Brexit - A False Economic Divorce?

Aug 2 2016 | 7:44pm ET

Editor’s note: The Brexit vote raised concerns about potentially significant economic and political consequences befalling both the U.K, the EU and, to some, global financial markets. But more than a month after the vote, are there signs such concerns were justified? Not necessarily, writes Benoist Grossmann, managing partner at Paris-based €6 billion PE/VC firm Idinvest Partners, in this contributed article. Instead, even though the U.K. may be leaving the European Union, its economy may well remain closely integrated with that of its neighbors.

Brexit - A False Economic Divorce
By Benoist Grossmann

Let the dust settle and then examine the damages. One month after the explosion of Brexit, it is clear that many institutions are still standing. Aside from the domestic political consequences, the British vote to leave the EU has not caused the feared economic disaster. 

The pound has certainly declined against other major currencies, especially the euro and the dollar, causing an immediate loss of purchasing power for the British. But since then, the situation has stabilized above the levels that had been theoretically predicted in the case of a vote in favour of a Brexit. The UK economy is likely to suffer from a post-vote slowdown. Deficits will increase slightly. But the pound, which remains a reference currency, will be the adjustment variable. 

After the initial shock of the result, the stock markets have also recovered their spirits. More than a month after the vote, the FTSE 100, the bench mark index of the London Stock Exchange, is 5% above its level before June 23rd as of early August. The Stoxx 600, the enlarged European index, has recovered from its post-vote lows. 

The Brexit creates volatility that remains a negative for the financial markets and investors. However, due to the crisis in Greece and even the turbulence from China, the Eurozone has learned how to cope with volatility in the past five years. Some financial activities have begun to suffer from the situation.

First of all, there are the British banks. But even before Brexit, they were among the worst European students, supported at arm’s length by the state since the financial crisis. The Bank of England was once again committed to providing all necessary liquidity, up to £250 billion, to guarantee the fluidity of the banking system and to avoid any risk of a credit contraction.

Commercial real estate funds are facing demands for withdrawal from their investors, forcing them to freeze their assets due to insufficient liquidity. This does not reflect a situation of bankruptcy, but results in the same characteristics for the property market. The asset sales will still take a few months before they are signed off. The funds will suffer losses; the situation must be monitored, but the impact of these real estate funds will not create a systematic problem for stakeholders. 

For the European states that are still attached to the EU, the prospect of a United Kingdom exit is a strong, but not major, political shock. The popular decision serves first to clarify an ambiguous situation. The United Kingdom is not a founding member of Europe, and since its adhesion in 1972, has always shown through its actions that it didn’t wish to become a driving force. It was, in fact, a handicap for a more efficient Europe. 

Although France, Germany and Italy are hoping to recover some of the financial activities of the City, a massive transfer of skills seems unlikely. London was one of the finance capitals of the world before the adhesion to the EU of the United Kingdom, and it will remain one after its departure. Their skills are historically strong. The labor market is flexible, and their infrastructure has proven effective. The relocations to the mainland will remain marginal. 

Finally, while some projects were legitimately frozen, having had time to see things more clearly, the economy continues to function as before. It is still governed by the agreements with the EU, to which the United Kingdom will still belong for a further few months or even years. Will the country leave the Union? Feeling the discomfort of voters, British politicians seem paralyzed by such a prospect. None of them, including the most vocal supporters of the Brexit campaign, have to date had the courage to step up to the plate and begin implementing the divorce.

It raises a question - does the UK truly want it? The British recognized their interest in dragging things out, primarily to better negotiate its future agreements with the European Union, from which countries such as Switzerland or Norway can benefit. The EU countries also have vested interest in a Brexit. However, it is almost impossible to imagine the severance of one of our first economic and financial partners in such a globalized and interconnected world. 


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