Blog Post

Markets and broken promises in the UK referendum

After four days of violent market reactions to the prospects of Brexit, markets have paused and gained in strength slightly. Why has that happened?

By: Date: June 29, 2016 Topic: European Macroeconomics & Governance

In the wake of the referendum result of June 23, financial markets around the world nosedived. The pound sterling lost more than 10% while the British stock market was down 7 percent. Meanwhile, stocks of financial institutions all over Europe and in particular in Britain have suffered tremendously.

Rarely had economists been so united.

This reaction was in line with economists’ predictions. Rarely had economists been so united. Most agreed that leaving the EU’s single market would have negative implications for UK and EU business, probably causing a recession in the short-term and lowering GDP levels in the long-term.

Economists also agree that the long-term economic consequences for GDP levels largely depend on the terms of the agreement that the UK strikes with the EU and other trading partners.

Markets have so far behaved in line with what economic theory would tell you about the effects of increasing barriers to trade: economic activity falls, which in turn should lead to lower stock market valuation.

So why have markets recovered today? In such volatile circumstances, it is obviously difficult to assign a clear and single reason for this recovery in the stock and exchange market.  One aspect is certainly the extent of political chaos in the UK, and the extent to which markets sense that the political situation is getting sorted out and a new government put in place.

The market recovery is also the result of a clear change in political direction in the UK.

But a further and important factor is the extent to which the promises made during the referendum are being broken. In my view the market recovery is also the result of a clear change in political direction in the UK. Let me explain how:

Many of those who voted for Brexit did so on the assumption that

Both propositions were largely taken off the table on Monday by Boris Johnson and Michael Gove, who were part of the official leave campaign. Boris Johnson now talks of the UK remaining a part of Europe and seeking to have access to the single market. Others have meanwhile noted that being outside of the EU would not necessarily mean limiting the free movement of labour from the EU.

Newspapers now proclaim that the most realistic option for the UK is to become like Norway.

Newspapers now proclaim that the most realistic option for the UK is to become like Norway. Let’s recall that Norway is a full member of the single market with full labour mobility, full acceptance of all EU regulation, EU competition policy, EU jurisprudence on single market matters and almost full payment into the EU budget.

Norway is, in fact, basically a member of the EU in economic terms without having any formal possibility to exercise its sovereignty by shaping EU legislation. This option would indeed be very favourable to British and European business, compared to leaving the single market. But it would break promises made during the referendum and it would diminish, not strengthen, the UK’s sovereignty, compared to the UK being a member of the EU. An alternative pondered by Gideon Rachmann in the FT is that Britain may not even leave the EU in the end.

Market volatility will continue in the coming months, until the terms of the UK’s relationship with the EU are settled.

This story indicates that market volatility will continue in the coming months, until the terms of the UK’s relationship with the EU are settled. The more politically possible it looks that the UK will stay closely associated with the EU’s single market, the better the market reaction will be. Meanwhile, the more isolationist the approach taken by the UK and the more punitive the mood on the continent, the bigger the stock market losses for both, the UK and the EU.

This reveals a basic economic truth: despite claims to the contrary: you cannot have your cake and eat it too. But the economic truth creates a political dilemma: either you lose economically or you break electoral promises. And what were sold as choices before the referendum are now effectively  political dilemmas.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Blog Post

Does the European Parliament miss an opportunity to reform after Brexit?

While Brexit negotiations are beginning to progress, the European Parliament is preparing to vote on the possible reallocation of seats following the UK's departure. With many of the current proposals reflecting Member States' concerns about losing seats, this paper advocates for options that could better achieve equality of representation even within the constraints of the EU treaties.

