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Why Brexit's 'disastrous economic consequences' could be on hold

Nigel Farage
Frederick Florin | AFP | Getty Images
Nigel Farage

We know who won the Brexit vote on June 23rd: the Leave camp. But if we were to run a contest of whose side's predictions were the most accurate, I think the clear winner would be the Stay camp.

First, there is the issue of cost savings, one of the Leave camp's main arguments: the reported £350 million that the UK gives to the EU on a weekly basis and which would be transferred to the UK's health system. Soon after the referendum result was announced, Nigel Farage, leader of the Independence Party, admitted on Good Morning Britain that it was a mistake for the Leave campaign to make this inaccurate claim.

By contrast, the Stay camp's prediction of trouble in the banking and real-estate sectors largely has been borne out: bank stocks are down by 20 to 30 percent; and only today we heard that the third UK property fund halted withdrawals. More generally, the sentiment that uncertainly and volatility are on the rise suggests that the Stay camp's dire economic predictions were not too far off the mark.

This is the background against which we should analyze the news of Boris Johnson and Nigel Farage "exit" decisions. Boris decided he will not throw his hat into the Tory-party-leadership ring, whereas Farage resigned as head of the Independence Party. I wouldn't necessarily agree with EU President Jean-Claude Juncker, who called Johnson and Farage "unpatriotic quitters;" but they are certainly hedging their bets: now that reality is hitting hard, the responsibility of taking Britain through a difficult and highly uncertain process is not something they are attracted to.

The "Borexit" and "Farexit" announcements also reflect a general sentiment of "second thoughts" among a significant share of the Leave camp. Looking over social networks, one finds multiple entries of Brexit voters who thought the referendum was just going to be a sign of protest; or voters who think they voted based on false claims (e.g., the increase in NHS funding). Some tweeters are even hoping that a second referendum will take place where they will vote on a precise set of terms for a UK-EU divorce.

There is no shortage of UK leaders willing to pull the Article-50 trigger and lead their country in the Brexit negotiations. But given the current cold-feet environment and the Johnson and Farage decisions, the negotiating power of whoever steps up is likely to be considerably smaller than expected, both within the UK and with respect to the European Union.

For all of these reasons, I would not be surprised if, in the next few months, the new leader of the Conservative Party were to find a nice face-saving strategy to escape the Brexit process, or at least postpone it sine die. In some way, that might be a win-win outcome: supporters of the Brexit vote would have made their protest loud and clear, whereas the rest of Britain — and the rest of the world — would be saved the disastrous economic consequences of a costly divorce.

Commentary by Luis Cabral, the Paganelli-Bull Professor of Economics and International Business, and chair of the Department of Economics at New York University's Stern School of Business.

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