The British people have voted to leave the European Union. Not that long ago Greece’s people voted to default on their debts to the EU. In both cases the argument was won by the side that demonised the unelected EU officials. In both cases the immediate response to the news was to assume that what the population had voted for would come to pass. In both cases the countries leaders resigned, leaving the task of negotiating with the EU to others. Greece was unsuccessful in its attempts to obtain what its people wanted – but then what they wanted was known to be unrealistic. Britain has not even begun its negotiations.
Any family breakup is going to be keenly felt. In this case (Britain) a prominent member of the share house that is the European Union has declared that they want no longer want to be part of the household. This is just the first step, the expression of feeling. There are more steps to go. The request needs to be formally lodged. Then the terms of separation need to be negotiated. All of this will take time, most likely 2 years or more.
At this point it is not clear who is going to negotiate the terms of separation, or even what Britain want to achieve. They have declared that they want more independence, but also to maintain their current trade relationships. During the campaign they have promised the British people that exiting the EU will result in nothing changing and everything changing when it comes to the movement of people. Even if the negotiations go well it is unlikely that those that voted in favour of the exit will get what they wanted from it – simply because most of the benefits were left to the imagination of the voters, and no one really knows what they dreamed up.
While the British are better placed to negotiate than the Greeks, they are still the lesser party in the negotiations and unlikely to get a favourable deal. Having kept its own currency Britain is at least saved the trouble of extracting itself from the Euro. What it appears to want is the benefits of EU trade without the obligations of EU citizenship. However even this position is a difficult one to negotiate as the human rights aspects of EU citizenship are a requirement of favourable trade negotiations with the EU. And that is with countries that have not done anything to offend the EU, let alone one that has publicly denounced it as Britain has just done.
Britain’s hopes of a favourable exit deal appear to rest with getting the support of other countries that are contemplating an exit as a means of establishing a positive precedent for them, should they follow down the same path. However, avoiding the creation of a positive precedent for exiting is also going to be a key motivator for the EU to take a hardline in their negotiations with Britain.
In the meantime the initial shock of the decision has agitated world currency and equity markets that were already hypersensitive. They should calm down soon enough, but probably not before some speculative fluctuations in both directions. At times like this it is better to spectate than participate. The longer term question is how people will behave differently as a result of Britain leaving the EU and what will be the economic impact of this change in behaviour. As they say on election night – at this point it is too early to call.
Recap
- Reward for effort – Britain does not want to share its reward for effort with the EU
- Value is relative – by separating itself from the EU Britain hopes to be able to establish its own values.
- Trade requires difference in value – the difference in perceived value between Britain and the EU will be reflected in the value of the currency and terms of trade.
- Money is a catalyst – the British pound is already a separate currency, the British Treasury is also likely to have more freedom.
- Trade creates economic ecosystems – Britain will remain a significant participant in the world economy, and as such will continue to be impacted by world events and world trade.
- Economic measurements are incomplete – The net economic benefits of being part of the EU or being an independent country are difficult to estimate.