Asian and European shares are currently trading higher and the British pound is advancing for the second day in a row against the dollar but remains near its 31 year low after plunging over 10 percent in the 2 days following the U.K’s Brexit vote last Thursday to leave the EU.
Speaking before the European Parliament yesterday, Nigel Farage, leader of the U.K. Independent Party who helped embolden the “Leave EU” side during the June 23rd Brexit vote, sounded like a well rehearsed Donald Trump “King of Debt” dealmaker before European parliament members when he advocated for Britain to have the special privilege of having full access to the EU’s tariff free single market even though as a newly hatched non-EU member, Britain would be exempt from following the EU’s freedom of movement policy the other member states must observe, allowing for free movement of workers within the EU’s borders as a condition of EU membership.
“Why don’t we be grown up, pragmatic, sensible, realistic and let’s cut between us a sensible tariff free deal and thereafter recognize that the United Kingdom will be your friend, that we will trade with you, cooperate with you, we will be your best friends in the world? Do that, do it sensibly, and allow us to go off and pursue our global ambitions and future” Farage told Parliament members on Tuesday.
German Chancellor Angela Merkel threw cold water on that suggestion and told Britain on Tuesday that it won’t be able to “cherry-pick” the parts of the European Union it wants to keep such as the EU’s single tariff free market without accepting the principles such as free movement when negotiating its exit with the other 27 member countries.
Despite British politician Nigel Farage’s attempts yesterday in Brussels to downplay the negative economic impact of the U.K.’s Brexit vote while arguing that the British Sterling was already a weakened currency before the Brexit vote on June, it’s still hard to deny the negative headwinds that Britain must confront with a currency that has already shed over 10 percent of its value since the vote on June 23rd while being slapped with 3 credit downgrades from 3 credit agencies that increases Britain’s borrowing costs, higher taxes and spending cuts on the way, and the growing prospect of Scotland holding a referendum vote to remain in the EU and perhaps separating from Britain.
All of these combined factors when weighted together could in fact lead to some real headwinds for Britain’s economy which was the fifth largest in the world just prior the Brexit vote.
To make matters worse, business and investment money that could have been invested in Britain’s economy now remains on hold until more transparency is known about Britain’s timeline for electing new political leadership and developing a clear roadmap for exiting the 28 member European Union which will take 2 years to negotiate.
Draghi Weighs In
ECB President Mario Draghi said in a central bankers’ meeting yesterday in Portugal that the Brexit outcome could hit euro area GDP growth by as much as 0.5 percent over three years.