Financial markets place bets
on political outcomes, such as how or even whether the E.U. state of Britain
would secede from the Union. Leading up to the March, 29, 2019 secession date,
the shifting odds moved stock, bond and foreign exchange markets, especially
given the instability in the state government in general and more particularly
on reaching a deal with the federal government in Brussels on just how the
state would secede. Of course, the political
magnitude of a state seceding from a Union such as the E.U. or U.S. is not
captured by how markets anticipate the risks. To reduce secession to the end of
a trade treaty does the secession and the Union itself a grave injustice. More
generally, political changes do not reduce to their economic anticipations or
effects. Nor is it wise to assess the political viability of future political
events by the economic assessments in financial markets.
On January 16, 2019, for
example, Capital Economics, a research group in London, placed a 70%
probability that Britain would find a way to “fudge and delay” its secession
past the deadline, as per the E.U., Article 50, of March 29, 2019.[1]
To investors, the implications that the British pound would probably rise and
the stocks would likely surge are of value. This does not capture, however, the
political downside of a government
dealing with such an important matter by “fudge and delay.” In other words,
what such a way of handling something as important as seceding from a union in
which the states are semi-sovereign means in terms of governance is not
captured by the 70% projected likelihood.
March 29, 2019 remained “a
meaningful deadline” even as British “lawmakers were unable to agree on a
course of action.”[2]
This reflects terribly not just on that government, but democracy itself. The establishment
of an ordered means by which a state could secede from the E.U. represents a
significant advance over the U.S., which has left states with one option—secession
by force. Yet the British government mishandled the matter of seceding
from the E.U. after the state invoked the secession process at the federal
level. This undermined the E.U.’s prudent advance over the U.S. in introducing a flexible constitutional (or "basic law") way for states to secede without the need to resort to force.
The probability of somewhere
below 20% but above zero that the secession would occur without any negotiated
agreement represents a more dire economic prospect. In November, 2018, the Bank
of England projected “a major shock that could subtract more than 10 percent
from Britain’s gross domestic product” from this low-probability outcome.[3]
Yet even such a remarkable economic effect
on the state would not capture the severity of the political failure. Secession from a union is not just ending a
trade treaty; much more than the economic aspect is involved. At the very
least, the failure of the negotiations between the state and federal government
would point to a major weakness in the E.U.’s Article 50, and thus to a
political need to alter it. In short, secession should not depend on the vagaries
of negotiation. After all, it had broken down between U.S. President Lincoln and the state of South Carolina in 1861.
Another possible scenario facing Britain before the March deadline was that the state would not secede after all. "Goldman placed a 40 percent probability on the chance that Britain, in the end, would not leave the European Union at all, which would be accomplished through another referendum repudiating the original vote."[4] Because the original referendum had been billed as the decision point on the question, to go back on that decision just because it was difficult for the British government to implement betrays democracy itself, for the people had spoken with the understanding that it would be final. To say, "Oh, actually it wasn't" would be bad form. That the people had spoken, each side playing by the same rule (i.e., the question would be settled by that referendum), is something that government officials and legislators should--from a democratic standpoint--have fully respected from the day of the referendum. That the losing side on the question would set up another referendum would undermine democracy because even those decisions billed as determinative could not be taken as such. Goldman's 40% probability can thus be read as saying something about democracy in Britain and democracy itself, and we can't get this merely from the way the announcement of the 40% probability affected financial markets and individual investors.
See Essays on the E.U. Political Economy and Two Federal Empires, both available at Amazon.
Another possible scenario facing Britain before the March deadline was that the state would not secede after all. "Goldman placed a 40 percent probability on the chance that Britain, in the end, would not leave the European Union at all, which would be accomplished through another referendum repudiating the original vote."[4] Because the original referendum had been billed as the decision point on the question, to go back on that decision just because it was difficult for the British government to implement betrays democracy itself, for the people had spoken with the understanding that it would be final. To say, "Oh, actually it wasn't" would be bad form. That the people had spoken, each side playing by the same rule (i.e., the question would be settled by that referendum), is something that government officials and legislators should--from a democratic standpoint--have fully respected from the day of the referendum. That the losing side on the question would set up another referendum would undermine democracy because even those decisions billed as determinative could not be taken as such. Goldman's 40% probability can thus be read as saying something about democracy in Britain and democracy itself, and we can't get this merely from the way the announcement of the 40% probability affected financial markets and individual investors.
See Essays on the E.U. Political Economy and Two Federal Empires, both available at Amazon.
1. Jeff Sommer, “Governments
Malfunction and the Markets Place Their Bets,” The New York Times, January 25, 2019.
2. Ibid.
3. Ibid.
4. Ibid.
4. Ibid.
