James, Brunnermeier, and Redding react to BREXIT
The British people voted yesterday to exit the European Union. The outcome, 52% to leave versus 48% to remain, has shocked many - including members of Princeton faculty. Here are the reactions of three faculty members to this historic event.
Harold James, Claude and Lore Kelly Professor of European Studies and Professor of History and International Affairs, said that he “did not expect it [Brexit], though deep down feared this outcome.” In his view, the decision to leave will have dire consequences for the UK, the European Union and the global economy. He said that it will heighten tensions within the UK as Scotland and Northern Ireland did not vote for Brexit and may not feel bound by the vote. It will produced a financial shock that, like Lehman in 2008, will “highlight weaknesses and vulnerabilities elsewhere in the world, including the Eurozone.” James also feared a domino effect should voters in Sweden, the Netherlands and Denmark take up British demands and positions. “That could indeed destroy the EU, and a destruction or even a weakening of Europe would make the whole world more uncertain and much more unstable.”
Markus Brunnermeier, Director of the Bendheim Center for Finance, urged for unity of the remaining EU members in their efforts to rescue the integration project. He said “It is an historical moment for the European integration process that needs to be handled with care. I hope that the German saying “nothing is eaten as hot as it is cooked” holds true. The remaining countries in Europe now have to show more unity in order to reverse the momentum.“
Brunnermeier remarked that Central Bankers had to act quickly to ensure that markets remained orderly and to reduce unnecessary market volatility. He pointed to the actions of the Bank of England that had made 250 billion pounds available for emergency interventions. And noted that capital was already flying to safety forcing the National Bank of Switzerland to lean against the incoming flows. Looking into the future, the Bank of England has a hard task ahead, he said, it will not be easy to raise rates despite the inflationary pressures that will accompany the devaluation of the British pound. Despite challenging times ahead, Brunnermeier is hopeful that this “wake-up call would lead to positive responses.”
Steve Redding, Harold T. Shapiro ’64 Professor in Economics, expressed the general sentiment that “it’s a sad day for the United Kingdom and Europe.” He noted that most economic studies predict negative long-term effects on GDP through reduced international trade, foreign direct investment and financial activity in the City of London of the order of a couple of percentage points of GDP. The long-term consequences of Brexit will depend heavily on the actual deal that the United Kingdom is able to negotiate with the remaining EU members. In the short-run, he said, the resulting increase in political and economic uncertainty is likely to depress levels of economic activity and that the reaction of financial markets so far is in line with these predictions.
James and Brunnermeier together with Jean-Pierre Landau are the authors of the book “The Euro and the Battle of Ideas” scheduled for release later this year.