Brexit from London

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On June 25th, while in London, I had the pleasure of joining David Asman on Fox News to discuss the meaning of Thursday’s vote to leave the European Union. The view of Brexit from London has been stunning. All those who underestimated the British sense of self-confidence and desire for sovereignty or who were over-confident in the betting odds giving only a 25% change of leaving, are now paying dearly for that confidence. The shock amongst most in the financial sector in London is palatable, with the lights burning bright in most offices all weekend, as portfolio managers, investment bankers and traders work to get their arms around just what this means for them and their clients.

What this means for the US

Pundits in the US are trying to calm markets buy assuring them that this won’t over overly impactful for the US as the UK, the fifth largest economy in the world, only accounts for roughly 3.8% of world GDP, according to estimates for 2016 from the International Monetary Fund, versus the United States, which accounts for around 25.4%. But that misses that this is not just about the UK, but rather about the future viability and success of the European Union, whose GDP is nearly the same as the US. With the tumultuous and highly contentious presidential election cycle in the US,  about 50% of the world’s economy is now experiencing a high level of political uncertainty within the context of an already weak global economy. That is a strong headwind to growth for everyone.

The most immediate impact of Brexit for the US likely a continued increase in the strength of the dollar, which is great for American tourists abroad, but a challenge for American multinational firms that export their products and/or services. The strong dollar will also impact emerging markets that have a good deal of debt denominated in U.S. dollars, acting as a headwind to those economies as that debt becomes more expensive. The uncertainty of how this all will pan out means transactions and contracts between companies in the European Union and with companies outside of the union may be put on hold or cancelled entirely – more headwinds to growth.

Many today are harshly criticizing the Brexit leadership for not having a clear plan for what to do if their side actually won, but the reality is that kind of a plan was literally impossible. A plan would have required having some clarity on how agreements would be worked out with, primarily, other European nations. The leadership of the rest of the European Union had every reason to assure the UK that, “Fine, you want to leave us! Then we will refuse to play with you anymore!” as they desperately wanted the UK to stay. But now that the decision has been made, and after time soothes the many bruised egos a bit, real conversations can begin.

Impact on European Union

The bigger issue here is that the European Union has not delivered on its promises to all who joined. Many countries are suffering in ways that were not expected, with internal tensions rising with every passing year of weak economic growth, high unemployment (particular among the youth) and supercilious finger-wagging from the stronger nations at the weaker ones. As hope for a recovery fades, desperation is rising and the belief that those in Brussels are a cure is shifting to suspicion that they are instead the disease. One of the greatest lessons of political history from the dawn of nations is that the further the decision-makers sit from those affected by the decisions, the poorer the quality of the decision. History shows that the more people that are forced into one size-fits-all solutions, the poorer the end result, often times with dramatic actions to break those bonds.

Those countries in the European Union that have been struggling to reignite their economies post-financial crisis will be closely watching as the events unfold for the UK, placing a lot of pressure on everyone involved. European leaders find themselves in a catch 22. On the one hand, they will be better off having strong trade relationships with the UK, but on the other hand they don’t want other nations that may be contemplating their own exit to see the UK benefiting from this move. Expect more threats, grandstanding and predictions of doom and gloom before this breakup drops from the headlines around the world.

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