The European Union (EU) woke up Friday to a new, uncertain world with the United Kingdom’s (UK) vote to leave the Lisbon Treaty. The political, economic and cultural implications of this disunion are causing an uproar across the globe. As the shock of this geo-political divorce wears off, we are left wondering what will be true of the many predictions from pundits regarding global public policy, financial policy and other implications ringing out on news shows.
While it’s truly anybody’s guess as to how this change will shake out economically over the coming months and years, three cautionary issues surface as a result of the vote that will generate real challenges for many American businesses.
Over the short term, many will be fixated on how the financial markets and currency indexes fair over the coming days.
Corporations will be watching key currency fluctuations. Last week, both the U.S. dollar and Chinese yen benefited greatly from the vote, while the British pound took a nosedive and hit a 30-year low. Nearly every major global financial index posted losses ranging from 3 to 5%, and many analysts are forecasting additional losses over the next few weeks. Frankly, it is probably the safer bet.
Nonetheless, the bigger question is what happens by the end of year. Some are predicting a UK recession that could cast a shadow over the already weak global economic recovery. Better odds are that the vote will generate a fairly typical market reaction to a significant, but not immediately understood, uncertainty. We expect both the markets and key currencies to regain their footing and rebound over time once the initial impact of the vote settles in. Nonetheless, volatility is to be expected between now and the end of the year, especially among key currencies, presenting significant cash flow challenges for some global corporations.
Government contractors, especially those that supply defense and technology to EU and UK governments, may also feel a pinch over the coming years. As with any major political disruption, the vote to leave the EU is likely to generate a chilling effect on larger EU government procurements. The UK exit will have many other countries pondering and even actively debating similar referendums, while the EU and NATO missions will be under question just as future budgets are debated and set. EU financial officials and agency leaders will have to re-focus their energies and resources accordingly. This unpredictable government-spending environment will continue to challenge European countries until stability can be restored over time. In the meantime, government contractors are likely to see large procurements delayed or even shelved permanently.
The UK political establishment is also in total upheaval with David Cameron’s resignation, and Labour Party resignations were announced recently over the apparent precarious leadership of Jeremy Corbyn. The UK has a national election coming, and the parties that are leading its government were on the losing side of the referendum vote. These political uncertainties will most certainly have an impact on certain government spending over the coming years.
What will remain on the minds of business leaders for some time is what will happen to the overall integrity of the EU as a leading financial backer exits? Current predictions on this matter are not clear. Many want to know how other key countries such as Germany, Italy and France will react to the UK vote. Will other countries follow suit? Will the EU ultimately dissolve? How and when will trade matters be resolved? The impacts of EU dissolution go well beyond currency issues to contracts, counterparties, and financial instruments.
Establishment forces on both sides of the Atlantic have been hit hard by populist sentiment, and conventional political wisdom has been shown lacking. Indeed, the nationalist and populist sentiment of the “leavers” in the UK has even roiled politics in the U.S. Elites and bureaucrats alike are under attack by this angry, energetic voter block.
How will political leaders around the globe respond to the unrest being stoked by immigration concerns and assimilation problems, economic doldrums and wage stagnation, terrorism fears, and the other pressures that are mounting in many Western countries?
This unrest was the driving force behind the Brexit vote last week, and its prevalence in the U.S. presidential election this year should really be one of the biggest concerns for businesses. Because it is real, it’s growing, and it has the potential to devastate our global economic recovery if left unanswered for long.