Britain’s Tarnished Sterling: A Global Warning for Theresa May on Brexit

At 7:07 last Friday in Hong Kong, the British pound suddenly plummeted: In the next two minutes it fell 6.1 percent, to $1.18, its lowest level since 1985. In the next half hour, it regained most of the loss, ending at $1.24 when the clock struck 7:39.

A wild ride, you might say, but all’s well that ends well. And you would be wrong.

There are two things to know about the pound’s out-of-nowhere “flash crash” at the end of last week. First, British financial markets are going to resemble the weather: unpredictable and more violent.

Related: Theresa May’s Biggest Challenge: Her Party’s Division on Brexit

Second, we’re all invested in Britain now as its impending exit from the European Union deepens global market uncertainty.

The hope is that Prime Minister Theresa May and her cabinet will be able to engineer the Brexit with the intelligence and skill required to avoid a god-awful mess over the next few years.

But a few short months into May’s residence at 10 Downing Street does not inspire confidence.

Philip Hammond, David Cameron’s foreign secretary and now May’s chancellor of the exchequer, put this uncertainty right on the table last Friday as he responded to the sterling’s sleigh ride. “The word I would use is turbulence,” he said helpfully—adding that “fiscal uncertainty” will be par golf over the next five years.

Since May was named to replace Cameron when the latter fell on his sword after Britons voted last summer to leave the EU, we haven’t been told much about what’s coming next. “Brexit means Brexit, and we will make a success of it,” May famously declared when the Conservative Party named her Cameron’s successor in July.

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At the Tories’ annual conference in Birmingham October 2, May said her government would begin negotiating Britain’s exit next March. Last week’s flash crash followed this first disclosure of May’s plans by five days.

“The prime minister has removed one big question—on timing—but has accelerated an urgent need for answers on others,” Carolyn Fairbairn who heads the Confederation of British Industry said immediately after May spoke. “Businesses cannot continue to operate in the dark in other areas.”

Exactly. Maybe there is a lot of conflict within the Tory leadership — “We’re still formulating our strategy,” Hammond said the other day — but British business and everyone else needs to know more, and soon, about the May government’s thinking.

The biggest questions now hanging over the Brexit process are two. One, what kind of outcome is May proposing? Two, what kind of Britain does May want to govern after the divisive, austerity-obsessed Cameron era?

Related: Hammond Vows to Protect UK Economy During Brexit, Sterling Falls

Let’s look briefly at these, one at a time.

There are two ways to manage a divorce from the EU. In a “hard exit,” everything’s off, and Britain will retain no more privileges in its relations with the single market than, say, Brazil or South Korea. The “truly independent, sovereign United Kingdom” May spoke of in Birmingham will be… truly independent.

A “soft exit” would leave Britain with a kind of “favored nation” status within the EU framework. May insists, “It’s not going to be a ‘Norway model,’ it’s not going to be a ‘Switzerland model,’” referring to two nations with privileges in the EU’s single market but not all of a member’s obligations.

In fact, that’s precisely what a soft exit would look like—and what the CBI and many other British organizations now vigorously demand. Fine, but there’s a catch: This may not be what core EU members have in mind any more if they ever did.

François Hollande spoke at a dinner in Paris last week, a day before the flash crash. Jean–Claude Juncker, who heads the EU Commission, and Michel Barnier, the union’s Brexit negotiator, were also at the dinner and heard Hollande reject the idea of a soft exit.

Related: Threat of ‘Hard Brexit’ Pulls Down Wall Street

“The U.K. has decided to do a Brexit; I believe even a hard Brexit. Well, then, we must go all the way through the UK’s willingness to leave the EU. We have to have this firmness. If not, we would jeopardize the fundamental principles of the EU. Other countries would want to leave the EU to get the supposed advantages without the obligations,” Hollande said.

May’s political strategy is similar at home. She stresses her desire to pull Britons together after the unpopular austerity policies that obsessed Cameron’s chancellor, George Osborne. May has consistently nodded ever so gently to her left in the name of inclusion—not quite satisfying working Britons, so far as one can make out, but freaking out the business community. This is part of what the CBI means when it demands “urgent answers.” What’s going on here, Madame Prime Minister?

It’s not clear what’s going on. The core question is whether the May government is going to acknowledge weak demand as Britain’s fundamental problem; Hammond, once again, is walking a line so fine one can’t even see it.

The day of the flash crash, Hammond point-blank denied there were any plans for a demand-inducing “fiscal splurge” on infrastructure projects, as other Conservative officials, notably George Freeman, who heads May’s policy team, have suggested.

That may be sound politics according to the Tories’ ideological catechism, but it’s bad economics. If May wants to unify Britain again, she might urge Hammond to read the International Monetary Fund’s latest World Economic Outlook, which predicts a lower global growth to 3.1 percent, from 3.4 percent.

That report came out three days before the flash crash. It’s titled, “Subdued Demand: Symptoms and Remedies.” Good reading, Chancellor.