There are considerable downside risks to what might happen in the wake of the referendum, but Brexit also presents some important upside opportunities for the UK. It will have the opportunity to take a freer hand in its own trade policy, its own immigration policy, its own regulatory policy, and there’s at least the possibility that it could do so in a more progrowth way than would likely have happened if it had remained part of the EU. If it takes advantage of that freedom to construct a regulatory environment that facilitates the formation of new businesses and the creation of new jobs, that’s likely to be good for workers across the spectrum in the UK economy.

On the other hand, if Brexit is really the first step toward an inward retreat with respect to trade, capital flows, immigration, and so on, that’s likely to choke off growth prospects for the UK for some time to come.

One big political issue is how well and how soon the EU and the UK will establish a new trade arrangement. The sooner the better, in my view. The Economic Policy Uncertainty Index for the UK is at historically high levels. (The Index quantifies newspaper coverage of policy-related economic uncertainty.) Until the EU and the UK come to a new understanding about trade in goods and services, capital flows, and financial relationships, that uncertainty will forestall long-term investments, hiring decisions, and other activity. That’s going to spill over to the entire UK economy if it persists for long.

“It’s easier to blame the EU when you don’t really have a strong say in how it functions.”


Just as there are opportunities for Britain, this could have a positive impact on the EU. For one thing, the referendum and the larger dissatisfaction in many EU countries suggest that the EU suffers from a shortfall of democratic accountability. People, rightly or wrongly, blame some of the failure to perform economically on decisions made by the EU, and it’s easier to blame the EU when you don’t really have a strong say in how it functions. I would encourage folks in the EU to think about how it is that they can restore both the perceptions and the reality of greater accountability to the citizens of EU member countries.

Many of the aspects of globalization that come with EU membership can be achieved without something akin to political integration. There’s been a long-standing trajectory since the end of World War II—through the GATT (General Agreement on Tariffs and Trades), the WTO (World Trade Organization), and free-trade agreements, which have all promoted greater trade globalization while respecting the sovereignty of individual countries. It would be wise to step back and unpack the elements of globalization and ask, “Which ones can we promote in a way that’s likely to be most beneficial economically and most hospitable to the electorates in democratic societies?”

For more from the Chicago Booth faculty on the fallout of the Brexit vote, visit our collection here.

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