Brexit Begins a New Long-Term Normal for the Markets

Brexit Begins a New Long-Term Normal for the Markets

This week, British Prime Minister Theresa May sent a short, polite letter to the EU president initiating a two-year negotiation to separate. In the short term, investors and traders may not notice much change, but the new normal will bring a new tone to many markets. 

Keep Calm and Leave Europe |
Keep Calm and Leave Europe | Vikram

One of PM May's first meetings after the Brexit referendum was with Nissan's CEO, to whom she promised that her government would do whatever it takes to keep Nissan manufacturing in Sunderland, England, as it has since the late 1980s. Nissan said it would stay in Sunderland, but later added an assurance to investors that it would continue to assess the uncertain situation. Given that Britain can no longer make any actual promises to Nissan without coming under new WTO restrictions, Nissan has no other choice. Britain is no longer part of the EU, but it's not yet a nation with clear trade agreements of its own. 

Soon other companies and countries will face their Sunderland moment, when they realize they are not dealing with the English-speaking gateway to Europe anymore, but rather with an island off the northwest coast of a powerful, largely united continent. It may be jarring to think of, but it's what British citizens voted for, by a narrow margin. And it's the new normal. 

In the near term, the markets have barely reacted, with the pound remaining fairly weak against a dollar that continues to slide from its December highs. A weak pound should theoretically help British exports, but the question now is how long Britain can continue to capitalize on that before trade barriers come up to inhibit those exports. After all, the biggest help to British exports was being in the EU; Europe is the UK's biggest trading partner. 

Now Theresa May's government will spend a good bit of its time conducting a messy two-year divorce from that market. In some ways, it is really 27 divorces, since one of the purported advantages of Brexit was the possibility of negotiating new one-on-one deals with individual countries. But if Germany and Portugal and the 25 others all give the same answer of "One for all and all for one," then the UK will find itself facing a united and jilted EU in a new round of trade negotiations. 

The prospect of getting a better deal from a post-Brexit EU than Britain enjoyed while in the EU is bleak. It's not that European leaders will be vindictive and want to teach the UK a lesson about what happens to members who leave. But in a sense, it kind of is. With populist, anti-EU politicians on the rise in France, the Netherlands, and even Germany, it would be counterproductive for the EU to try too hard to make nice with Britain. Nicolas Véron, an economist and senior fellow at Bruegel, a research institution in Brussels, told The New York Times, "You don’t allow someone who leaves the club to have better terms than someone who’s in the club, or otherwise the club doesn’t mean anything." 

With Russia salivating at the prospect of a weakened EU, there is even more pressure now to show that the club means something. 

Part of the pro-Brexit logic was that Europe would be eager to negotiate a new trade deal with the UK because it needs British consumers. Three of the 10 bestselling cars in the UK last year were an Audi, Mercedes, and Volkswagen, for example. But it's hard to see Brexit supporters triumphantly driving around in new German cars saying, "See? Told you so." 

Could they drive around in new British autos? Not easily. The rest of that top ten list includes Fords, Nissans, and a KIa. There are two models from venerable English automaker Vauxhall, which began making cars in 1903 in Bedfordshire. Only, Vauxhall is now owned by Opel and makes cars in Germany, Spain, and Portugal, as well as the UK. And Opel in turn is owned by GM. Even Rolls-Royce and Bentley are now owned by BMW, and VW, respectively. 

How about a Jaguar or Land Rover? Those are made in the UK, but the firms are owned by the Indian company, Tata. And James Bond's own Aston-Martin? Owned mostly by investors from the US, and Kuwait. Incidentally, the US, India, and Kuwait are all former British colonies. Or to put it another way, once upon a time the Brits left those places, too. 

The English poet John Donne wrote in 1624: "No man is an island, entire of itself. Every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less." Didn't expect that line to sound so topical four centuries later. It may be true that no man is an island. Britain, however, soon will be.


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