Of course, Brexit is the process by which the U.K. is supposed to leave the European Union. Robert Berwick, an accountant for the CPA firm S&G from Greenwich, Connecticut, has provided quite a bit of information about how Brexit will likely affect the U.S. economy based on his experience over the years with both Perrier and Heineken’s U.S. branches.
Brexit, three years after the U.K. voters decided to leave the E.U., is still an unclear and muddled process. The March 29 deadline this year for the U.K.’s departure has come and gone, and the U.K. has secured an extension in negotiations until April 12.
Parliament refuses to ratify Prime Minister Theresa May’s negotiated deal with the E.U. The reasons for Parliament’s refusal to ratify the negotiated Brexit show how incredibly fractured Parliament is. Brexiteer M.P.s do not consider May’s deal to really be Brexit at all and fear that it gives the sovereignty of the country to the E.U. Other M.P.s who voted against May’s deal are Remainers and don’t support Brexit in any form. In the wake of the March 29 deadline, Parliament took six separate votes and could not decide upon any alternative to May’s “soft Brexit.”
This leaves the U.K. in turmoil because the Brexit date has come and gone. Now, the government is on an extension of the negotiation process with the E.U. until April 12. As Berwick explains, there are still a few viable options for Brexit to occur. Each one has different consequences for the U.K. and U.S. economies.
A Second Referendum
One option that kept being proposed is that the voters be given a chance to vote again on Brexit. It is clear that this option is dangerous because many voters in the U.K. are very angry with May and Parliament, even those who are Remainers. They feel their wishes have not been supported. At press time, it appears the possibility of a second referendum has mostly been quashed for now. This is likely because politicians fear the wrath of the voters. There have been many demonstrations in the U.K. about this very issue.
Potential Effects on the U.S. Economy of a Second Referendum – Berwick believes the consequences on the U.S. economy of a second referendum are dependent upon what the voters do in response to being required to vote again. One dangerous event that could have larger repercussions in the U.S. would be civil unrest. More on that below.
Some Version of “Soft Brexit”
“Soft Brexit” plans tend to keep the U.K. trading in a customs union with the E.U.
Potential Effects on the U.S. Economy of a “Soft Brexit” – Berwick explains many companies in the U.S. have set up a headquarters in the UK so they can take advantage of being a part of the Eurozone. Berwick believes that a “soft” Brexit would allow U.S. companies to continue to have a presence in the E.U. trading block. If the U.K. stayed within the trading block, their economy would likely only contract about 2.2 percent, so there would likely be little effect on the U.S. economy.
A “hard” Brexit means the U.K. simply take their marbles, all of them, and leave the E.U. This would involve no payments made to the E.U. and would have the U.K. trade with the E.U. post-Brexit using the World Trade Organization (WTO) agreements from the past.
Potential Effects on the U.S. Economy of a No-Deal Brexit – Berwick has consulted prognostications of the effects on the U.S. economy of a “hard” Brexit. With the U.K. outside of the E.U. under WTO trade regulations, it is predicted that the U.K. economy would decline by around 9 percent over the next 15 years. Since the U.S. is a major exporter to the U.K., there would be a decrease in U.S. exports. Also, the U.K. would be less inclined to spend more money on their military budget, some of which would be armaments from the U.S. The U.K. defense spending has already decreased to only 2 percent of their GDP. A decline in the pound in relation to the dollar could also reduce some exports from the U.S. to the U.K.
If by leaving the E.U., the U.K. began to lose its place as a main financial center in the world, Berwick believes that New York City would begin to take up some of that slack. There have been on-going talks between the U.K. and the U.S. over strengthening ties between the two financial centers and becoming one large financial block that leads the world into a future of cryptocurrency.
A General Election
It appears that the U.K. is headed for a general election since May and the Tories cannot swing the Brexit deal in any way that unifies Parliament. Berwick states that it is likely, at this point in a very fluid situation, that Jeremy Corbyn, the opposition leader of the Labour Party, could win a general election. If so, he would likely be able to secure more time for negotiating Brexit because a new party would be in power.
Potential Effects on the U.S. Economy of a General Election that Delays Brexit – See below about the dangers of Brexit delays. Berwick also adds that Corbyn, were he to become the Prime Minister, has already made statements in the past that hamper his ability to be able to negotiate any other kind of Brexit than May has with the E.U. It is possible that the E.U. will not accept any further negotiation from a Corbyn government. This may leave the U.K. stuck inside of the E.U. with absolutely no decision-making power whatsoever. This is the “Hotel California” dilemma.
As mentioned above, although not the odds-on-favorite outcome, there is a possibility of violent civil unrest in both France and England. The majority of the French people are fed up with their government and its austerity measures, which seem to be taxing and shrinking the middle class. This is far beyond just the gas tax issue that has been reported in the mainstream news media. In the U.K., the messy Brexit process, in which many people from outside of London feel betrayed that their wishes are not being carried out, has hardened many people against May and the majority of Parliament. There is the possibility that these resentments could boil over and spill into the streets.
Potential Effects on the U.S. Economy of a violent unrest in the U.K. – Berwick explains that since the U.S. is a major exporter to the U.K., civil war, or any facsimile thereof, would disrupt the U.K.’s economy and stifle exports coming in from the U.S. This would be the worst-case scenario of the Brexit situation. Obviously, such effects cannot be predicted, but they would be far greater than the 9 percent lessening of the U.K. economy economists predict for a hard Brexit. This would have a negative impact upon companies who have set up headquarters in the U.K. to trade with the E.U.
Delay is One of the Worst Scenarios
Berwick states that delay is also not a good situation for the U.S. economy. Delay causes uncertainty in the financial markets. 1.1 million U.S. jobs are directly tied to U.K. trade and financial investing. In the uncertainty over Brexit delays, the U.K. economy contracted 1.3 percent in 2018, and the pound is 14 percent lower than it was before the referendum.
Thus, delay, which could be caused by a general election or May asking for and receiving more extensions on negotiations, is likely to affect the U.S. economy by virtue of the U.K. economy contracting and the U.K importing less U.S. goods. Also, the delay will result in uncertainty, by virtue of businesses investing less in the U.K. American businesses have been investing in the U.K. and setting up headquarters there to be able to trade in the Eurozone. U.S. businesses are already beginning to incur higher costs to stay on top of the fluid situation between the U.K. and the E.U.
Robert Berwick, a CPA in Greenwich, Connecticut, makes it clear that delay, one of the worst possible scenarios, is likely to rule the day in the unfolding of Brexit. The impact upon the U.S. economy will be that companies will face uncertainty if they have or hope to have offices in London to trade in the E.U. Likely the British economy will experience some shrinkage, even though they are remaining within the E.U. for now, so U.S. exports to the U.K. will likely experience some loss. Joint work towards creating a financial block with cryptocurrency will likely be put on hold until after the dust settles on what will become of Brexit. Finally, defense spending will continue to stay flat for now.