England have just been ejected from Euro 2016 by Iceland. Is this an early example of the hapless future that lies ahead for Britain now that we have opted for exile from the richest economic zone on Earth? Or is it a demonstration of the mighty feats that even the tiniest of nations can achieve once freed from the EU yoke?
The debate on the economic implications of Brexit before last week’s vote was fuelled by fantastic claims of epochal economic disaster and transformative economic opportunity made by both sides. What does a more sober assessment of our prospects look like, the morning after?
In the long term – even in the medium term – everything, of course, will depend on the details. Only a fool would try to predict today what Brexit will actually look like, or how the EU itself will function, in five or ten years’ time. Indeed, Mervyn King, the former governor of the Bank of England, claimed on Monday that economically speaking Brexit was a giant red herring, because its impact on Britain’s long-term growth prospects was neither knowable nor likely to be large.
That is not as daft a diagnosis as it may sound. The economic history of most advanced nations shows a remarkable consistency in the pace at which they grow – a consistency that even depressions and world wars have found it difficult to disrupt. The logical inference is that geographic, cultural and demographic factors far outweigh policy levers in the determination of long-term prosperity.
Yet, as Keynes famously said, in the long run we are all dead. Lord King’s Olympian perspective is all very well – but in the short term, Brexit is already having serious economic consequences. Stock markets around the world have stuttered: European bourses, and especially Europe’s banks, have suffered most. Government bonds – savers’ favourite safe havens in a financial storm – have rallied, sending interest rates in the advanced nations to fresh lows (the Remain campaign’s warnings that interest rates would rise following a vote for exit always sounded strange – and sure enough, the yield of the benchmark UK government bond hit an all-time low this week).
The most visible, and probably the most important, immediate economic casualty of Brexit, however, has been the value of sterling. The pound sank to a three-decade low against the US dollar on Monday, having lost 11 per cent of its value in the space of two trading days. We all know what this means for us individually: we’ve become poorer almost overnight. Foreign holidays have suddenly become more expensive. The price of booze and fuel – we import far more than we export of both – will go up. Remittances to families abroad will be worth considerably less.
What it means for the economy as a whole is less easy to say. Much has been made – correctly – of the negative impact of leaving the EU’s single market on foreign direct investment into the UK. Manufacturing cars in a country from where they can be exported freely to the rest of the EU is clearly a more attractive prospect than making them in one to which import tariffs apply.
Yet sterling’s exchange rate against the euro is at least as important. Between Thursday and Monday, the cost base of manufacturers exporting from the UK to the eurozone got some 8 per cent cheaper as a result of the pound’s fall against the euro. It would take a hefty hike in tariffs to offset a profit margin windfall on that scale.
The weaker pound brings other benefits. Most voters will not have been thinking about how to solve Britain’s addiction to foreign borrowing last Thursday.