In a piece for the Wall Street Journal, Greg Ip (a friend and former colleague of this blogger) does a nice job explaining the links between Brexit and a tumbling pound. Markets anticipate that it will become more costly for British firms to sell goods and services to Europe. Europeans will consequently buy fewer of them, and therefore fewer pounds, leading to a weaker currency. That is, cheap sterling is part of the adjustment to a loss in British competitiveness: the mechanism by which Britons come to spend less on foreign goodies (now increasingly dear) as the price of its choice to leave the EU.
As Mr Ip notes, that’s not all that’s going on. Britain is also in a fortunate position, able to produce valuable stores of wealth: British government bonds, London property, and sterling itself. The ability to make such things, which foreigners like to hold, is a bit like owning a gold mine or rich oil deposits. Foreigners buy lots of those valuable things, pushing up sterling and making Britons richer. The downside is a touch of Dutch disease; exports are more expensive than they would otherwise be, and many industries therefore struggle to compete. Brexit threatens the value of those magical assets, however, and undoes the Dutch-disease effect. Brexit is a little like Saudi Arabia swearing off the oil business, declaring it would rather work for an honest living even if that makes its people poorer. That might sound noble, though it does make one reflect on the lack of policy imagination that led voters to make themselves poorer so that they could work harder for what they get.
Brexit is thus turning out to be a useful test case for deglobalization. Raising barriers to the free flow of goods, services, capital and people need not entail recession or panic. It may even redress some of the grievances behind the anti-globalization backlash. If Britain exports fewer financial services and more manufactured goods and tourism, the income gap between London and the rest of the country should narrow.
In the end, Britons may be a bit poorer than if they’d stayed, but more self-reliant and more in control of their own borders. That’s the tradeoff.
Two remarks on this. First, it is not obvious to me that manufacturing industries will definitely be the big winners (such as it is) from Brexit. Financial services are bound to be harmed, it is true. Yet British industry might find it more difficult to pivot to new foreign markets than British services. In the trade of goods, distance matters; “gravity models” of trade, which reckon that trade intensity is negatively associated with distance, do a surprisingly good job explaining actual trade patterns. Ironically, the digital revolution has reinforced the importance of distance by enabling the growth of supply-chain trade: the co-ordination of production across suppliers in lots of different countries. If leaving the EU costs British firms their positions within the supply chains of Factory Europe, those firms will find it difficult to turn and embed themselves in the production chains of Asia or North America; such places are simply too far away. This was always one of the great inanities of Brexit. Leaving the EU does not change the fact that Britain is right next door to a bunch of rich European countries and not especially close to anyone else.
And second, let me draw your attention to one very important word in that ultimate sentence: self-reliant. What is this “self”? The typical Briton will not become more self-reliant as a result of Brexit. The chap behind the bar at the pub will not suddenly find himself cobbling his own shoes and milling his own flour because of the vote to leave the EU. Mr Ip seems to intend the self, in this case, to be Britain. That may have been what voters intended; the assertion of the nation as the most important civic body is a disheartening development if so. And that might be the outcome, in part, of Brexit; trade volumes will probably fall a bit, and as Mr Ip notes Britons will spend less holiday time in Provence and more in Blackpool. Yet it’s also not quite right. Whether Britain is selling gilts to foreigners or turnips, it is still reliant on them.
The self at issue here is actually something different. It is a conservative sort of Englishness, which entails the rejection of London as well as of Brussels. And what is being purchased, it should be clear, is the ability to shut particular people out of Britain: those that are not enough like the community of selves on which the English intend to become more reliant. It is a vote against cosmopolitanism and multiculturalism. Nothing in the decline in sterling is going to make that adjustment less painful to those being shut out of the circle of British life. Neither should it make us optimistic that deglobalisation can occur without a great deal of accompanying ugliness.