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 More by this author

Podcast

Podcast

Director's Cut: The economics of no-deal Brexit

Bruegel director Guntram Wolff is joined by senior fellow Zsolt Darvas to rake through the possibilities and probabilities inherent in a no-deal Brexit scenario, covering trade, the Irish border, citizens' rights and the EU budget.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 16, 2019
Read article More by this author

Blog Post

What 2019 could bring: A look inside the crystal ball

Economic performance prospects in Europe, the US and Asia in 2019. We start off by reviewing commentaries and predictions about the euro zone, which many commentators expect to perform below potential as uncertainties continue to dampen a still robust recovery.

By: Michael Baltensperger Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 14, 2019
Read article More on this topic More by this author

Blog Post

EU budget implications of a no-deal Brexit

A no-deal Brexit would mean the UK’s contributions to the EU budget fall to zero as of March 30th 2019. The author here calculates an estimate of the budget shortfall that would have to be covered in this case, and how the burden would fall across different member states.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: January 14, 2019
Read article Download PDF More on this topic More by this author

Policy Contribution

The implications of no-deal Brexit: is the European Union prepared?

The author, based on a note written for the Bundestag EU Committee, is exploring the possible consequences of a no-deal Brexit for the EU, assessing preparations on the EU side and providing guidance on the optimal strategy for the EU, depending on the choices made by the United Kingdom.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 14, 2019
Read article Download PDF More by this author

Parliamentary Testimony

German Bundestag

The implications of no-deal Brexit: is the EU prepared?

Hearing on Brexit in the EU Committee of Bundestag on 14 January 2019, exploring the possible consequences of a no-deal Brexit for the EU and assessing preparations on the EU side.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, German Bundestag, Testimonies Date: January 14, 2019
Read article More on this topic More by this author

Blog Post

Brexit: Now for something completely different?

The life of Brexit. After a week of ECJ rulings, delayed votes, Theresa May’s errands across Europe and the vote of no confidence, we review the latest economists’ opinions to try to make sense of what has changed and what hasn’t.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: December 17, 2018
Read article More on this topic

Opinion

How a second referendum could be the best way to overcome Brexit impasse

A new vote based on the revocation (or not) of Article 50 would give the UK government a clear signal to proceed in one direction or another, and thus trim down the number of options being touted – most of which are unworkable as things stand.

By: Maria Demertzis and Nicola Viegi Topic: European Macroeconomics & Governance Date: December 14, 2018
Read article More on this topic More by this author

Opinion

Immigration: The doors of perception

Surveys show that people systematically overestimate the share of foreign-born citizens among resident populations. Aligning people's perceptions with reality is vital to the betterment of public debate and proposed policies.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: December 12, 2018
Read article More on this topic More by this author

Blog Post

The Brexit withdrawal agreement

On November 14th the UK government cabinet approved the draft text of the withdrawal agreement, the deal reached between EU and UK negotiators. The decision was followed the next day by the resignations of several members of Parliament. We review the first reactions in the blogosphere.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 19, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: Options yet open for a Brexit deal

Robin Niblett, director of Chatham House institute, joins Bruegel deputy director Maria Demertzis for an assessment of what progress can be reasonably expected from the final months of the Brexit negotiations.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: November 7, 2018
Read article More on this topic More by this author

Blog Post

Post-Brexit transfers of personal data: The clock is ticking

The UK government would like to keep EU-UK data transfers largely the same following the country's separation from the EU. But talks have yet to even commence on a future data-sharing relationship, and a landmark European Court of Human Rights ruling in September bodes poorly for the UK's future status under the EU’s General Data Protection Regulation.

By: J. Scott Marcus Topic: European Macroeconomics & Governance Date: November 7, 2018
Read article More on this topic More by this author

Blog Post

Digesting the Salzburg Summit

As the moment of truth for Brexit negotiations is approaching, with the October European Council around the corner, we review opinions on the outcome and meaning of the Salzburg summit.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: October 1, 2018
Load more posts