July 20, 2016
The Price of Brexit–An Economic Slump
by The Editorial Board
It was always clear that Britain’s divorce from the European Union would be painful and costly. Nearly a month after the country’s ill-advised referendum on union membership, it is becoming clear just how bad it will be.
The British economy will slow noticeably this year and in 2017, the International Monetary Fund and the European Commission, the union’s executive arm, said in separate reports released on Tuesday. The IMF now expects 1.7 percent growth for 2016, down from its April forecast of 1.9 percent. It predicted a drop to 1.3 percent for 2017, almost a full point below its earlier forecast of 2.2 percent. The chief economist of the fund, Maurice Obstfeld, said that growth could be much lower if negotiations between Britain and its European partners drag on or become contentious.
The European Commission is even more pessimistic. It says Britain’s economy could shrink 0.3 percent next year under its “severe” scenario. Both bodies also warned that the uncertainty caused by Brexit will slow growth in the rest of Europe. The IMF lowered its forecasts modestly for global growth in 2016 and 2017.
British and European leaders need to take these forecasts seriously as they negotiate how to remove Britain from the union and structure a new economic relationship. Britain trades extensively with the E.U., and London is the biggest financial hub in the union. Economists say a disruptive breakup would be bad for everybody, leading to job losses and a spike in the prices in Britain of basic necessities like food that it imports from Europe. The pound has already fallen about 11 percent against the dollar and 9 percent against the euro since the referendum, raising prices in Britain for imports of goods and services.
It is clear that British politicians, especially those who campaigned the loudest for Brexit, did not prepare for this eventuality. Now, it is up to Prime Minister Theresa May, who took office just last week, and her new team to come up with a strategy to minimize the economic damage. Perhaps the best outcome Britain could hope for is an arrangement similar to the one Norway has with the E.U. It is not a member of the union but has access to the European common market and agrees to abide by its regulations and to allow free movement of Europeans across its borders.
So far, Ms. May appears to be wisely ignoring calls by some anti-E.U. politicians to quickly start the formal process of leaving the union by invoking Article 50 of the Lisbon Treaty. British officials recently said they would not invoke the article this year.
But a long delay would carry risks, too, by increasing uncertainty, which would depress business investment and consumer spending. What is clear is that Britain now finds itself in a no-win position.