Lesson from Brexit: unthinkable isn’t unpriceable

June 24, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Britain’s decision to leave the European Union is an unwelcome blow to an already-fragile world economy. The real impact, however, is psychological. Companies and investors now have to reconsider other once-unthinkable risks.

Most of the economic costs of untangling four decades of integration will fall on Britain. Still, this is a shock the rest of the world did not need. Morgan Stanley economists estimate Brexit could knock 0.3 percentage points off global growth in 2017. A soaring dollar puts renewed strain on emerging-market borrowers whose debts are denominated in the U.S. currency – and may prompt the Federal Reserve to delay its next hike in interest rates. The Japanese yen also rose, undermining Prime Minister Shinzo Abe’s economic revival plans.

Despite the gyrations, though, it would be surprising if Brexit led to financial calamity. Following the truly global crisis of 2008, central banks have swap lines and other tools to minimise market disruptions. Should action be necessary, policymakers convening in the Swiss town of Basel this weekend are well-placed to coordinate it.

The lasting damage may be to old ways of thinking. Until a few weeks ago, it seemed hard to believe that the majority of voters in Britain would overrule the country’s political and financial establishment. The repercussions of that decision will affect trade and capital flows as companies and investors rethink the United Kingdom’s long-term stability.

The reverberations will be felt elsewhere too. Brexit will embolden populist parties across Europe, raising other ignored fears. Marine Le Pen’s chance of winning the French presidency next year, for example, suddenly seems less remote. A victory for the far right in France would in turn have profound consequences for the future of the EU, and the single currency.

Then there’s Donald Trump. According to online gambling site Betfair, the Republican nominee has a less than 25 percent chance of winning the U.S. presidential election in November. But those are about the odds that the same site attached to a “Leave” vote in the UK referendum a few days ago. Britain’s upheaval is a reminder that other shocks are also possible.

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