The British pound sterling provided an excellent proxy for the global economic mindset this week.
When trading resumed Monday morning in Asia – Sunday afternoon in the U.S. – the currency “gapped” lower, in trading jargon. Instead of smooth up or down trading, there was a sharp, sudden drop in the pound after markets got a hold of rumors and excerpts from British Prime Minister Theresa May’s speech regarding Brexit.
But after trading below the key 1.20 area on the Interbank market for the first time since 1984, the currency promptly came back after the speech was delivered Tuesday with most of the expected rhetoric left intact.
Prime Minister May dispelled any thought that the UK would attempt a half-in, half-out Brexit. She said that it would happily take back its sovereignty and control of its borders while setting aside EU trade benefits. Then, it will attempt to negotiate a new trade agreement with the EU.
That will be an extraordinarily tricky act to pull off, with high stakes on both sides.
- The EU cannot allow for painless trade negotiations with the UK or else it risks setting an easy template for the next country that wants to bail out.
- Nor can the EU be overly punitive: Europe needs UK cooperation to bring it out of its low-growth malaise and it does not want to anger UK allies.
- For Britain to actually negotiate a new economic treaty with the EU requires massive amounts of time and unanimous agreement with every national parliament in the union. That difficulty was on full display last year when a small regional parliament temporarily blocked an EU-Canadian treaty that had been in negotiations for a decade.
One question that has loomed large over the past few months should be answered late next week by Britain’s high court: What role will the British parliament play in voting on and helping structure the Brexit process?
My View: To call the next few months complicated for Brexit is probably the understatement of this new year. As the process unfolds, we will see the difficulties involved in disconnecting a globally connected world and trying to piece it back together again.
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