A few weeks before Britons voted on whether to remain part of the European Union, Michael Gove, one of the leaders of the Leave campaign, was asked why he should be trusted over the overwhelming number of economists and international authorities who opposed Brexit. “People in this country have had enough of experts,” he replied.
Experts are, of course, known to make mistakes. But in this case, the people who voted for Brexit will pay a big price for ignoring economic expertise. The harmful effects of this vote are both immediate and lasting.
Britons are already worse off. The pound has — so far — plunged by nearly 9 percent against the dollar, slashing the value of British assets, with higher import prices likely to follow. The stock market has also taken a hit. The prices of property, most British people’s main asset, are almost certain to fall, too. While Mark Carney, the governor of the Bank of England, has already pledged 250 billion pounds (about $345 billion) to support the financial system and has said he could offer more if necessary, central bankers cannot protect against an enduring economic shock.
Rarely have businesses faced such uncertainty. Britain’s economy had already slowed as they put investment decisions on hold ahead of the referendum. Now, a country renowned for its political and legal stability is descending into chaos. The future prime minister is unknown, as is the direction his or her policies will take. The favorite to replace David Cameron, Boris Johnson, the former mayor of London who opportunistically campaigned for Brexit, styles himself as pro-market and pro-globalization, but in the lead-up to the vote he said he supports curbs on European Union migration, tariffs on Chinese steel and higher public spending. The future terms on which Britain will trade with both the European Union and all the countries with which it has negotiated trade deals on Britain’s behalf are uncertain. Domestic regulations on everything from finance to environmental protection may change.
All that uncertainty is amplified by the prospect of a second referendum on Scottish independence, which may this time be won. In Northern Ireland, the political party Sinn Fein has already called for a referendum on a united Ireland.
Faced with such uncertainty, businesses are likely to continue to put investments on hold. Consumers may pull back, too. The resulting downturn will cause the government’s budget deficit, already large, to swell. The pound’s depreciation, which might have been expected to boost exports, is unlikely to do much to cushion the blow. Its huge decline in 2008 failed to boost exports and Brexit will dent them.
This unpredictable situation will not be brief. Once triggered, the formal process of leaving the European Union is supposed to take two years. But extricating the union’s second-biggest economy from 43 years of European Union legislation is a daunting task.
Negotiating a new trade relationship with the European Union is equally tricky. Britain seems certain to lose access to the single market — with which it does nearly half its trade — because this is conditional on accepting the free movement of people and contributing to the European Union’s budget. (These were key issues for pro-Brexit voters.) That will jeopardize the foreign investment and good jobs predicated on single-market membership. Britain-based financial institutions will lose their rights to operate freely across the European Union.
Brexit’s supporters are deluded when they argue that Britain could cherry pick what it likes about the European Union and discard the rest. Since exports to the European Union (13 percent of G.D.P. in 2014) matter much more to Britain than exports to Britain (3 percent of G.D.P. in 2014) do to the European Union, the European Union will call the shots. Other governments have every incentive to be tough, both to steal a competitive advantage and to deter others from following Britain out the door.
A fallback position is trading with Europe on the basis of World Trade Organization rules, as the United States does. But that entails tariffs on good exports — up to 10 percent on car exports, for example, most of which go to the European Union — as well as non-tariff barriers that gum up trade. It offers little access to Europe’s markets in services, in which Britain specializes. Less open markets will stunt competition, crimping productivity growth and living standards.
Brexit’s supporters claim that a deregulated Britain that trades with the rest of the world would prosper once unshackled from Brussels’s overregulation and protectionism. But Britain has the least regulated labor markets in the European Union and the second-least regulated product markets, so any potential benefits from deregulation are likely to be meager. Moreover, Britain is likely to end up with worse access to markets in the rest of the world. While it won’t be hamstrung by protectionist interests in the European Union, its relatively smaller economy, largely open markets and desperation for new deals will weaken its clout in trade negotiations.
The young, the higher educated and city dwellers, the most dynamic members of Britain’s economy, voted to Remain. They were outvoted by the old, the less educated and non-urban English, who often rely on taxpayer largess. With economic opportunities stunted, everyone will suffer for Leave voters wrongly blaming hard-working, taxpaying European migrants for everything they dislike about modern Britain and wrongly trusting economic charlatans like Mr. Gove.
Philippe Legrain is the author of European Spring: Why Our Economies and Politics Are in a Mess and How to Put Them Right.