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By HaleStewart June 24, 2016 8:46 am
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Thoughts on Brexit, Part 3

More thoughts:

1.) I can’t get this out of my head: over the last year, Fed President Brainard has given several speeches that discussed the increased international linkages between economies.  It’s subtle and hard to demonstrate, but definitely there.  For example, over the last few months, the Markit reports for the UK all noted that future plans were on hold until the Brexit vote.  Let’s assume that some of those projects employed US inputs in some capacity.  Not only did the pre-Brexit environment slow parts of the US economy, but post as well.

2.) The UK does half of its trade with the EU.  All that trade was premised on EU trading rules, which are now be completely upended.  What do UK exporters now do?  Answer: nothing until they know the new rules.  The EU will do everything they can to make withdrawal painful, difficult and costly, not only to punish the UK but make withdrawal from the region that much more difficult.

3.) And consider this: for the last 25 years, the existence of the EU has been a fundamental assumption of international trade and economics.  And the block was growing.  The euro was a viable reserve currency and the ECB one of the more important central banks on the planet.  Now one of the largest economies and clear political counter-balances to Germany is leaving thanks to rising nationalist tendencies -- which are also on the rise in France and Germany.  Will the euro and the ECB now start to lose influence, changing our assumptions about international finance?

4.) How do you now do business in the EU?  Many companies used the UK as the entry point into the market.  That’s now gone.  But where do you move your operations to gain access to that market?  France?  Germany?  We don’t know because both countries’ political right wings will now be emboldened to force the same kind of vote.  And that, I think, is one of the greatest rubs of this.        

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