Why Brexit is so much more problematic than the financial crisis of 2008

An interesting thread by David Hayward [@SimeonStylites] on Twitter today compared the severity of the crisis engulfing us with Brexit to the financial crisis of 2008.  Although the economic damage has been so far less, and more slow-moving, in may ways I think the difficulties we face now have the potential to be much worse.

For starters, during the financial crisis we had governments that were coherent entities and able to respond to events as they unfolded.  At present, both the opposition and the government cleave between more than one set of leave and remain factions.  No faction has supremacy.  Theresa May is to a large extent impotent to respond.  Conceivably, if the economic damage mounts as the end of the Article 50 period approaches, factions will start to unify around a course of action.  But this is by no means clear at present.

Second, during the crisis there was a basic consensus around a problem, and a set of solutions, and a reasonable degree of truth-telling about the issues.  Regulation of the financial sector had been too lax.  Risks had been allowed to build up in the financial system.  Ailing institutions had to be supported or resolved.  In future, regulation had to be tighter and risk monitoring more careful, extensive and intrusive.  We also needed counter-cyclical monetary and fiscal policy.  There were disagreements, and some telling of untruths about the necessary degree of counter-cyclicality of the latter.

During the Brexit process, by contrast, there has been a shortage of truth-telling, both about the costs and benefits of Brexit, and about important procedural matters [like what could and could not be renegotiated now;  conflation of the substantive aspects of the withdrawal agreement and the political declaration;  the ‘bollocks’ of Labour’s ‘six tests’;  what ‘No Deal’ means].  Technocratic assessments of the ways forward have been successfully tainted as, in Lord King’s words, a ‘project’ ‘designed to scare the country into voting Remain.’

Even absent the strategic incoherence caused by the factional struggle ongoing, therefore, the lack of truth-telling bodes ill for arriving at rational decisions to take us forward and improve matters from here on.

Part of the difficulty rests with the subject matter.  Although I caricature somewhat, during the financial crisis, there seemed a basic acceptance of the idea that although the authorities had failed us in managing the financial system, this was a subject that the authorities’ delegated experts were best placed to fix.  When the solution of tighter regulation was proposed, there was no disputing it.  Not so now.  Economic and technocratic aspects of the costs and benefits of leaving the EU have been relegated relative to other features, like national and cultural identity, on which it is not appropriate to delegate to decision-making elites.  And since the nation at large is divided on these questions, this adds to the paralysis.

As many others have remarked, furthermore, the financial crisis was not a constitutional one, even if it may ultimately have been implicated in today’s difficulties, which are constitutional.  Back then, given the issues at hand, the processes for decided were settled.  Not so now.

A final aspect aggravating the situation is the fact that, unlike during the financial crisis, there is another strategic entity [in this case the EU] greatly limiting our choice set.  The necessity of keeping open the border between Ireland and Northern Ireland, under current and foreseeable technology, pins us in a customs union with the EU, and in large degree pins us in circumstances of regulatory alignment with them.  The alternative to acceding to this is a potentially disorderly exit to very disadvantageous trading arrangements.   During the financial crisis the government was freer to choose.  It might have found itself similarly paralysed if some unstoppable external force had dictated that the UK either choose narrow banks or entirely unregulated banks, with no intermediate solutions allowed.

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