Brexit: When Economics Come Second

The voting is done, and the Brits are leaving the European Union. This was not just a referendum on whether or not the United Kingdom should be a part of Europe, it was a vote on the establishment and elites in Europe. It was a vote against everyone in power.

There’s a reason why we are seeing the growth of the extremes both on the right and on the left across the EU and in the United States. We are witnessing the hollowing out of the middle classes in the developed world. They’re not optimistic about the future. In the UK, they do not believe that they are suddenly going to win by becoming independent from the EU. But they do believe that they can send a real message to those who have governed them and forgotten about them.

What comes next? If Boris Johnson becomes the leader of the Conservative Party, his ability to strike a solid deal with the EU will be extraordinarily limited. He will simultaneously face hostile European leaders and a revolt within his own country. Scottish leaders have already called for a new referendum on independence from the United Kingdom. Northern Ireland’s status is being called into question, and the peace deal there faces a risk of unwinding.

The UK will experience its own domestic G-zero, and a period of domestic creative destruction will ensue. David Cameron’s decision to call the referendum and then campaign against it has left his own party split. Labour is also revolting against Jeremy Corbyn’s failure to lead a successful remain campaign. Nationally, Scotland and Northern Ireland voted strongly to remain, while England outside London and Wales wanted to leave.

To be sure, the UK is still one of the 10 largest economies in the world. They’ve got good technology, strong entrepreneurship and – for now – a great banking sector. When they finally do come out of this, they will still be a wealthy country, they will still be reasonably robust. But make no mistake that the UK is going to go through a significant recession, starting now. Much of the great talent and cheaper labor that was brought into the UK as a consequence of their strong economy will disappear. The financial sector in the UK is going to shrink significantly, along with major capital flight. The UK will make it to the other side eventually, but it will be an enormously rocky road on the way.

Across Europe, the winners in this environment will be the euroskeptics like Marine Le Pen in France and Geert Wilders in the Netherlands, both of whom have already called for referendums in their own countries. Brexit is the greatest possible hit to establishment political forces not just in the UK but across Europe. That means that those leaders have to now punish the Brits by driving a hard bargain with Cameron’s success on terms of access to European markets.

The European governments want to avoid a damaging economic unwind, but the way they do that is by making sure that out is out. German leaders, looking at elections coming up in the next year, need to ensure that the British divorce is messy. Even though there are strong economic incentives for the Europeans to keep the UK functioning well, the politics are not aligned right now. If we could just focus on the economics, this would be a fairly stable process. But the British voters have just declared that the economics come second. Now we wait for that message to echo across Europe.