Britain’s recent unexpected departure from the European Union in June this year has led to global economic uncertainty, which could ultimately have a direct impact upon the economic future of America.
In a surprising result, the people of Britain on June 23, 2016, voted in favor of the departure of the United Kingdom from the European Union. The unexpected result and its potential ramifications led to the sudden resignation of the British prime minister and others. The U.K. had always retained its own currency, the pound and did not convert to the problematic euro adopted by other countries in the E.U.
As one of the major global trading blocs, the European Union is a significant trading partner with the United States. Any demise of the Union will subsequently cause economic tension and uncertainty throughout the world and may require a restructuring of any existing trading deals or partnerships.
Following an immediate economic backlash and the loss of its AAA credit rating, Britain appears to be weathering the sudden change and initial uncertainty. Any ongoing significant effect on the economy of the United States will be dependent on a subsequent slide in equities, which could impact strongly on the level of confidence that businesses and consumers have in the American economy. Conversely, a strong U.S. dollar could result in increased expense for products produced by American companies.
The European Union – frequently referred to as the EU – is a strategic partnership between 28 European countries that is both economic and political. It came into being following the hardships brought by the Second World War. The shared vision put forward was that economic unity between the countries would promote trade and economic prosperity and discourage war. Other E.U. countries such as Germany and France were against the exit of Britain. Northern Ireland voted to remain, but, found itself suddenly a part of the departure. The view of president of the United States, Barack Obama was that the United Kingdom should not leave the EU.
Nineteen of the countries that constitute the EU have adopted the Euro, its currency. This means that an economic downturn or crisis in any of the member countries who have adopted the euro will be impacted if its value subsequently falls.
The potential impact of Brexit on the American stock market is complicated. The immediate economic reaction to the vote to leave saw many United States investors swap the equity which they held for Treasuries which they considered to be safer. However, the initial fall in equities was followed by an historic high in the S&P 500 index. This brought some reassurance and a sense of stability to traders and investors in the United States.
Factors which weigh in favour of Brexit not having an enormous economic impact on the United States take into consideration that the American economy is relatively isolated. International trade is only a small part of the Gross Domestic Product. In addition, a much-anticipated increase by the Fed in interest rates did not occur. The decision was made by the Fed to place any rate increase on hold. This decision gave the United States markets enough liquidity to increase. Financial analysts remain cautious but positive. If wary investors withdraw from the British and European markets and instead invest in America, a fall in the pound or euro could increase the value of the US dollar and result in a decline in exports from America.
Due to Britain representing a significant one-sixth of the EU economy, any resultant destabilization stemming from Britain’s departure from the European Union could potentially have a negative impact upon the American economy. As Brexit is a completely new situation for the financial world, and the full picture is not yet clear, the Federal Reserve is closely watching for any shifts in financial markets around the globe which may impact the United States.