I’m finding myself less horrified by Brexit than one might have expected – in fact, less than I myself expected. The economic consequences will be bad, but not, I’d argue, as bad as many are claiming. The political consequences might be much more dire; but many of the bad things I fear would probably have happened even if Remain had won.My split with Krugman here is that it is not at all clear that Britain will become poorer. It, for one, will not have to adopt a number of the socialist, politically correct central planning programs pushed by Brussels, including monetary support of refugees. This is a positive. What happens on the trade front is the big question. If Britain becomes Donald Trump mercantilist/protectionist, down goes the Brit standard of living, but it is unclear if Brits will go down this road.
Start with the economics.
Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects of leaving the EU, but it will be substantial. True, normal WTO tariffs (the tariffs members of the World Trade Organization, like Britain, the US, and the EU levy on each others’ exports) are low and other traditional restraints on trade relatively mild. But everything we’ve seen in both Europe and North America suggests that the assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders; revoking that assurance will, over time, erode trade even if there isn’t any kind of trade war. And Britain will become less productive as a result.
But right now all the talk is about financial repercussions – plunging markets, recession in Britain and maybe around the world, and so on. I still don’t see it.