In the Nation's Interest
On Brexit—and Learning from the Divorce
by Diane Lim July 22, 2016
Many commentators have characterized the UK vote to separate from the European Union (EU), known as “Brexit” (for Britain’s exit), as a decision to break-up with—or “divorce”—a political and economic partner. While the “divorce” word might be too strong (a gentler interpretation of the situation is that it is an opportunity to “reframe” the relationship rather than break-up), it’s clear the relationship will change in major ways. The ongoing uncertainty about where the (likely prolonged, two-plus years) Brexit negotiations will go and what the future UK-EU relationship will become will continue to weigh on the global, not just UK, economy. How are the UK and the rest of the world coping with this major “life event”—and are there broader lessons to be learned from the Brexit experience in terms of how and why it happened and what it means for the sustainability of our globalized, capitalist economic systems?
Brexit and the “Five Stages of Grief”
Denial/Shock (stage 1)
UK citizens, politicians, and observers frankly did not expect the “Leave” vote to win. Polling had not predicted it, and experts assumed a “bad idea” would not prevail. From a CBS story the morning after:
'I'm a bit shocked to be honest,' the voter, identified as Adam from Manchester, England, told the broadcaster. 'I'm shocked about both. I'm shocked that we actually voted to leave. I didn't think that was going to happen. My vote, I didn't think, was going to matter too much because I thought we were just going to remain.'
Anger/Blame (stage 2)
Within a few days of the Brexit vote, the UK media were reporting on the “blame game” going on among UK citizens. Young people were mad at their own parents and grandparents, friends were annoyed with each other—saying “how could you?” or just not speaking:
From The Telegraph’s Judith Woods, quoting some angry voices, leading off with that of her own child:
'Why were old people even allowed to vote? I mean, they’ll all be dead soon,' wails my 14-year-old, echoing the cry of millennials the length of the land, who feel they have been betrayed by their inward-looking elders.
According to the last YouGov poll before the referendum an overwhelming 72 per cent of 18 to 24-year-olds wanted to Remain. It goes without saying that social media is awash with indignation.
Woods then points out that few of those indignant Millennials bothered to vote. Here’s what and older person who voted to Leave had to say about her vote:
'My grandchildren are furious but I remember the days before we joined the single market and I believe we are better off out,' one retired grandmother tells me. 'They will thank me. Maybe not immediately, but later, because sovereignty isn’t something that can be bought by Brussels.'
This BBC article highlights how the “Leave” vs. “Remain” votes broke down, geographically, and by age. In broad terms, older people and those living in more rural areas or the northern cities voted to go, while young people and those living in London, Scotland, and Northern Ireland voted to stay.
Bargaining/Rationalizing (stage 3)
This is the stage where one tries to calm down and cope with the situation by finding ways to “avoid a cause of grief” and minimize the pain of the loss. Often this involves rationalizing the loss to make more sense of it. In the case of Brexit, while the immediate reaction was shock and panic about what damage it might inflict on the UK and global economy and a correspondingly dramatic response of global financial markets, the situation had stabilized within a week. And subsequent analyses of the economic impact of Brexit show it’s not that bad.
Various expert assessments (see the Wall Street Journal survey, JP Morgan-Chase’s Jim Glassman, former Fed chair Ben Bernanke, and The Conference Board) all indicate Brexit will most significantly impact the UK and European economies, with very little economic impact on the rest of the world. The economic effects transmit from the UK to the rest of the world mainly through financial markets and the effects of lingering uncertainty over Brexit’s meaning and process on investment decisions. The IMF’s global economic outlook (released on 7/19) revised their growth forecast only “modestly” relative to their April 2016 outlook (downward by 0.1 percentage points for 2016 and 2017). The IMF’s baseline assumes a gradual decline in uncertainty over time, where the Brexit negotiations do not result in a large increase in economic barriers and where there will be “no major financial market disruption, and limited political fallout.”
So as CNBC’s Stephen Sedgwick puts it, we should “keep calm and carry on”—for our own good and the good of the economy:
We've all kind of got to just get on it with it because the scaremongering from both sides before last Thursday was a disease, which is spreading now the result is clear. As we all know confidence is the X factor for everything in the markets and economy. Over time it will come back, I just hope we don't all elongate that waiting period by overdoing the pessimism.
Depression/Regret (stage 4)
This is the stage of resigned sadness and regret. In the case of Brexit, at least some “regret” actually came very early (right after Shock or Blame, and definitely before Bargaining/Rationalizing) in the Brexit grieving process. Google searches immediately after the vote suggest many people didn’t know what they were voting for (because they didn’t understand what being part of the EU meant in the first place), and a survey indicated that up to 7 percent who voted for Brexit regretted their vote a week later.
Acceptance (stage 5)
It will be a long (2+ years) and uncertain path to the final Brexit “divorce”—but the new UK Prime Minister, Theresa May, seems to recognize there is no turning back, even though she had previously pushed for the UK to “Remain.” She has said “Brexit means Brexit” and “we’re going to make a success of it.”
So, what will “accepting” and “making a success of it” mean? Can the UK and the world learn from the Brexit episode to build better, stronger political and economic relationships going forward?
Part of learning from the experience requires much self-reflection and a better understanding about how Brexit happened.
It happened because there are fundamental disconnects between economic and political decisions when fruits of economy are enjoyed mostly by a few—when dollars are distributed differently from votes. In such cases there will not be enough political support to support economic systems that are net positives only in a macro sense and not in a universal sense.
Salman Sakir (Huffington Post) underscores this point, writing that Brexit “demonstrates the need for globalization to be inclusive so that it benefits all segments of the population, particularly people in the low-income group, and people with low levels of education and skills.”
