The outcome of the Brexit vote is clearly bad news for the UK. At the macroeconomic level, if Britain loses access to the single market, that’s going to harm the British economy. Until the negotiations about the single market are completed, there will be a lot of policy uncertainty about what kind of deal we’re going to end up with, and until then, investment in Britain will be lower. There will also be less spending. Hopefully, the large drop in the pound that we have seen will be strong enough to offset this blow to the British economy.
One opportunity for the UK, the easy opportunity to preserve access to the single market, is to follow the so-called Norway model. In other words, join the European economic area, which currently includes not only Norway but also other non-EU countries such as Iceland and Liechtenstein. However, I do not think this is a viable solution for Britain in the long run. Yes, it would preserve access to the single market, but it would come at the expense of free movement of labor, which British voters clearly don’t want, by revealed preference. Britain would also have to continue paying into the EU budget, which they don’t like. And Britain would have to abide by the EU rules, over which it would have no say, which I don’t see the British liking at all.
The Brexit vote is also bad news for the rest of Europe. Brexit, if it takes place, will reverse the long-term process of European integration, which has contributed significantly to peace and prosperity in Europe. Losing Britain will be bad for the EU, both externally and internally.
Externally, the UK has been a strong member of the EU; it’s been able to contribute militarily, and it’s been able to contribute diplomatically. Losing the UK means losing a big voice. The EU will now be smaller and less important on the global stage. Internally, in losing the UK, the EU is going to lose an important voice of reason that has often argued for market-driven solutions inside the EU.
Another unfortunate consequence of the Brexit vote is that over the next few months and possibly years, European politicians will be dealing with Brexit instead of with important problems such as immigration, Greece, and fiscal issues. That’s unfortunate—it’s almost unfair of the British to put Europe in this position.
Lubos Pastor serves on the governing board of the National Bank of Slovakia, Slovakia’s central bank. Slovakia is a member of the European Union. Pastor spoke in his personal capacity.
For more from the Chicago Booth faculty on the fallout of the Brexit vote, visit our collection here.