Over this past week, the British pound experienced another major tumble of about 7 percent. It was a knee-jerk reaction as markets woke up to reality and Britain’s Prime Minister Theresa May began laying out the path she envisioned for legally pushing Britain’s divorce with the European Union.
May took a “hard” Brexit stance that the market felt would do more damage to the UK economy than good.
Immigration control was brought to the forefront, with strict control of the UK’s borders as a priority, and trade was sacrificed as May spoke of Britain giving up preferential access to the EU single market because she wanted the UK to be a “fully independent, sovereign country.”
To put a nail in the coffin, she originally wanted Article 50 of the Lisbon Treaty (which legally starts the Brexit process) to be triggered by next March – without a debate in Parliament.
Clearly, markets were expecting a “softer” Brexit process, with Britain possibly retaining some trade privileges with the EU. It seemed surprising that the exact democratic process that the British people voted for was actually ignored.
The following day, pro-Europe Tories persuaded Prime Minister May to moderate her stance. She now says she will allow Parliament to debate the Brexit negotiations. This eased the pound’s tumble a bit, with more than a 1.2 percent one-day rally, but some damage had already been done.
These are the problems that the financial markets recognize in a “hard” Brexit:
- Nationalistic immigration laws may force the departure of the rich, skilled foreign labor force that Britain’s economy has heavily relied on for many years. This includes the financial industry – some banks are already starting to pack their bags.
- Britain currently trades with 50 countries, with half of its trade coming from Europe. New trade agreements cannot be negotiated until two years after Article 50 is triggered. With Britain’s trade position at a standstill by 2019, their already huge current account deficit – one of the biggest in the world – may become even larger, putting further downward pressure on the pound.
- Completely giving up tariff-free access to the single market means that trade terms would be widely less favorable to the UK economy. This would damage UK exporters.
- Britain’s “divorce bill” from the EU, which settles shared payment liabilities, is as much as €20 billion. British taxpayers have to pay this, which could choke future consumer spending.
My View: Back in June, the Brexit proponents’ intention was to take control of their country and become fully independent from a political union. While this ideological stance can be respected, it can also be hard to realize if the country’s grip on its economy and financial system is lost. This reality can be a reminder for us when we make critical decisions here in the U.S.
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