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[...]The UK, Europe, the west and the world are damaged. The UK is diminished and seems likely soon to be divided. Europe has lost its second-biggest and most outward-looking power. The hinge between the EU and the English-speaking powers has been snapped. This is probably the most disastrous single event in British history since the second world war.
Yet the UK might not be the last country to suffer such an earthquake. Similar movements of the enraged exist elsewhere — most notably in the US and France. Britain has led the way over the cliff. Others might follow.
The UK and, to a lesser degree, the EU are now at the beginning of an extended period of uncertainty. [...]
This will probably consume the energies of that government and its successors over many years. It will also involve making some huge decisions. One point seems evident: it is now politically inevitable that the UK will have to bring in controls over immigration from the EU. That rules out what might at first glance seem the best option: membership of the European Economic Area, which would permit membership of the single market. At best, the UK might participate in a free trade area in goods. But the services, on which it depends, would be excluded from the single market.
Meanwhile, the rest of the EU, burdened with so many challenges, will have to work out its own negotiating positions. They will surely be tough ones. [...]
The pound has already plunged. If it stays low, which is likely, that might cushion the effect on output, at least in the medium term. But the unavoidable uncertainty will last for years, not months, and is likely to destabilise asset markets repeatedly. If the pound’s fall generates a short-term jump in inflation, so be it: the Bank of England can ignore that. But the loss of confidence in the UK might be so severe, particularly given the size of the UK’s current account deficit, that the UK authorities cannot manage it. If so, sizeable foreign support might be needed. Will it arrive?
George Osborne’s fiscal warnings were not altogether foolish. The provinces will have to learn, possibly soon, what the likely loss of economic dynamism means for the tax revenues on which they depend. An emergency Budget is unnecessary. But it is probable that the structural, not just the cyclical, fiscal position has now deteriorated. If so, that will surely demand a fiscal tightening at some point.
The UK economy is going to be reconfigured. Those businesses that have set up in the UK to serve the EU market must reconsider their position. The City’s role in trading in euro-denominated assets will be undermined. Manufacturers will also have to consider how to readjust their productive capacity. Many will relocate. Businesses who depend on their ability to employ European nationals freely will have to reshape operations. Many will want to move inside the EU single market. Such decisions will not have to be made at once. But they will drive down investment now. In economic life, the future is always, to an extent, here today.
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