The hard Brexit has compounded pressures on many UK industries, but some key positives have started to emerge.
This article is the second installment of a two-part series. The first installment explored some of the darker sides of Brexit that have emerged so far. This second part takes a look at a few of the bright spots that are beginning to shine through.
As British companies grapple with the fallout of Brexit, at the same time as having to contend with the economic pain of yet another lockdown, the benefits of Brexit remain largely elusive. This is to be expected: Brexit, it’s worth repeating, is a process, not an event. It will take time for many of the benefits of leaving the EU to materialize — or at least be felt by the companies or people on the ground in a tangible way. These benefits include being able to make one’s own laws, negotiate trade deals directly with other nations, control one’s own borders, and having greater leeway to support domestic industries.
The impact of these shifts will be huge over time. But for the moment it is outweighed and overshadowed by the combined negative toll of Brexit + Covid. That said, there are a few bright spots.
A Stronger Pound.
A few months ago, the consensus on sterling was decidedly negative. Goldman Sachs was forecasting that the pound would sink to parity against the euro, just as it had predicted it would reach parity with the dollar after the Brexit referendum. Neither has happened.
Instead it has rebounded against most currencies, including the euro and the dollar. On Wednesday February 24, the pound-to-dollar rate hit $1.42, a level not seen since April 18, 2018. Against the euro, it hit its highest level since February 2020. Even after correcting over the next two days, it is still stronger than many had thought.
One obvious reason for this is that the market had already priced in a much more disorderly Brexit than actually happened. When a deal was finally secured, the biggest fears evaporated, allowing the pound to regain some of the ground it had lost over the past year. Some big market players have turned a lot more bullish on both sterling and the UK economy in recent weeks, in part due to the UK government’s vaccine roll-out.
Of course, this sentiment could change over night. Plus, a stronger pound is not good for exporters as it makes exports more expensive, while imports drop in price. And exporters in the UK are already in a world of pain. But if faced with a choice between a crashing or a surging pound straight after Brexit, most would prefer the latter.
The City of London: Diminished But Still Important.
The UK’s all-important financial services sector lost its access to the EU market when the withdrawal agreement transition period came to an end on December 31, 2020. And Brussels appears to have little intention of granting the sector equivalence status any time soon. This came as a major blow to the City of London.
Now, the jewel in its crown — its clearing business — is up for grabs. The EU has allowed London-based firms to continue handling trades for European clients but only until June 2022. After that, banks and other traders could be forced to shift the bulk of their Euro-denominated business to the bloc. The Bank of England governor Andrew Bailey described any wholesale move on London’s clearing business as “very controversial,” adding: “I have to say that would be something we would have to, and want to, resist.”
Given the City’s time-tested ability to withstand and, when necessary, adapt to dramatically changing circumstances, one would be foolish to write off the Square Mile just yet. Brexit may have weakened the UK’s financial services industry but not nearly as much as many had predicted…
Continue reading the article on Wolf Street
Nick Corbishley 