Brexit matters to the US — 'bigly'

Brexit matters to the US — 'bigly'

It is tempting for the Trump administration to dismiss U.K. Prime Minister Theresa May’s Brexit problems as those affecting a small and spent imperial power in a distant land with little relevance to the United States economy. However, that would be a grave mistake. 

Not only is the unfolding Brexit crisis casting a dark cloud over the world’s fifth-largest economy; it is also occurring in the context of meaningful difficulties in Europe’s other major economies. As such, a deepening in the Brexit crisis has the real potential to spill over from the United Kingdom to the rest of Europe and to reach our shores. 

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Tuesday’s crushing parliamentary defeat of Theresa May’s Brexit proposal means that her plan is all but dead. With so little domestic support for her proposal, there is no incentive for her European partners to make additional concessions to the 500-page Brexit deal that might otherwise have got the proposal over the line. This likely means that the United Kingdom is headed for a prolonged period of political uncertainty.

This is the case even though May somehow survived Wednesday's no-confidence vote. She'll likely now request from her European partners an extension of the two-year negotiating period under Article 50 of the Lisbon Treaty.

In the best of circumstances, May would succeed in extending Article 50. That would allow the U.K. more time to negotiate an orderly exit from Europe or to hold a second referendum as to whether the U.K. should in fact leave Europe.

However, such a course would prolong Brexit uncertainty beyond the current March 29 end-date as mandated by Article 50. It also would not immediately allay fears that the U.K. will crash out of the EU, which must be expected to weigh heavily on U.K. business and household economic confidence.

In the worst of circumstances, Article 50 would not be extended and the U.K. would crash out of Europe on March 29 without a deal. According to most impartial observers, including the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD), such an eventuality would deal a real body blow to the U.K. economy.

It would do so because the U.K.’s global supply chains would be disrupted and because both domestic and foreign investors would take fright about the U.K.’s diminished access to Europe’s single market.

A stumbling of the U.K. economy is the last thing that an already challenged European economy now needs. The German economy is showing clear signs of sputtering in response to domestic political uncertainty, a slowing in the Chinese economy and fears of a spread in the U.S.-led trade war.

Meanwhile, the French economy is being buffeted by the rise of the "yellow vest movement" at the same time that confidence in the Italian economy is being undermined by its populist government’s seeming disregard for disciplined budget policies.

Particularly at a time of considerable domestic and global financial market fragility, it would seem to be in the United States' economic interest to promote a healthy U.K. and European economy. The last thing that the world economy now needs is to have the U.K. crashing out of Europe in a disorderly fashion.

Hopefully, the Trump administration is fully aware of the risks to the U.S. and global economies associated with a hard Brexit and will do whatever it can to help prevent such an eventuality. 

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.