Whatever technical economic relationship Britain chooses to strike with the European Union, it has already effectively left and the continent is moving on without it.
The latest series of confusing parliamentary votes and dramatic European summits may have given the impression that the Brexit saga will never end. The reality is, it’s over. Whatever technical economic relationship Great Britain chooses to strike with the European Union, it has already effectively left and the continent is moving on without it.
Investors should start getting used to a Europe that is, on the margin, more likely to regulate economic activity, less likely to negotiate new trade deals and facing a crucial debate about allowing more flexible rules around fiscal policy to boost growth.
Of course, there’s still an outside chance that Britain doesn’t technically leave. Pundits are spinning scenarios that trigger a new election or referendum (or both) and could seat a new government mandated to remain in the European Union.
But with emotions running so high, watch for the “counter-counter-revolution” of Brexiters insisting angrily that the people have been robbed again by London elites. The latest polls indicate a badly split electorate that will be locked in tribal battle for years and unable to play a significant role beyond its borders.
[GDP size US, China, EU, UK][EC GDP growth forecasts U.S., China, France, Germany, Italy, Spain]
And so Europe is trying to get on with its future in a world where big decisions will be made increasingly by China and the United States unless the European Union raises its game.
Ironically, this all-consuming Brexit drama has briefly bolstered European coherence the same way some clubs turn wholly against a member who incomprehensibly resigns. “He never really belonged,” you will hear. “I never liked her anyway.”
And yet for investors, the European Union will become a much more difficult place without Britain -- whether it belongs or not.
An unwritten understanding among European leaders has held that London’s views would prevail on financial market issues. Britain had a vital interest in a healthy financial industry and its instincts tended to follow a “trust markets more, regulate less” credo. (Similarly, France would have an unofficial veto over agricultural policy and Germany could prevail on important matters of industrial matters.)
Now the task of crafting healthy financial markets and boosting economic growth lies primarily in the hands of policymakers in Paris and Berlin.
This hardly means the European Union will lurch toward Soviet central planning. It is, above all, a deeply integrated market for goods and services. While Brussels is often tarred for its excessive regulatory zeal, its most powerful commissioners champion free trade and competition. Just ask Google, which has been fined $9 billion in three separate cases for anti-competitive behavior. Or Japan, which just opened its markets to Europe in the world’s largest trade deal.
But there’s already a shift in the air. French and German politicians are exploring policies that will help bolster European corporate champions that can compete globally against Chinese and American counterparts, undermining a key premise of competition policy. Increasingly, EU leaders worry that only 12 of the world’s 100 largest companies are European (without the U.K.) compared to 28 a decade ago.
Meanwhile, U.S.-EU trade negotiations have launched under a cloud as Washington insists on talks that include both industrial and agricultural goods. The Germans are eager for a deal that would lower automotive tariffs, but the French balk at anything that touches agriculture. French President Emmanuel Macron has now insisted that any country that signs a deal with Europe must also be party to the Paris climate accords, which is clearly a poison pill for the current U.S. administration.
Rules around foreign investment in Europe have also tightened on national security grounds, modeled from the Committee Foreign Investment in the United States (CFIUS). The target is China, but it will impact everyone.
This more assertive state role in markets, trade and investment comes amid a rising populist wave that will crest on May 23 with the next European parliamentary elections. It’s hard to draw too much meaning from these, however, since turnout is often low and voters don’t necessarily back the same party in national and European elections. Even with a media narrative around rising anti-EU sentiment, recent polls show that most voters remain undecided.
For investors, the most important immediate signals from this new Europe without Britain will come from any potential shifts in government spending. Budget discipline has been the by-word of European membership, even if often observed in the breach. Today, tight fiscal policy has been a drag on growth. Even now, with Germany recently teetering on recession, the government is running a surplus. Italy’s legacy debt is high, but growth is stymied by its own budget surplus after interest payments on debt.
Ignore the rhetorical fireworks around immigration or national sovereignty. Instead, watch for any indication of greater flexibility on government spending that will support recovery. That’s a far better indicator of the future of Europe than anything going on these days in London.