Brexit: What Is It and Why Does It Matter?
In a staggering move that immediately sent ripples through the world economy, British voters have approved Brexit, its plan to leave the European Union. Britain has been a member of the EU since 1973 and has been the single-largest trading partner to the Continent. But fears of a struggling European economy and a flood of immigrants led England’s leading conservatives to win over voters by promising independence and immigration barriers. Conservatives in other European nations The Netherlands, Germany, Italy and France are also calling for abandoning the EU, an alliance that has prevented the Balkanization of Europe for decades.
Brexit’s Immediate Impacts
With the world’s fifth-largest economy, Britain has taken an immediate economic hit. Its credit rating was abruptly downgraded to AA by Standard and Poor’s. The value of the British pound has also plummeted to its lowest point in seven years. The drop against the dollar makes vacations to England a bargain but creates potential stagnation of America’s already slow climb out of the 2008 crisis.
According to Time Magazine, America will lose access to European trade on its own favorable terms with the elimination of England as our major trade gateway. And if the value of the Euro drops as some have forecasted, American trade on the Continent will suffer even more, particularly in global brands, manufacturing, and high technology. Brian Klaas of the London School of Economics told The New York Times that the destructive impact of Brexit will be as harmful as if California and Florida choose to leave the U.S. economy.
Market Volatility and American Consumers
This week, CNN Money predicted that the immediate and potentially lingering volatility in Wall Street and world markets will scare off spending plans by many American consumers and businesses. Economists have told Time that consumer spending will likely remain stagnant as a result of Brexis since Americans, already wary of runaway bank debt and stalled interest rates are likely to save rather than spend during what some believe is the beginning of yet another major slowdown. That’s bad news as economists have noted that consumer spending has been a plus in an American economy with 2016 slowdowns in job growth, earnings, and overall recovery.
Impact on U.S. Interest Rates
The Federal Reserve has apparently reversed its recommendation for a prime rate interest hike this year, in part due to an already stalled U.S. recovery. Without an increase, making investments in the light of Brexit are a tenuous proposition, says CNN. Supporters of Brexit by and large hailed from England’s working class and poor people.
On the other hand, the hold on interest rate increases may look good to those eying locked-in rates for mortgages or refinancing. National Mortgage News (NMN) this week reported that Brexit should especially help consumers looking for mortgages on their first home and for those looking to refinance. Mortgage rates were already near three-year lows before the British vote. Kroll Bond Rating Agency’s Christopher Whalen told the NMN that rates could drop into the 3 percent range.
In the aftermath of Brexit and with the EU’s long-term stability in question, it may take time for American consumers to regain confidence in a banking system.