INSIGHTS
JAN
16
COSTA’S CORNER

“Hump? What hump?

With apologies to Mel Brooks and Young Frankenstein there is a story that has been developing for over two years and it just seems like no one cares or if they do care, they are not taking it serious.
Brexit.
The UK’s planned move out of the European Union this March is a major story with what could be Worldwide implications and yet, we gloss over it repeatedly.
To start off with, I do not profess this deep knowledge about Brexit but I have been following it from the beginning with more than just passing interest.
Everyone knows the background and pretty much how they got to where they are so I won’t regurgitate it.
The government of Prime Minister Theresa May is in such a state of political crisis today, the likes of which has not been seen in Britain in over 50 years.
Whatever plan the May administration has put out there has been rejected and it seems that Parliament is not on board with Britain leaving the EU.
This upheaval and uncertainty in Britain has had very little impact on the US so far. However, it should.
Leaving the EU is a bold move and one that will be fraught with consequences seen and unseen and it will be felt, to some extent, around the World.

Without downplaying the historical connection between the United States and the UK lets just look at its economic significance. Britain is our fourth largest trading partner.
The City (London’s financial hub), while a competitor to Wall Street, is also home to every major bank’s European operations. This financial link is hard to quantify in dollars and pounds but lets just say it’s the most important link between two financial capitals anywhere in the World.
Those banks have been quietly preparing for Brexit by moving some of their operations to the Continent and making plans for an outright exodus if need be.
Destabilizing London as a financial hub is probably not going to happen fully. The investments and the very tight bond between London and the US won’t dissipate unless something truly earthshaking happens and the powers that be both in London and in Brussels are not looking to let that happen.
What probably will happen however is something like this:
If the British government does reach a consensus on how Brexit will look they will ask for an extension from the March 27th deadline.
No matter, extension or not, Brexit will eventually happen and depending on the clarity of the agreement or agreements, chaos will prevail for the short term.
The UK’s manufacturing base will have to separately negotiate trade agreements with the EU. Those agreements will add a cost to all imports and British exports to the Continent, will cost more.
The overseas impact will be substantial as well.
The pound, which like the dollar has always been a source of pride in Britain, will most likely sink to levels not seen since the 80’s. This will impact the US directly by having our goods become more expensive in England. The potential for rising inflation in England and eventually having a recessionary cycle begin will increase drastically.
These are worst case scenarios for sure, but because it’s impact seems to be limited to Europe, in the global economy of today, everyone eventually gets affected by paradigm shifts.

We are on repeat here:

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