Pitfalls of the Brexit Revolution

Stephen Fidler 
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Supporters of the British decision to leave the European Union sometimes speak of it as a revolution. If so, will it turn out to be 1789, when the French Revolution overturned the European order, or 1848, when the revolutionaries failed and Europe’s old regimes reasserted themselves?

If last month’s vote corresponded to the storming of the Bastille in 1789, the revolution still has a long way to run. The referendum is only the beginning of a long, possibly difficult voyage to an uncertain destination. And the parallels with revolution aren’t necessarily comforting for the winning side.

Whether they succeed or fail, revolutions often consume those who start them. The “successful” revolution that began in 1789 destroyed not only the leaders of the old order, but also many of those supporting a new one.

Less violently but still dramatically, Prime Minister David Cameron has already pledged to step down. The leaders of the Leave campaign inside the Conservative Party — Justice Secretary Michael Gove and former London Mayor Boris Johnson — have also seen their political fortunes seriously damaged. And the process has hardly started.

There are some potentially very turbulent waters ahead for Mr. Cameron’s successors to navigate after a referendum won with the support of an uneasy coalition of voters.

A minority of Brexit advocates, like Messrs. Gove and Johnson, depicted the EU as an obstacle to a more freewheeling, buccaneering, open-market economy. A majority appeared to be motivated by very different concerns: that the U.K.’s openness, particularly to immigration from elsewhere in the EU, was depressing wages, damaging job prospects and putting pressure on public services.

The first group embraces free markets and economic disruption; the latter are reacting in part to globalization and believe their lives have been disrupted enough already. If the widespread prereferendum forecasts of an economic downturn prove right, the latter group may also be worst hit by reduced job prospects and cuts in public spending.

In these circumstances, there is a risk they become further disaffected. Particularly after a campaign in which the competence of the Bank of England, Treasury and other leading government departments were attacked, some British politicians and officials worry about permanent damage to British politics and trust in government institutions.

There are other pitfalls. The smoothest exit from the EU — and the one that would entail the least economic disruption, according to numerous economic models — would be for the U.K. to join the European Economic Area, along with Norway. If that could be negotiated, it would leave the U.K. inside most of the single market in goods and services.

But there are well-known drawbacks to this: The U.K. would have to accept most EU rules without having any input into them, pay into the EU budget, and accept free movement of people from other EU countries, or at least a large measure of it.

It is hard to reconcile that arrangement with the sovereignty arguments for leaving and specifically the wishes of many Conservative Party supporters who voted Leave because they “want their country back.”

The implicit alternative to the EEA, and the one that gives the British government most control over immigration, is to step away from the European single-market architecture altogether. That would most likely involve trying to negotiate a free-trade deal with the EU and then, after exit, a series of trade deals with other countries. But economists say that would entail a much more serious hit to the economy.

So there is a dilemma between reconciling the wishes and expectations of the pro-Brexit voters with the outcomes that most economic analyses suggest would do the least damage to their economic well-being.

As the world waits for the vote of Conservative Party members that will decide the next prime minister, the British government and civil service will be laying out these options and gearing up for divorce with the EU. The widespread assumption among U.K. officials is that it is unimaginable that the separation won’t go ahead.

Yet over more than 40 years of U.K. membership, the British economy has become intimately intertwined with the rest of the EU. Parting will be like separating conjoined twins, one senior European official says.

The enormous difficulty of divorce and the economic damage many expect to become increasingly apparent over timeare reasons why some people still think or hope that the U.K., in the final analysis, won’t go ahead and do the deed. That would suggest 1848, rather than 1789.

Yet, in different ways, Europe was transformed by the events of both years. Wherever the process begun by the referendum leads, the U.K. and Europe will be deeply marked by it for many years to come.

Copyright (c) 2016 Dow Jones & Company, Inc.