Brexit Matters for the United States

With the looming October 31 Brexit deadline, Desmond Lachman emphasizes the catastrophic implications of the UK's departure from the EU both for the US and the broader world economy.

Desmond Lachman
June 21, 2019

President Trump should be very careful about that for which he wishes, both in his cheerleading the UK to leave Europe without a Brexit deal and in his campaigning for Boris Johnson to replace Theresa May as the United Kingdom’s next prime minister.

At a time of a disquieting constellation of global economic risks, the last thing the U.S. and world economies need is a full-blown economic crisis in the UK, the world’s fifth largest economy. Yet that is precisely what is most likely to occur were the UK to crash out of Europe on October 31, when the six-month extension its European partners granted expires.

On his recent state visit to the UK, President Trump showed characteristically little restraint in meddling in another country’s politics. He did so by disingenuously suggesting that were the UK to leave Europe, it would be very easy for the UK to negotiate a favorable free trade agreement with the United States. While he was careful not to mention that free trade agreements generally take several years to negotiate or that the UK market would need to be opened to U.S. agricultural exports, he undermined his case that a U.S.-UK trade agreement would be easy to reach by insisting that any such agreement would have to include the UK’s treasured National Health Service.

President Trump also threw his full support behind Boris Johnson, the odds on favorite to be the UK’s next prime minister. He did so in the full knowledge that Johnson has pledged to take the UK out of Europe on October 31 with or without a Brexit deal. Johnson is doing so in direct response to the Brexit Party’s strong showing in the recent UK European parliamentary election and to the corresponding historic humiliation of the Conservative Party at the polls.

The economic damage to the UK economy from a hard Brexit is not to be underestimated. According to the Bank of England, the IMF, and the OECD, such a worst-case scenario would almost certainly precipitate a deep UK economic recession with GDP likely to decline by more than 5 percent in the year following its exit from Europe.

It would do so as the UK would lose its current favored access to the Single European Economic Market, which currently buys as much as half of all the UK’s exports. It would also seriously disrupt international supply chains as investors would choose to relocate their operations out of the UK and towards the continent.

At this stage, the only real way that a prime minister intent on taking the UK out of Europe without a deal can be stopped would be for parliament to engineer a successful no-confidence vote in the government before October 31. That would precipitate a general election, giving the Europeans a credible excuse to make yet another extension to their Brexit deadline. They could do so on the grounds that a new general election would offer the possibility that the current UK parliamentary gridlock could be broken and that it might give the UK public a chance to reconsider whether or not it really wanted to leave Europe.

The chances of a successful no-confidence vote before October 31 would not appear to be high. This is particularly the case since it would require many members of parliament to be prepared to accept the high likelihood that they would lose their seats in such an election to members of the surging Brexit Party.

However, even if there were a successful no-confidence vote, it would not be without adverse, albeit lesser, economic consequences. Investors’ confidence would be seriously shaken by the real prospect of a minority government that could be led by a very market-unfriendly Jeremy Corbyn, who seems intent on taking the UK back to the failed economic policies of the 1970s.

An economic crisis in a country of the UK’s systemic importance would be unwelcome at the best of times. However, these are hardly the best of economic times. The world economy is already showing troubling signs of stalling and it is beset by a constellation of serious economic risks. These risks include the possible escalation of U.S.-China trade tensions, a populist Italian government now on a collision course with its European partners, potential U.S. import tariffs on European and Japanese automobiles before year-end, and rising geopolitical tensions in the Persian Gulf.

At challenging economic times like these the world economy needs responsible economic leadership. Sadly, President Trump’s recent forays into UK politics and the Brexit debate in particular is a reminder that one can no longer count on the U.S. to provide that leadership. This could prove to be highly problematic not only for the U.S. and world economic outlook. Indeed, by casting a cloud over the U.S. economy, it could also be problematic for President Trump’s own re-election prospects.

Desmond Lachman is a Resident Fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund's Policy Development and Review Department and the Chief Emerging Market Economic Strategist at Salomon Smith Barney.