Even once a new leader is chosen, that leader will either be a Brexiteer, in which case he or she will be at odds with a majority of Parliament — and therefore vulnerable to a vote of no confidence, which could trigger an early election. Alternatively, the new leader will be a Remainer, in which case he or she will be at odds with the outcome of a referendum in which fully 72 percent voted. Nor is the situation going to be stabilized by other political developments. There is talk that the Labour Party may seize this moment to defenestrate its leftist leader, Jeremy Corbyn. The Scottish National Party has already predicted a second referendum on independence from the United Kingdom.
There will be consequences for financial markets, both in Britain and abroad. Already, the British pound and the London stock market have been hammered, anticipating the recession that is likely to come. So-called “safe haven” currencies are rising: the Japanese yen, the Swiss franc, the U.S. dollar. For all these economies, stronger currencies mean weaker exports and lower inflation. Do not expect the Fed to tighten soon. In Japan, Prime Minister Shinzo Abe’s attempt to rescue his country from terminal stagnation has just suffered a mortal blow.
But the largest consequences will be for Europe — both for the reality and the idea. Britain’s vote will encourage populists elsewhere: Already, Euroskeptics in Sweden, France and the Netherlands have demanded a copycat referendum. Spain’s neo-Marxist far left is expected to win a quarter of the vote in Sunday’s election. Polls suggest that French voters are more skeptical of the E.U. even than British ones, a sentiment that will assist the far-right populist, Marine Le Pen, in next year’s presidential contest. Populist governments are already in power in Greece, Hungary and Poland. The fear that Europe’s cohesion is weakening could reignite economic turmoil in the euro zone. Government bonds in Spain and Italy look riskier now that the continent’s cohesion is in doubt.
In an ideal world, the Brexit shock would galvanize Europe into a muscular response. To borrow an analogy from the 2008 financial crisis, if Thursday’s vote was something of a “Lehman moment,” then we should all wish for the next steps to resemble the fast rescue of AIG and the passing of the TARP bailout plan — in other words, a determined commitment that no more dominoes should fall. But Europe’s problems are too deep, and its leadership too fragmented, for this vigorous response to appear probable.
The project of European integration can be thought of as three experiments in the management of globalization. The first is a triumph: The single market for trade in goods and services spurs competition and efficiencies in a bloc of more than 500 million people. The second experiment is a mixed story: The commitment to free movement for students, workers and retirees across 28 countries has expanded individual freedom and prosperity but is politically unpopular. Meanwhile Europe’s third experiment is a disaster. The creation of the euro, the shared currency now used by 19 E.U. countries, was quite simply a bridge too far.
But what is the way back? Once a country has given up its currency and denominated every contract in euros, the prospect of exit is too awful to contemplate. Greece has gone up to the brink on more than one occasion; each time it has decided not to jump. Yet if the euro’s dissolution would be prohibitively traumatic, the further integration required to sustain a common currency is equally daunting. Nations in the euro zone need to coordinate their taxing and spending. They must be prepared to transfer large chunks of federal revenue from rich regions to poorer ones — as happens within the United States. Given the Euroskepticism revealed by the Brexit vote, none of this is in the cards.