and the tumbling pound could mean fewer exports sold from the Golden State. And if the U.K. experiences a recession, consumers there would purchase fewer American goods, dragging the U.S. economy down at a critical juncture of the post-recession recovery [7].

There is no clear indication of what Brexit means for the average citizen of the United States or the average resident of California. In a word, the result is uncertain. There is no way to know if other E.U. members will follow in the U.K.’s footsteps, or if the U.K. itself will break up. Then there will be more uncertainty, and more shock waves tearing through the world economy. Perhaps this is only the beginning.


[1] http://bbc.in/28ZnuPt

[2] http://bbc.in/291N2i7

[3] http://cnn.it/29i11h0

[4] Article 50 is the part of the Lisbon Treaty, which the E.U. member countries signed into in 2007, that allows member countries to withdraw from being a part of the European Union. It begins “[a]ny Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.”

http://bit.ly/29i18ti

[5] http://econ.st/28QFo5X

[6] http://bit.ly/29688eY

[7] http://bit.ly/28YdMN4

Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: