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Markets and broken promises in the UK referendum

After four days of violent market reactions to the prospects of Brexit, markets have paused and gained in strength slightly. Why has that happened?

Publishing date
29 June 2016

In the wake of the referendum result of June 23, financial markets around the world nosedived. The pound sterling lost more than 10% while the British stock market was down 7 percent. Meanwhile, stocks of financial institutions all over Europe and in particular in Britain have suffered tremendously.

Rarely had economists been so united.

This reaction was in line with economists’ predictions. Rarely had economists been so united. Most agreed that leaving the EU’s single market would have negative implications for UK and EU business, probably causing a recession in the short-term and lowering GDP levels in the long-term.

Economists also agree that the long-term economic consequences for GDP levels largely depend on the terms of the agreement that the UK strikes with the EU and other trading partners.

Markets have so far behaved in line with what economic theory would tell you about the effects of increasing barriers to trade: economic activity falls, which in turn should lead to lower stock market valuation.

So why have markets recovered today? In such volatile circumstances, it is obviously difficult to assign a clear and single reason for this recovery in the stock and exchange market.  One aspect is certainly the extent of political chaos in the UK, and the extent to which markets sense that the political situation is getting sorted out and a new government put in place.

The market recovery is also the result of a clear change in political direction in the UK.

But a further and important factor is the extent to which the promises made during the referendum are being broken. In my view the market recovery is also the result of a clear change in political direction in the UK. Let me explain how:

Many of those who voted for Brexit did so on the assumption that

Both propositions were largely taken off the table on Monday by Boris Johnson and Michael Gove, who were part of the official leave campaign. Boris Johnson now talks of the UK remaining a part of Europe and seeking to have access to the single market. Others have meanwhile noted that being outside of the EU would not necessarily mean limiting the free movement of labour from the EU.

Newspapers now proclaim that the most realistic option for the UK is to become like Norway.

Newspapers now proclaim that the most realistic option for the UK is to become like Norway. Let’s recall that Norway is a full member of the single market with full labour mobility, full acceptance of all EU regulation, EU competition policy, EU jurisprudence on single market matters and almost full payment into the EU budget.

Norway is, in fact, basically a member of the EU in economic terms without having any formal possibility to exercise its sovereignty by shaping EU legislation. This option would indeed be very favourable to British and European business, compared to leaving the single market. But it would break promises made during the referendum and it would diminish, not strengthen, the UK’s sovereignty, compared to the UK being a member of the EU. An alternative pondered by Gideon Rachmann in the FT is that Britain may not even leave the EU in the end.

Market volatility will continue in the coming months, until the terms of the UK’s relationship with the EU are settled.

This story indicates that market volatility will continue in the coming months, until the terms of the UK’s relationship with the EU are settled. The more politically possible it looks that the UK will stay closely associated with the EU’s single market, the better the market reaction will be. Meanwhile, the more isolationist the approach taken by the UK and the more punitive the mood on the continent, the bigger the stock market losses for both, the UK and the EU.

This reveals a basic economic truth: despite claims to the contrary: you cannot have your cake and eat it too. But the economic truth creates a political dilemma: either you lose economically or you break electoral promises. And what were sold as choices before the referendum are now effectively  political dilemmas.

About the authors

  • Guntram B. Wolff

    Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Public Policy and Economics at the Willy Brandt School of Public Policy. From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

    An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, Business Insider ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and  advisory board of Elcano.

    Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media. 

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