The Brexit debate is an endless source of mirth for anyone with a dark sense of humour. My favourite quote is from Michael Gove, Britain’s environment secretary.

Just before the EU referendum in June last year, Gove, then justice secretary in David Cameron’s government, dismissed the all-but-unanimous view of economists and others that a decision to leave the EU would deeply damage the British economy. “People in this country have had enough of experts,” Gove testily explained, referring to “experts from organisations with acronyms, saying they know what is best and getting it consistently wrong”.

The early post-referendum evidence suggested, to the surprise of many – or at least to many of the experts – that Gove was right and they were wrong. There was in fact no immediate recession in the UK after the vote for Brexit; indeed, there was not even a slowdown in growth.



To explain this, observers pointed to the nimble response of the Bank of England, which cut interest rates to prevent any softening of demand. They pointed to the big post-referendum depreciation of the pound, which promised to make British exports more competitive and offset any problems with the transition to a new trade regime. They suggested a UK freed of burdensome EU regulations could offer a more business-friendly environment and lower corporate tax rates, and thus become a magnet for foreign investment.

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Most provocatively, they questioned predictions that the uncertainty surrounding Brexit would have a profoundly adverse impact on economic performance. Economists cannot measure uncertainty directly, they reminded us, while proxies, like the frequency with which the term appears in the financial press, do a poor job of capturing its effects.

Indeed, we economists have had little success at reliably predicting when and why uncertainty arises. And there is little agreement on the severity of its impact. Maybe we would be better off placing less weight on the effects of uncertainty when making forecasts in general, and in the case of Brexit in particular.

But this view looks rather less compelling with the passage of a couple of additional quarters. British consumer confidence is down, with spending in the second quarter of this year falling to its lowest level in four years. New car sales have been down for four consecutive months. The Bank forecasts a whopping 20% decline in business investment in the coming years; Brexit’s champions predicted the opposite.

The drop in confidence, some might object, reflects an inconclusive general election and a hung parliament, not the Brexit vote. Or worsening conditions can be blamed on the government’s less-than-stellar negotiating strategy and the appearance that it is entering discussions with its EU partners unprepared.

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But the inconclusive election reflects the divisions within the Conservative and Labour parties on the Brexit issue. The prime minister, Theresa May, opposed Brexit before the referendum but embraces it as the occupant of 10 Downing Street. The Labour opposition under Jeremy Corbyn officially opposes Brexit but seems to derive peculiar satisfaction from the fact that it is proceeding.

Some argue that if the government adopted a more coherent negotiating strategy the damage would be less. But the fact is that there is no coherent negotiating strategy. May’s objectives – restriction of immigration from the EU while maintaining full access to the European single market – are fundamentally incompatible.

The only surprise is that it took so long for the consequences to materialise. It evidently took more time than expected for the implications to sink in – to understand that “Brexit means Brexit,” as May’s pithy tautology put it. It took time to realise that there would be no smooth break with the EU and that negotiations would not be wrapped up in two years. There might be no free-trade agreement, no passporting rights for British banks seeking to do business in the EU, and not even an agreement on landing rights for British aircraft on the continent.

And now the chickens are coming home to roost with a vengeance (if chickens could be vengeful). Consumers, seeing the pound depreciate, front-loaded their spending in the second half of last year, because they understood that import prices would rise. Having incurred additional debt, they are in no position to continue spending at that earlier pace.

Sterling’s substantial depreciation, moreover, augurs a significant rise in inflation, which means the Bank will have to start raising interest rates sooner rather than later. The consequences for growth will not be pretty. The Bank will no longer be the Brexiter’s friend.



What the late, great MIT economist Rudi Dornbusch – that most expert of experts – said about Mexico’s peso crisis in the 1990s applies to the damage from Brexit as well. A crisis, he noted, “takes a much longer time coming than you think, and then it happens much faster than you would have thought”.

• Barry Eichengreen is professor of economics at the University of California, Berkeley; Pitt professor of American history and institutions at the University of Cambridge; and a former senior policy adviser at the IMF.