Today, the British pound hit 31-year lows in early London trading as the reality of Brexit negotiations continued to weigh on the pair.
U.K. Prime Minister Theresa May confirmed that her government intends to begin the formal exit from the European Union as early as March, noting that it is important to set out timing of the Article 50 trigger in order to reassure British businesses. Ms. May admitted that the process will not be “smooth sailing” for the economy but she stated hopes that the U.K. will strike a number of trading relationships and will maintain its special relationship with the U.S.
There was nothing new in her remarks, but they served to underscore the reality of the Brexit issue, which has remained on the backburner for the past several weeks. Now that U.K. officials appear to be committed to a hard deadline, the market is acting accordingly and taking cable to fresh multi-year lows as fears abound that the country will suffer from a protracted economic slowdown because of being disconnected from the European Union.
Some analysts have pointed out that even under the current schedule, the U.K. would not properly exit the EU until 2019 at the earliest. But many investment decisions will be made well ahead of that date, the most important one having to do with the financial center.
The most crucial question is whether the U.K. will remain the financial center of the world. If London can maintain its preeminence in capital markets finance, then much of the economic pain from Brexit could be avoided. The U.K. operates primarily a services economy, and the free flow of those services means much more to Britain’s future than trade.
|At the Bank of England, a gatekeeper in traditional 18th century garb seems unperturbed over Britain losing its status as the financial capital of the world.|
Ironically, in the current environment, the biggest beneficiary of all this turmoil is actually U.K. trade. Britain’s manufacturing data soared yesterday as lower exchange rates helped make U.K. goods much more competitive.
U.K. manufacturers are enjoying a “Garden of Eden” moment for now. They have full unencumbered access to the EZ market while enjoying a 17% discount in the exchange rate since the Brexit vote last June.
But, just the like the Biblical idyll, the good times won’t last. The Europeans are dead set against offering Britain any special access because the EU members fear such a move would encourage other countries to leave the union. This is especially so, because PM May’s government is emphasizing the right to sovereignty and control over immigration versus access to free trade.
Someone posted a humorous note on Twitter yesterday that at 30 pence per jar, the U.K. simply needed to sell 15 billion jars of strawberry jam per year to even out its trade balance. But the whole Brexit story is no laughing matter. In fact, it is becoming a referendum on the type of society the West will live in.
Since World War II, the inexorable path of history has been toward more civil rights, more freedom of movement and more political integration on the supranational level as well as a near-instant flow of trade and capital across the globe. Brexit and its cross-ocean cousin Trumpism are the first major revolts against this trend. And if they succeed, strawberry jam will be the least of investors’ worries.