By: Robert Kalcik, Nicolas Moës and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 10, 2018
Read article More on this topic More by this author

Opinion

Opportunities and risks in Europe in 2018

The new year could very well see the positive story of 2017 continue in Europe – but a number of looming policy and political problems cannot be ignored.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 30, 2017
Read article Download PDF

External Publication

European Parliament

The Impact of Brexit on the EU Energy System

What will be the impact of Brexit on the EU energy system? With or without the UK, the EU will be able to complete its market, to achieve its climate and energy targets with feasible readjustments, and to maintain supply security

By: Gustav Fredriksson, Alexander Roth, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, European Parliament, Testimonies Date: December 19, 2017
Read article More on this topic More by this author

Blog Post

Optimistic UK business confidence indicators predict smooth Brexit

UK business confidence indicators hardly fell after the Brexit vote in 2016 and have been increasing steadily since. The most likely reason is an expectation of smooth Brexit deal, especially for industry, while there is more uncertainty for services.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 19, 2017
Read article More on this topic

Blog Post

Brexit, phase two (and beyond): The future of the EU-UK relationship

Whether it looks more like ‘CETA-plus’ or ‘EEA-minus’, the trade deal that emerges from phase two of the Brexit negotiations should not be the limit of ambition for future partnership between the EU and the UK

By: Maria Demertzis and André Sapir Topic: European Macroeconomics & Governance Date: December 13, 2017
Read about event More on this topic

Past Event

Past Event

The impact of Brexit for Research & Innovation in Europe

This event featured a new and interactive format, with a restricted and high-level on-site audience and in parallel, it has been livestreamed on our website to remain public and attract the widest participation.

Speakers: Alastair Buchan, Matt Dann, David Earnshaw, Kurt Deketelaere, Maryline Fiaschi, Martin Muller, Christian Naczinsky and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 12, 2017
Read article More on this topic More by this author

Opinion

Brexit: When the banks leave

More than a tenth of the City’s business is now bound to go, but how much worse could things get?

By: Nicolas Véron Topic: Finance & Financial Regulation Date: December 1, 2017
Read article More by this author

Blog Post

The impact of Brexit on the Irish energy system – pragmatism vs. principles

Brexit promises pain for Ireland that could be cut off from the EU internal market and be left exposed to market instability in the UK. Georg Zachmann assesses the scale of the possible damage for Ireland, and how the UK and EU might use the special energy relations on the Irish island to commit to a pragmatic solution.

By: Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance Date: November 21, 2017
Read article Download PDF

Policy Contribution

A ‘twin peaks’ vision for Europe

The organisation of the European Supervisory Authorities (ESAs) is based on a sectoral approach with one ESA for each sector, with separate authorities for banking, insurance and securities and markets. But is this sectoral approach still valid? This Policy Contribution outlines a long-term vision for the supervisory architecture in the European Union.

By: Dirk Schoenmaker and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 13, 2017
Read article More by this author

Blog Post

European worries about isolationist trends

Populist shocks in the UK and US threaten the multilateral order on which the EU depends. What lies behind these earthquakes, and what does it mean for Europe? Withdrawing from the world is no solution to geo-political upheavals, but Europe needs to reassess the future of globalisation.

By: Maria Demertzis Topic: European Macroeconomics & Governance, Global Economics & Governance Date: November 7, 2017
Read article More on this topic More by this author

Blog Post

The Bank of England’s dovish hike

For the first time since 2007, the Bank of England raised interest rates, with a hike of 25 basis points. At the same time, it provided forward guidance that outlines a very gradual path for future increases. We review the economic blogosphere’s reaction to this decision.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 6, 2017
Read article More on this topic More by this author

Blog Post

Falling Pound might not bring UK trade balance boost

The Pound Sterling depreciated by 14% against a basket of world currencies in the four months after the referendum vote to leave the EU. A number of pundits claimed that this would improve the UK trade balance and boost the economy. But the data do not show any visible improvement in the trade balance to date. Could it be that currency depreciations have less impact on trade balances than before?

By: Nicholas Branigan Topic: European Macroeconomics & Governance Date: October 31, 2017
Load more posts