Editor’s Note: On June 23, the United Kingdom voted to leave the European Union. The decision came as a shock to many economists, including our own Paul Solman. “[T]hese are millions upon millions of people who were voting against their pocketbooks,” Paul wrote as the results rolled in on the 24th.
On the day of the Brexit vote, Mervyn King, the former Bank of England governor who oversaw the ‘08 financial crisis, gave Paul a tour of London, during which he made his case that banks have yet to reform themselves eight years after the crisis. That concern is central to King’s new book, “The End of Alchemy: Money, Banking, and the Future of the Global Economy.” PBS NewsHour spoke to King after the Brexit results and asked how Britain’s exit from the UK will affect the world banking system and the global economy.
Read what King has to say below, and for more on the topic, tune in to tonight’s Making Sen$e, which airs every Thursday on the PBS NewsHour. The following text has been edited for clarity and length.
— Kristen Doerer, Making Sen$e Editor
Is it a serious blow to the UK economy? If so, how serious?
Well, I think it is momentous in terms of a number of political careers and certainly in terms of the political structure of this country. But I think in terms of the underlying economy, as time goes by, we’ll start to see that maybe the impact of this is a lot less than really either side in the campaign claimed to be the case. When people and countries want to trade with each other, they find ways to do so. And I’m sure that will happen now.
In the short run, there’ll be certainly some impact on total spending, because the sheer uncertainty of the situation — political but to a certain extent economic — means that investment is likely to be postponed for a while, and that will slow down the growth of the economy in the short run. But I’m not at all convinced that this will have an enormous impact on the economy in the longer run, just as joining the European Union in the 1970s didn’t, I think, with the benefit of hindsight, have anywhere near the same impact on either the level or growth of our national income as either side in that campaign then held out to be the case. Economists have a habit of being pretty resilient in the longer run.
Will it hurt the UK or the European Union more?
In my book, “The End of Alchemy,” one of the chapters in that book explains why, in essence, the impact of this is likely to be more severe on countries in the euro area than it is on the United Kingdom itself. Because I think what’s been thrown into some uncertainty now is the political commitment of countries in the European Union to move sufficiently fast towards a political union to make the euro area a credible monetary union at present.
In how much danger is the world banking system now after the Brexit vote?
Well, there are certainly risks to the world banking system. But I don’t think they come primarily from the Brexit vote. I think they come from the state of the world economy as it was before the vote and as it remains after the vote. Namely, deeply unbalanced, with serious problems in all the major economies. We’re all suffering from weak demand, and there’s no easy way for any one country to get out of this. That is the major threat to the banking system, because banks are very dependent of the success of the economies in which they operate.
We didn’t talk much about the Brexit vote because actually the Brexit vote isn’t germane to the fundamental challenges dealing with our banking system and putting it on a sound footing. It’s as much a political event as it is an event which will influence our economies in the longer run. We were talking as we walked around London about the really important long-run issues affecting our economies.
I think if you look 10 years ahead and ask the question, “What is the chance of a serious problem in the next 10 years?” the Brexit vote wouldn’t make very much difference at all. I think there’s a willingness, not just in Europe but all around the world, to make sure that we cope with this and put in place new trade deals. So I think the risks to the banking system, which are real, come still from the fragilities of banks around the world, particularly in the euro area and in China but in other parts of the world as well. But these don’t stem from Brexit. They stem from the problems facing the world economies in a much wider and deeper sense.