Making Sense of the Brexit Effect: What do we know and what can we expect?


Depending upon who you listened to, the Brexit vote was going to save the world, or it was going to bring about international hardship and financial ruin. When the opposing proponents of an issue simultaneously believe it is going to cure and cause cancer, you can almost surely count on an entirely separate and more reasonable set of opinions and outcomes.

Now that the vote has occurred, and the British have elected to part with the EU, partisan speculation has, if anything, increased in frequency and amplitude. Through the haze of parallel praise and dread, it is difficult to make sense of a very fluid financial and political situation, which has scarcely begun unfold.

It will take time to sort through the conjecture and make any genuine conclusions. The “exit” itself is not instantaneous. Article 50 of the Lisbon Treaty, the EU’s governing charter, defines a two-year process for any member parting from the European Union. While brand new British Prime Minister, Theresa May, a Remain advocate, has vowed to respect the will of the people, she is openly not in a rush to do so. Her freshly spoken intent is not to even begin making separation arrangements until 2017. No matter which way you lean, as for determining Brexit’s outcome, especially its long-term effects, it is entirely too early to tell.

They say figures don’t lie, but even the initial financial fallout has been inconsistent. There was an instant and dramatic drop in the value of the pound, against the dollar, and in share prices in the aftermath of the EU referendum. Britain’s AAA credit rating dropped to AA, which means an increase the cost of government borrowing. Then, within a month of the vote, share prices in the UK recovered, with the FTSE 100 index trading higher than before the “fall.” As markets, moneylenders and prevailing attitudes seek to find equilibrium, we are left to identify the new, post-Brexit normal.

One way to tell if even a habitually trusted source is leaning too far to one side, is when they insert a vast, gaping inconsistency in their own analysis. Discussing the Bank of England’s expected cut this week, to its key interest rate, where it has stood at a record-low 0.5 percent, U.S. News & World Report, points out this worrisome Brexit byproduct is a break from concurrent U.S. Federal Reserve policy.

Last December, the Fed raised U.S. benchmark interest rates for the first time in seven years. U.S. News further reports Bank of England may expand its stimulus program. Though this type of quantitative easing (QE) is well in line with the current and popular U.S. banking policy, U.S. News chose rather to waive the red-flag of England’s declining interest rates.

The lasting effects of our own quantitative easing remain to be seen. Federal banks buying government bonds from other banks with newly generated money has been effective domestically, though seems a little short sighted. While boosting the economy, stimulating lending and, certainly, revitalizing private investment in the stock market, the fact we are hesitant to back off of our own QE policy sews its own doubt. That the Bank of England would consider similar methods indicates genuine concern of potential recession in the wake of an EU withdrawal.

Whether QE is the wisest future course, it is at least tried and tested short-term solution, and is widely anticipated. Again, domestically, Bank of America/Merrill Lynch analysts forecast a 0.25 percentage point rate cut in England, an additional 50 billion pounds ($67 billion) of bond-buying and similar stimulus efforts.

Uncertainty rules the day following far less notable political and economic developments. Not surprisingly, in the U.K. manufacturing and service activity declined in July, based upon measures of production, orders and hiring intentions. Were the Bank of England to take no action, confidence would likely further erode.

As Brexit proponents seek to secure a measure of national control within the chaos, one relative certainty is the impending changes to, if not the outright disruption of international trade. According to historical U.K. overseas trade statistics, over half of all British exports flow into European Union member countries. The trade figure exceeds 60% counting those nations with which the United Kingdom trades because of their own associated free-trade agreements with the European Union.

None of the EU members and affiliated players will benefit from severing trade ties with Britain. Even if France, Germany, Belgium or any of the most ardent EU enthusiasts wanted to make a political point, each of them has a far more significant financial stake in maintaining a positive relationship. The UK will also be in a position to broker trade deals on their behalf, rather than at the whim of, and in the foremost interest of a collective. Whatever the ultimate economic result, the loudest Brexit voices will tell you that was the whole point.

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