Markets don’t like uncertainty. And Britain’s vote last week to leave the European Union, a global economic earthquake, has left layer upon layer upon layer of uncertainty in its wake.
How exactly does Britain go about disengaging from the European Union, at what pace, and at what cost to its economy? Politically, the country is in disarray. Prime Minister David Cameron is a lame-duck leader, and the head of the opposition Labour Party is fighting off a rebellion from within his party. Who will emerge to assume the leadership of this important U.S. ally, and what direction will he take?
Will the United Kingdom hold together, or will Scotland, which voted overwhelmingly to remain in the EU, go its separate way?
What will happen to the European Union if other strong economies follow Britain’s lead and decide that they’ve had enough with letting Brussels decide its policies on trade and immigration and paying the bills of failed economies like that of Greece?
Discontent in France, the Netherlands, Denmark and Finland runs deep. Voters want a chance to reconsider whether remaining in the European Union really serves their best interests. Britain’s declaration of independence could easily set off a chain reaction that causes the implosion of the EU over a period of decades.
And what does it all mean to the United States, which is being asked to choose between its close ties with Britain and its close ties with the European Union? What will it mean to the U.S. economy? To the dollar? The banking system? Exports? Jobs?
Uncertainty, political and economic, is devastating to economic growth. Factory owners, unsure of what to expect, hold on to their cash, instead of investing in new equipment. They fire workers at the first sign that sales are slowing and are very hesitant to hire when things pick up. Workers, fearing unemployment, hold off on purchases, which in turn slows sales and causes more layoffs, leading to recession.
To prevent this, it’s incumbent upon the parties to move quickly on Brexit, to invoke Article 50 in the Lisbon Treaty, the sooner the better. The leaders of Britain and the European Union, together with the United States and others, must work together to bring about a smooth transition to a post-U.K. European Union that is good for both sides.
As Secretary of State John Kerry said this week in Rome, “The most important thing is that all of us as leaders work together to provide as much continuity, as much stability, as much certainty as possible in order for the marketplace to understand that there are ways to minimize disruption, there are ways to smartly move ahead in order to protect the values and interests that we share in common.”
Kerry’s advice requires the leaders of the European Union to resist the temptation to punish Britain, out of peevishness or a desire to turn it into an example for others who are thinking of following suit. We are talking about huge economies, with profound impact on hundreds of millions of people. The responsibility on all sides is to proceed responsibly and expeditiously in carrying out the split in a fair and timely fashion.
Only this can calm the jitters that are impacting so severely on markets and investors everywhere.
Finally, the challenge of the coming months and years goes beyond ensuring that the British-EU divorce is amicable, and that neither of the parties suffers devastating economic harm. There is a need to understand the underlying problems that led to the current crisis and recognize that they run deep and threaten economies everywhere, including the United States.
Alan Greenspan, the long-time former chairman of the U.S. Federal Reserve Bank, is concerned that the Brexit vote is ushering in a period that is even worse than the darkest days of October 1987, when the Dow dropped 23 percent. He calls it the worst crisis he’s seen in his long years of public service.
At the heart of the problem, he says — and this is true in the United States and throughout Europe — is less productivity in the workplace, less savings, more entitlements.
It is a moral and economic imperative to turn the clock back to a work ethic that placed an emphasis on pride of workmanship, on savings, on delayed gratification. A time when people bought only after they saved enough money to afford it — not impulsively, with a credit card.
There was a time when there was more giving than taking, when it was honorable to go without, when the needs of others came first, or at least featured prominently.
Abandoning these values has ultimately led to the current crisis. Embracing them anew is the key to climbing out of it.