January 29, 2019

Back in June 2016, the people of the United Kingdom (England, Scotland, Wales, and Northern Ireland) passed a referendum to leave the European Union (EU) – determining that the benefits of being members of the unified body of nations no longer outweighed their loss of sovereignty and the cost of immigration and compliance with myriad EU regulations. A majority of UK citizens claimed the #1 reason for leaving the EU is that it offered the best chance to regain control over immigration and its borders, followed by too many outside regulatory bodies having too much decision-making influence on affairs in their lives.

British exit (“Brexit”) from the EU is now facing a March 29 deadline. Prime Minister May’s 21-month transition plan with the EU was soundly defeated in Parliament in a landslide vote: 432 against to 202 in favor. As a result of the vote, the risk of a “hard Brexit” increased dramatically, meaning the UK leaves the EU with no restrictions, other than the need of a new free trade agreement that is yet to be negotiated.

The Brits are fed up with unelected EU elites in Brussels dictating to them from their lavish headquarters.

In the eyes of the Brexit crowd, the EU stands for anti-democracy, anti-independence, the elimination of borders, mass immigration, and the creation of a federal super-state where EU officials are not held accountable for reckless spending that requires Britain to fork over billions per year to support Europe’s Big Brother and their brand of socialist “group think” that is pervasive among those in power.

There are a lot of moving parts to what the final form of Brexit will take, and hard Brexit opponents warn of the re-imposition of huge tariff increases, tens of thousands of lost jobs, huge numbers of companies leaving the UK, a collapse in real estate prices, the inability of UK companies to bid on EU contracts, tangled banking systems, jammed ports and border crossings, closed factories, higher prices for all manner of services and airfare, diminished healthcare, the possible loss of Scotland, customs delays resulting in food shortages and medical supplies, a spike in inflation, and a bear market for the pound Sterling, not to mention a lower European stock market. To put it simply, the British economy will tank.

Deal or No Deal —or Maybe Just a Delay?

This all sounds pretty dire, even if the Brexit critics are only half right, but UK citizens don’t want to be ruled by the Eurocrats that make up the European Council in Brussels. If the UK leaves, then who might leave next? Italy? It is widely accepted at this point among the EU Council that Brexit, in one form or another, is pretty much a done deal at some point, so it raises the question of whether the new populist movements in other EU member nations will evoke similar exit strategies and referenda.

While there is chatter that factions within Italy’s political parties want out of the EU, doing so would spell disaster for their already highly-leveraged banking system that is in need of a bailout by the EU – since Italy’s borrowing costs have soared since its new government unveiled a 2019 budget that sharply increased its budget deficit. Italy needs the financial support of both the EU and the ECB, now more than ever. That means there is a near-zero chance of Italy leaving the EU, but it doesn’t resolve the fact that Italy is sitting on a ticking debt bomb if it is not seriously addressed in the year ahead.

The UK economy is the fifth largest in the world. Within the EU, it is second only to Germany’s, with a GDP of just over $2.7 trillion. Their biggest exports are mechanical and electrical machinery, automobiles, and medical and pharmaceutical products. The UK is also the seventh largest trading partner with the U.S.

It is becoming increasingly clear that a hard Brexit, where there is essentially no action plan to maintain the free flow of goods in and out of the UK, could paralyze the country for an unspecified period of time. Currently, about 50% of goods imported into the UK come from the EU and 45% of UK exports go to the EU. A hard Brexit will definitely slow the UK economy, as it posted only 1.8% growth for all of 2018.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

With the likelihood of mutual economic destruction taking place if a hard Brexit comes to pass, those following the situation closely believe an agreement to extend the March 29 deadline will emerge in the next few weeks. The recent rally in the pound sterling would imply that scenario, meaning that a UK exit from the EU will somehow be put on hold with even the possibility of a second referendum vote to be held in the UK to determine if there is still a majority that want to separate from the EU.

Prime Minister Theresa May will take her latest modified proposal back to the Commons in Parliament this Tuesday to try to come up with a deal that UK voters can live with – maintain trade but not be subject to the long arm of Brussels dictating immigration policy and the eventual destruction of UK sovereignty.

The allure of delaying Brexit by members of Parliament is taking hold so as to avoid a hard or no-deal Brexit altogether and the calamity that would come with either outcome. At the end of the day, this will likely take place – kicking the can of EU membership down the road. And though nothing will have been resolved from over 2-1/2 years of parliamentary wrangling, the stock market will indeed celebrate delay.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license.


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