EN United States Institutional
Macroeconomic & Geopolitical

The Last Brexit Article You Ever Need to Read

23 April 2019 - 3 min read

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.

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Read More Less

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Barings Real Estate Advisers Europe Finance LLP, BREAE AIFM LLP, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

19-824583

X

We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.