On June 23rd, despite months of fear mongering by former Prime Minister David Cameron and his allies, doomsday global economic forecasts offered by the International Monetary Fund and the Obama Administration, and a steady drumbeat of anti-Brexit news stories by the BBC, The Economist and the Financial Times, the British people delivered an unexpected event to the global financial system by voting to take Britain out of the European Union. Despite the forecasts of doom and gloom, the people voted for freedom, democracy and common law.
Most of the elites continue to warn of dire consequences for Britain and many believe that the separation process will be long, messy, and perhaps even farcical. Many argue that Britain will seek some sort of reconciliation once it realizes the true costs of its hubris. A July visit to the UK convinced me otherwise.
While in England, I had the good fortune to attend the first parliamentary question session with newly minted Prime Minister Theresa May. Those fiery exchanges convinced me that she will take her time to negotiate a sensible and mutually beneficial Brexit treaty. Provided she can control the civil service apparatus (dominated by interests that leaned heavily toward the “remain” camp), May appears set to achieve Parliamentary approval and Royal Assent.
Tickets for in-person attendance to Prime Minister’s Questions (or PMQ’s as they are known) are typically hard to come by. This is particularly true when a new Prime Minister is being tested in the ring for the first time. Sitting on a special bench on the floor of the House in the immediate vicinity of Members afforded me the rare opportunity to sense the mood and ‘music’ of the House. It had been 37 years and one month since as a Member of Parliament I had listened to Margaret Thatcher tackle her initial PMQ’s as the UK’s first female Prime Minister. The comparison was not only interesting, but it influenced my outlook for the prospects of Brexit.
As Big Ben struck noon on July 20th, Mr. Speaker called “Questions to the Prime Minister.” Theresa May rose to Conservative cheers. Like Thatcher, she radiated composure and authority. With long experience as Home Secretary, she was very confident at the dispatch box even congratulating one Brexit questioner, Sir Edward Leigh, on his birthday. Most importantly, she established the central theme of her initial EU strategy by saying: “…Yes, the United Kingdom will leave the European Union, but the United Kingdom is not leaving Europe and our cooperation will continue.” (Sputnik International, UK-EU Security Cooperation…, 7/20/16) Subsequently, other ministers echoed this pivotal position.
As PMQ’s continued, one could not help contrasting May with Thatcher. Like Thatcher, May appeared utterly convinced of her cause. She is tough and unafraid to shed blood. She cut swathes in Cameron’s cabinet, even sacking Chancellor Osborne. However, rather than exhibiting a Thatcher-like delight in verbal combat, May preferred persuasion as the vehicle to bring House and country together, saying: “… The Conservative party will be spending those [recess] months bringing this country back together.” (Reuters, Kylie MacLellan & William James, 7/20/16) To a considerable extent May is a mirror of Thatcher, but with some important updated improvements. Less verbally combative, she has the ability to inject humor, which Thatcher found somewhat difficult.
I went to London deeply skeptical that, as a ‘remain’ voter, May would negotiate a Brexit treaty that she would then allow to be defeated piecemeal by the civil service or by the House. I came away feeling somewhat less skeptical. Apparently, May intends to play a long game to allow Chancellor Angela Merkel, the EU’s effective leader, to encourage cooler heads to prevail in negotiating a workable, mutually acceptable treaty. Such a delay would allow time for other nations to push for changes within the EU (like those urged by Italy for other nations to rescue its failing banks). Such suggestions of intra-EU changes might strengthen the UK’s negotiating position.
Following PMQ’s, I spoke to Boris Johnson and some former Brexit colleagues. They agreed with this analysis and although I did not discuss it with Johnson, all the others thought May’s performance was outstanding and that the UK would flourish under her leadership. Doubtless, the Brexit vote came as a shock to the British Establishment and resulted in some immediate uncertainty and alarm. In the medium term it can be expected to delay some investment and business decisions.
For example, the Common Agricultural Policy (CAP) lavished considerable sums on certain large farms in return for their commitments to reduce crop production. Of course, the CAP was designed in part to subsidize French farming and to reduce competition from larger more efficient farmers.
With Brexit, British farmers will be free again to farm all their land and so reduce not only the UK’s contributions to the CAP, but also help decrease Britain’s balance of payments! Furthermore, unrestricted by the absence of EU trade agreements with the U.S., Japan and China, the UK will be free to negotiate treaties with three of the world’s largest economies tailored to its own productive strengths, as opposed to those benefitting Germany and France. Already, Britain’s new trade negotiations with China are causing ruffled feathers in the U.S.
In an article appearing in The Washington Post on June 24 on Brexit, economist Larry Summers said: “…the prospects for Europe may in some ways be worse than for the UK.” He is not alone in this opinion. At a weekend house party in the English countryside attended by a Member of Parliament, a senior investment banker, a former IBM executive, a former member of MI5 and a graduate of INSEAD, the leading European business school, I found a consensus that implementing Brexit was in the best interests of the UK.
Later, I had an interesting exchange with a highly successful businessman who told me that in retrospect he should have voted for Brexit instead of the “remain” vote that he had cast.
If Theresa May continues to enjoy good chemistry with the German Chancellor while inspiring parliamentary and civil service support, it may be that, following a period of uncertainty, Brexit will succeed and prove beneficial to the UK. If this happens, it is possible that Sterling, currently at $1.31, will be seen as undervalued. The same could hold true for British stocks, many of which sold off sharply following the Brexit vote.
Conversely, if the EU fails to respond positively to the challenges presented by Brexit, the euro could be seen as overvalued, if not flawed fatally. But a successful British disengagement from the EU may encourage other European nations to also seek exit, which could further weaken the euro. In other words, I believe Brexit does not offer a good outcome for the euro in just about any scenario.
If there is a major move out of the euro, it may result in a stronger pound sterling and possibly a stronger dollar. This would likely push the prospect of a Fed rate hike even further into the future as the Fed has already voiced concern that the dollar is valued too highly. The economic catastrophe promised by those who opposed Brexit may have been nothing but a smoke screen.
John Browne is a Senior Economic Consultant to Euro Pacific Capital.