It is tempting for the United States and for markets to dismiss the United Kingdom’s Brexit problem as that affecting a spent imperial power with little relevance to the United States and global economies. However, that would be a grave mistake.
Not only is the Brexit crisis already casting a dark economic cloud over the U.K., the world’s fifth largest economy. It is also occurring in the context of meaningful difficulties in Europe’s other major economies. As such, a deepening in the Brexit crisis has the real potential to spill over from the United Kingdom to the rest of Europe and to reach our shores.
With the clock ticking down toward the March 29 end-period of the Brexit two-year negotiating period, there remains little prospect that British Prime Minister Theresa May will soon get parliamentary approval for her Brexit deal. This would seem to be particularly the case considering that Brussels has indicated that it is unwilling to make any substantive changes to that deal, which was overwhelmingly defeated in the U.K. Parliament last month.
Under intense pressure from within her party to avoid a no-deal Brexit, May has now opened the door to requesting a short extension of the two-year negotiating period. This almost certainly precludes the risk that the U.K. will crash out of Europe without a deal March 29. However, since a short extension would do nothing to resolve Brexit’s underlying political divisions, it does not preclude the possibility of a hard Brexit once the proposed short extension would expire.
According to most impartial observers, including the Bank of England, the International Monetary Fund, and the Organization for Economic Co-operation and Development, a no-deal Brexit would deliver a real body blow to the U.K. economy and more than likely tip it into recession. It would do so because the U.K.’s global supply chains would be disrupted and because both domestic and foreign investors would take fright about the kingdom’s diminished access to Europe’s Single Market, which currently buys around half of the U.K.’s exports.
Heightening the prospect that the U.K.’s economic decline would accelerate in the event of a no-deal Brexit is the fact that major companies like Honda and Dyson have now indicated their intention to relocate their U.K. activities abroad so as to ensure continued smooth access to Europe’s Single Market in a post-Brexit world.
The risk of a hard-Brexit has already had an adverse effect on the U.K. economy. In the two and a half years since the June 2016 Brexit referendum, the U.K. has gone from being the fastest- to being the slowest-growing economy among the G-7 countries. Over the period, British politics has fractured and there has been a marked decline in the pound.
Kicking the can down the road by requesting a short extension of the negotiating timeframe will only prolong the period of investor uncertainty to the detriment of the U.K. economy. It will do little to restore order to U.K. politics nor will it eliminate the risk that at the end of new negotiating term the U.K. will crash out of Europe.
A stumbling of the U.K. economy is the last thing that an already challenged European economy now needs. The German economy is showing clear signs of sputtering in response to a slowing in the Chinese economy and fears of U.S. tariffs on Europe’s automobile exports. Meanwhile, the French economy is being buffeted by the rise of the Yellow Vest Movement.
Worse yet, a highly indebted Italy has now again slipped into recession for the third time in the past decade as investor confidence is being undermined by its populist government’s seeming disregard of the need for disciplined budget policies. This raises the real risk that a further European economic setback could trigger another and more painful round of the European sovereign debt crisis in a country 10 times the size of Greece.
Particularly at a time of considerable global financial market fragility, it would seem to be in the U.S. economic interest to promote a healthy U.K. and European economy. The last thing the world economy now needs is to have the U.K. crashing out of Europe in a disorderly fashion. It is hoped the Trump administration is fully aware of the risks to the U.S. and global economies associated with a hard Brexit and will do whatever it can to help prevent such an eventuality.