On June 23, 2016, the United Kingdom voted to leave the European Union—a vote that sent shockwaves across the continent of Europe and beyond. On that day, the decision to leave won by 51.9 percent to 48.1 percent. Following the vote, the hashtag #WhatHaveWeDone started trending on Twitter as many young Brits took to social media to express their shock, rage, and disbelief about the result of the vote.
Despite the referendum vote, it turned out that leaving the EU was not so straightforward. The UK first needed to invoke Article 50 of the Lisbon Treaty, officially declaring a desire to leave. Article 50 also gave both sides two years from the date of invocation to agree to terms of separation. Because the process was triggered by British Prime Minister Theresa May on March 29, 2017, the deadline for the UK to officially leave the EU is scheduled for March 29, 2019.
Since the vote, deliberations have ensued and it’s uncertain if a clean exit will occur on deadline. To find out more, we sat down with professor Robin L. Lumsdaine, Kogod’s Crown Prince of Bahrain Professor of International Finance, to discuss what led to the Brexit vote and her thoughts on the upcoming exit deadline.
Prior to joining Kogod, Lumsdaine was an Associate Director in the Division of Banking Supervision and Regulation and Head of the Quantitative Risk Management Group at the Board of Governors of the Federal Reserve System. She was also a Director in the Global Markets Research division of Deutsche Bank where she served as the Global Inflation-Linked Bond Strategist.
Kogod School of Business: What are some of the issues that led to Brexit?
Robin L. Lumsdaine: One key issue is the perception of an inability in the UK to control its own destiny – that too much was being determined centrally through the EU. There was that feeling in terms of immigration policy, trade policy, etc. For instance, there are pockets of folks who perceived the difficulty of finding jobs with people coming in and taking [those] jobs. Or the difficulty with selling goods being due to good coming in from elsewhere. There is a tendency to look for an outward reason for why there’s difficulty.
The European Union was intended to make things consistent and seamless (e.g., uniform standards, open borders), but that of course brings its own challenges that I think some folks were dissatisfied with. One of the fundamental challenges of the EU was that while it created a unified monetary union, it is not a fiscal union. At some level, each country can control its own destiny because if they have economic challenges, they can alter their fiscal policy to try to meet those challenges. But it removes the monetary lever.
KSB: How has Brexit affected the EU?
RL: The minute the vote happened, the pound depreciated. Just one day after the vote, the pound was more than 8% weaker versus the US dollar and 5% versus the Euro. From an international finance perspective, that immediately illustrates the reaction.
In terms of economic impact, at one level, we might not expect to see an economic impact since officially nothing has really changed. But we are seeing economic impacts. Economists tend to talk a lot about direct and indirect impacts; the direct impact remains to be seen, i.e., what happens once Britain exits the EU. But there is an indirect effect as well -- the uncertainty impact -- that should not be overlooked. The uncertainty that has resulted from the Brexit situation has meant that firms have put off business decisions and workers have opted to either leave or wait to see how things are going to play out. There's just been a lot of deferred business as a result of this.
KSB: Would you have done anything differently?
RL: I would not have called a referendum. At some level, and especially in hindsight, that seems obvious, but that whole episode underscored the dangers of misjudging popular opinion. Cameron was in favor of remaining and wanted a clearer mandate. Calling a referendum and having it be that close, was very fractious. I don’t think it was the right way to go about it. It made the negotiations that much harder.
KSB: What do you think about the potential of a delay?
RL: In some ways, everything is uncharted because the possibility of an exit was never really envisioned. I would imagine some kind of modified delay will happen because they're obviously not going to have everything organized in the next three weeks. If you had asked me two years ago I would have said a delay wasn’t possible. But it’s looking increasingly likely that some kind of delay is inevitable.
KSB: What might happen if Britain leaves with no deal?
RL: My personal view is that it will be disastrous. There are so many nuances that they have not worked out. The Ireland situation is one example where I don’t think they really thought about the implications of Brexit in enough detail. I think the extreme version is if Britain left with no deal, then they go back to having border issues, having to put in all kinds of infrastructure on their own, including food safety inspections. Possibly they just proceed along that route, and I think there will be economic challenges to that, but eventually it would work itself out.
They've already basically said that they're exploring right of free movement issues, and that they've guaranteed right of free movement for people who are already in there or have already crossed borders. So some contingencies for a no-deal departure are already in place, although there are no doubt so many other issues they haven’t yet considered.
KSB: What could be some positive and negative influences of this for the EU and the US?
RL: In the US, it could be beneficial because the thing about [the UK] leaving [the EU] is that the UK potentially will need to explore other trade partners to a greater extent. They already have quite a lot of trade outside of the EU and with us, but it does mean that they will probably broaden out their trade base.
I think the biggest issue will be the ways in which they start to diverge from the rest of Europe. Right now, they're somewhat aligned, but over time, the UK could really chart their own path. We should start to see this quite quickly in the economic indicators. Exchange rates, in particular, will provide a fairly immediate signal regarding how things are playing out.
KSB: What else is important to know?
RL: I think the right of free movement is a big issue. That was something that I actually realized firsthand when I was working [for Deutsche Bank] in London—how easy it was to hire people from around the EU. We got really good people, and it was really easy for British citizens to work abroad. It’s sad that [this decision] creates challenges for that labor mobility. In higher education it’s a real issue, because higher education thrives by having diverse, international and multicultural communities – both in terms of faculty and also students. To potentially lose that is really worrying. The UK has begun issuing visas to EU citizens already living in the UK guaranteeing their right to remain post-Brexit, so it's possible that the impact won’t be so severe but that is one of the things I worry about the most.
One thing I find really interesting is that we now have a generation of people who don't remember what it was like pre-euro. I remember when I was a kid on a family roadtrip around Europe and having to carry a dozen different currencies and change money when crossing each country’s boarder. And I remember as an adult how strange it was to travel from one country to another in Europe without having to show a passport. The world of having border checkpoints and less seamless trade -- it's just a world that a lot of younger people in Europe don't know. The Brexit situation is slightly different because the UK has always maintained a separate currency and had passport checks. But to the extent that a UK departure encourages other countries to consider leaving the EU -- it'll be interesting to see how that plays out as well.
UPDATE: Per The Washington Post, British lawmakers will vote March 13 on whether to leave the European Union without an agreement, after Prime Minister Theresa May’s Brexit plan was overwhelmingly rejected by Parliament a day earlier. We will continue to monitor with commentary as more information becomes available.