CAMBRIDGE – The United Kingdom’s Brexit referendum has shaken equity and financial markets around the world. As in prior episodes of contagious financial turmoil, the victory of the “Leave” vote sent skittish global investors toward the usual safe havens. US Treasury bonds rose, and the dollar, Swiss franc, and yen appreciated, most markedly against sterling.
When it became clear that the “Remain” camp had lost, the pound’s slide seemed to be on track to match the historic 14% depreciation of the 1967 sterling crisis. But the rollercoaster outcomes that we’re now seeing in global capital markets are not unique to the Brexit episode.
What is unique, and particularly far-reaching, is the precedent Brexit sets for other countries (or regions) to “exit” from their respective political and economic arrangements – whether it is Scotland and Northern Ireland in the UK, or Catalonia in Spain. The borders of existing nation-states could be redrawn, or fenced off entirely if disgruntled member states submit to internal nationalist impulses and give up on the multi-decade experiment in European unification. (And, as Donald Trump’s presidential campaign in the United States shows, this impulse extends beyond Europe.)
With its systemic negative effects on finance, trade, and labor mobility, Brexit marks a major setback for globalization. The fallout from Brexit probably won’t spread as quickly as in outright financial crises, such as the 2008 financial meltdown or the 1997 and 1998 Asian episodes. But the aftereffects also won’t subside anytime soon.