When the E.U. state of Britain held a vote in 2016 on
whether to secede from the union, the British currency plummeted. On the day of
the December 2019 statewide election in the U.K., that currency initially
jumped and held on the day after as official results confirmed that the
conservatives had won a majority and thus would be able to see the secession
through. I submit that uncertainty itself was a major factor in both swings,
and that the market put too much emphasis on the matter of uncertainty at the expense
of the substantive economic effects of secession.
According to The New York Times, the British pound
plummeted after the referendum vote in 2016 due to “agitation over the economic
and financial disruption that seemed to lie ahead.”[1]
Such disruption would be an interim matter, rather than ongoing, because a new
equilibrium would doubtless take hold. The agitation was thus about change, and
more specifically about the uncertainty that is in any change. Alternatively,
the drop in the currency could have been to analysts having determined that the
British economy would not be as strong after
the change. In other words, the drop could have been prompted by analyses
of the new equilibrium more so than the uncertainty during the change. I submit
that such a rationale would have been better, for it would have reflected
economic fundamentals rather than merely an aversion to change.
The state’s general election in December 2019 took place
after a long period of governmental stalemate on the matter of secession. Prime
Minister Boris Johnson had secured an agreement with federal officials on a
secession plan, but his own state legislature balked. The achievement of an
outright majority in the House of Commons in the election meant that Johnson’s
plan could finally be passed. The high probability of secession taking place at
the end of the next month (and with a trade deal) removed the uncertainty
concerning even whether the state would secede. According to Lee Hardman at
MUFG, the election outcome “gives you more clarity over the direction of
Brexit.”[2]
Clarity, rather than how the state’s economy would be post-secession, involves
a decrease of uncertainty.
To be sure, the governmental stalemate and the related
uncertainty had been difficult on British businesses. Some even moved their
headquarters to other states. That Johnson would be able to push his secession
deal through his legislature means that the market could anticipate even less
uncertainty. So it makes sense that the decrease in uncertainty would be a
factor in the currency markets. Even so, what about how the state’s economy
would be like after the transition? That the UK would secede with a deal
suggested that the state’s economy would not only suffer less uncertainty, but
also be stronger, with continuing trade with the E.U.’s states. How would the
UK economy look? This, I submit, is what the currency markets could (and
should) have reflected to a significant degree relative to the matter of
uncertainty and transition.
1. Amie Tsang and Matt Phillips, “Brexit
Once Meant a Weaker British Pound, But Not Anymore,” The New York Times, December 12, 2019.
2. Ibid.