As Tim Harford (Financial Times) puts it: “When we stop admiring how much the pie has grown, we start fighting each other for a larger slice. Many people who voted to leave did not see EU membership as a joint project for mutual benefit but as a zero-sum game that Britain was losing and Brussels was winning.”
“Zero-sum politics” certainly dominates the media and public discourse these days. We are all too familiar with that kind of messaging here in the US, particularly in this election year. And with that loud and catchy “us versus them” rhetoric there seems to be little interest in patiently listening to economists trying to explain the details of economic tradeoffs and a more careful identification of winners and losers that add up to net positive or negative (not zero).
The zero-sum mentality breeds misunderstanding of the costs and benefits associated with having a more globalized economy where resources are free to move across borders. For example, in the Brexit case, the “Leave” vote was largely motivated by anti-immigration sentiment in the UK—inconsistent with evidence from a Centre for Economic Performance (of the London School of Economics and Political Science) report showing that increases in EU immigrants into the UK did not crowd out jobs or reduce wages for UK-born workers. That report also found that immigrants pay more in taxes than they benefit from public assistance and services.
And Bruce Katz (of the Brookings Institution) highlights how direct EU funding has benefitted UK cities and thus how Brexit will hurt those cities. We might wonder how many residents of those UK cities voted to “Leave” without understanding what that would mean for their city. We also shouldn’t be surprised if the answer is most of them, as even here in the US our own citizens have little understanding of what the various levels of government do for them. (The line “Keep your government hands off my Medicare!” comes to mind.)
Relationships are two-way streets, with give and take, costs and benefits—it certainly can’t be always wonderful. But Brexit, like some personal breakups, may have happened as emotional overreaction, in the “heat of the moment” when the negatives of the relationship were blown out of proportion and the tradeoffs not carefully weighed.
But as Prime Minister May says, the Brexit divorce must proceed. How she talks about it hints at “acceptance” and a better informed, post-breakup UK:
'And it will also be [the new UK government ministers’] duty to deliver success on behalf of everyone in the UK, not just the privileged few. That is why social justice will be at the heart of my government… So we will not allow the country to be defined by Brexit, but instead will build the education, skills and social mobility to allow everyone to prosper from the opportunities of leaving the EU.'
Handling the Uncertainty
As mentioned, the largest effects of Brexit on the global economy are through the shock it created and the uncertainty that remains over how Brexit negotiations will play out. The Brexit “divorce” process could go several different ways, as Alex Barker (FT) has categorized:
- “Hostile divorce” – talks collapse, UK essentially walks out and “sets out to become a low-tax, light-regulation magnet for global businesses—aggressively undercutting its EU neighbors”;
- “Clean break” – UK and EU able to arrange a tariff transition, agree to trade terms, and ratify the deal in the European Parliament and 38 national and regional assemblies;
- “Amicable transition” – UK remains part of the EU single market, but on adjusted terms (UK gaining more control over some policy areas such as agriculture, immigration);
- “Change of heart” – UK pulls out of the formal process to exit before it is complete, remaining a full member of the EU.
The UK’s Institute for Government explains there are two key sets of negotiations the UK must complete as part of its exit from the EU:
- Negotiating the withdrawal agreement – the “terms of the divorce” from the EU;
- Negotiating the future UK-EU relationship.
There are many (long) paths both sets of negotiations could take—and a range of subsequent public reactions and economic impacts for the UK, Europe, and the world. How to best deal with all this uncertainty and “carry on” with one’s (business) affairs?
Decision makers would do best to focus on alternative scenarios rather than single forecasts or waiting for particular economic outcomes to be fully revealed. Uncertainty doesn’t have to be paralyzing if one can proceed in directions that make sense under the full variety of scenarios. Harford suggests we can think wishfully but also realistically:
It’s time for more serious scenario thinking about the UK’s future in Europe. Because scenarios are persuasive stories, they can help us face up to uncomfortable prospects and think clearly about possibilities we would rather ignore. And because scenarios contradict each other, they force us to acknowledge that, in the end, we cannot actually see into the future. As a result, we move from a sterile question to a fertile one — from 'What will happen?' to 'What will we do if it does?'
Lessons from the Brexit Divorce for Sustainable Capitalism—and the Economists’ Role
Perhaps all of us (experts, policymakers, and the general public) can learn from the Brexit experience about how we might better sustain good relationships in the future. For an economic system or relationship to be sustainable, it must be good for everyone and that “good” must be well understood (or at least recognized!) by the public. Going forward, how can experts do a better job advising policymakers and communicating with the general public, so that political outcomes might more commonly reflect well-informed decisions?
(source of graphic: Financial Times (FT.com))
Tim Harford (FT) offers some ideas on how economists (and “experts” more broadly) might make themselves (ourselves!) less boring and more relevant and influential: (i) recruit experts that “confound people’s stereotypes” and represent a diversity of backgrounds and perspectives, and thus are more interesting and novel to listen to; (ii) acknowledge people’s “deep beliefs” and values before presenting them with the evidence; (iii) make greater effort to reach and engage with the general public by collaborating with journalists more. Some natural scientists in the UK started this latter practice in 2002 with the Science Media Centre; economists (everywhere) should do this, too:
Should economists do likewise? Perhaps. But the conduct of the campaign will not make that easier. Economists who did step forward to explain the issues were dismissed as corrupt or incompetent in the crudest terms. Nobody could be blamed for wishing to duck such mud-slinging. But if the events of the past few weeks have shown us anything, it is that public life is too precious to be entrusted to politicians alone.
So we will (all) survive the grieving process on Brexit. And on the other side it could very well be that the economic relationships that have been rearranged, reaffirmed, or entirely newly created will be not just put us in a different place, but actually in a better place from having gone through the divorce—and learned from it.