It’s still early, but Brexit vote looking increasingly disastrous

When asked for his assessment of the French Revolution of 1789, Chinese Premier Chou En-lai famously replied that it was too early to draw definitive conclusions. The same might be said of an assessment of the ‘yes’ vote in last year’s Brexit referendum. Serious negotiations are only now getting underway on the terms under which the U.K. will leave Europe.

Recognizing the early stage of the Brexit negotiations, it would seem, however, that all the clues are pointing in one direction. Those suggest that the U.K.’s Brexit decision might have been the most ill-advised policy decision that the country has made since it chose to return to the gold standard at the wrong exchange rate in 1926 or to join the European Union in the first place in 1973.

{mosads}One clear indication that the yes vote on Brexit was not the wisest of electoral decisions is the manner in which that vote has up-ended U.K. politics. The U.K., which had enjoyed a high degree of political stability for a long period, now has a minority government that depends for its survival on the votes of the Democratic Union Party, a fringe party from Northern Ireland with ultra socially conservative leanings. 

Further undermining the country’s political stability is the fact that the Conservative Party is now deeply split over the issue as to whether Prime Minister Theresa May should sue for a “hard” Brexit or for a “soft” Brexit. This split heightens the prospect that over the next year or so we could have a bloody and destabilizing leadership fight within the Conservative Party.

Ironically, the heightened domestic political instability that such a leadership fight would entail could all be occurring at the very time that France, under the new leadership of Emmanuel Macron, might be regaining its poise and political clout within Europe. 

Yet another disturbing political fallout from the Brexit vote has been the distinctly leftward shift of Theresa May’s Conservative Party and the resurrection of the Labor Party and Jeremy Corbyn, its far-left leader. One can no longer exclude the possibility that Brexit might have smoothed the way for a return to power of a Jeremy Corbyn-led Labour Party wedded to the failed economic policies of the 1970s. This would appear to be particularly the case considering how well both the Labour Party and Jeremy Corbyn did in last month’s general election.

If the political developments in the wake of last year’s Brexit referendum have not been encouraging, neither have the economic developments. In the immediate aftermath, the pound lost around 15 percent of its value and it has yet to recover very much of that loss.

This has caused inflation to rise to above the Bank of England’s inflation target, which has contributed to a marked slowing in real wage growth.

Meanwhile, at a time that the European economic recovery is now picking up pace, GDP growth in the U.K. appears to have slowed to barely 1 percent in the first half of the year. 

Looking ahead, there is the real risk that, if Theresa May hews to her hard Brexit line, the pound could experience another leg down, and the economy could slide into recession. U.K. industrial leaders are now becoming a lot more vocal about how disruptions to European supply chains from a hard Brexit would severely damage investor confidence at home.

Meanwhile, a growing number of financial firms in London appear to be making contingency plans for the possibility that they might lose their passport rights to the European Single Market in the event of a hard Brexit.

While the U.K.’s political and economic outlook appears to be darkening as a result of the government’s hardline Brexit negotiating position, there is one development that in hindsight could make the Brexit decision appear to have been a wise choice. Should the eurozone come apart because of untoward political and economic developments in a major eurozone member country like Italy, the U.K.’s decision last year to leave Europe would have proved to be a prescient one.

It would prove to have been so in much the same way the U.K.’s decision to leave the gold standard in the early 1930s, before the gold standard eventually collapsed, proved to have been a wise one in retrospect.

Only time will tell how Brexit in the end plays out. However, there are already all too many reasons to fear that the Brexit decision will ultimately inflict much long-run political and economic damage to the country. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney. 

The views expressed by contributors are their own and not the views of The Hill.