Distinguishing between risk and uncertainty—two concepts dating back to economist Frank Knight (1921)—has become popular in financial policy analyses in the aftermath of the global financial crisis of 2007-09. Risk refers to all those possible futures whose probabilities can be estimated, put in numbers, the “known unknowns.” Uncertainty, on the other hand, refers to the future fleeing our models, vague sentiments rather than numbers, the “unknown unknowns.” Addressing uncertainty has helped to make sense of ever-evolving financial markets—and the concept can be equally applied to the realm of transatlantic politics.
Craving for certainty was high before Britain’s leave referendum on June 23, 2016. In light of inconsistent outcomes of on- and offline surveys, the insider tip had been to rely on the odds of London’s betting shops. Bettors would get their information right, it was said, because bettors had skin in the game. The odds favored “remain” until referendum day, but the Brexit vote went through, nonetheless. The financial and economic uncertainty in the wake of the vote was fought by decisive central bank action, and equally by hopes for a dampened splitting of the European market—or was it necessary to split at all?, some asked. As it begins to dawn on experts, publics, and politicians on both sides of the Channel, there will be no “soft Brexit,” there will be no “all the same but for the name.” What will be remains uncertain.
What goes for referenda, goes for elections: The 2016 U.S. presidential election is weeks away, the French and German equivalents next year just around the corner. While settings surely differ, all three elections share the possibility of severely consequential outcomes. For long, elections in North America and Europe focused arguably more on domestic distributional issues; today, the pillars of transatlantic cooperation are at stake. Common financial regulatory reform efforts waned over the years and trade negotiations face unparalleled roadblocks—recently, the uncertainty spread even to the realm of security policy and NATO (presumably representing an electoral outburst, not a serious challenge).
Furthermore, the notion of “new normal” itself emerges from a realm of uncertainty. Describing unprecedented macroeconomic conditions after the financial crisis, the term gives a name to the current status quo forcing advanced markets’ central banks to lower lending rates close to, or even below, zero percent. Are these conditions more cyclical, and consolidated fiscal actions could presumably counteract this period of secular stagnation? Or are they indeed structural, in view of aging societies and falling productivity rates, and thus truly resemble a threshold to a new age? The economic discussion remains inconclusive—the empirical reality is uncertain.
U.S. colleagues of mine dread the never-ending 2016 elections; each week opens with another mind- and certainty-blowing revelation. If only it were November 9, 2016, they say, then at least this gruesome uncertainty would be settled. In view of the countless flaring hot spots out there, one must assume: after uncertainty will be before uncertainty. Uncertainty has become the new normal across the Atlantic.
Mr. Vincent Dreher is a Research Associate at the Center for International Political Economy at the Free University Berlin. He is a participant in AICGS’ project “A German-American Dialogue of the Next Generation: Global Responsibility, Joint Engagement.”
This blog post is sponsored by the Transatlantik-Programm der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministeriums für Wirtschaft und Energie (BMWi).