Brexit: It’s Now Reality

It’s been nine months since Britain stunned the world by voting to leave the European Union.

After decades of accepting the European Union’s burdensome regulations – one after another – the British people finally said enough is enough.

Now, the EU’s days of stifling the economic growth of Britain – and other countries that joined the union but not the currency – are finally coming to an end.

Last week, Britain moved one step closer to taking back its sovereignty, and escaping the burdensome regulations of the EU, when it was announced that Prime Minister Theresa May plans to invoke Article 50 of the Lisbon Treaty on Wednesday, March 29.

Article 50 is the mechanism for quitting the European Union, thus launching a chess match: Pitting the U.K.’s desire for a trade deal – while regaining power over immigration and lawmaking – against the EU’s view that Britain must not benefit from Brexit.

Britain is the world’s sixth-largest economy, and it’s been more than 40 years since the U.K. joined the European Union. So this separation won’t be a piece of cake.

The constellation of the European Union is about to lose one of its biggest stars.

In fact, the U.K. will have to pay a bill of about $62 billion when it leaves the European Union, warned Jean-Claude Juncker, the president of the European Commission, the EU’s executive branch. While Britain prepares to start Brexit negotiations, the EU has already been tallying the U.K.’s share of liabilities such as pensions for EU officials, infrastructure projects, and the bailout of Ireland.

I don’t know about you, but $62 billion is a heck of a divorce settlement!

Once Article 50 is invoked, the two sides have two years to come to terms on a trade deal.

And a lot can happen in two years.

In fact, if the negotiations collapse, May says she’ll walk away without a new commercial framework in place rather than accept a bad deal. All this makes the likelihood of a disruptive breakup “troublingly high.”

Brexit is just the beginning

The EU is already on borrowed time, same goes for the euro.

And the U.K.’s exit is just the beginning. There are still plenty more disruptions looming …

==> The elections in France – along with right-winged political rhetoric gaining strength in other countries across the eurozone – has the EU on life support.

==> And don’t forget about the debt problems: Once again, the Greek government is set to run out of money. In a few months, it will need a fresh bailout from the EU and the International Monetary Fund. After nine years of trying to fix Greece, the situation has only gotten worse. Even if the Greeks do end up with another bailout, it will only be another stay of execution.

==> The EU also has an identity crisis – and it’s not just the refugee crisis causing the divide. There is also a political bias between the Northern and Southern European countries. Dutch Finance Minister Jeroen Dijsselbloem recently inflamed the hostilities by making insulting remarks about Southern European culture. The remarks provoked former Italian Prime Minister Matteo Renzi to demand Dijsselbloem’s resignation as president of the Eurogroup, a coalition of eurozone finance ministers.

Bottom Line: The Brexit fiasco is finally coming home to roost. And that’s going to continue to wreak havoc on the European Union. Mark my words: There will be pitfalls ahead for investors who don’t know what they’re doing. Do you?

Good investing,

Mike Burnick

 

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Comments 8

  1. John H. Colvin March 27, 2017

    Mr. Burnick: A good composition article.. I was a little concerned as to whether anyone could carry on for Larry in His format.. Keep up the good work—-J.H.C.

    Reply

  2. Michael Coulson March 27, 2017

    Mike Burnick is correct but the current marked improvement in the performance of European economies may prove to be a stay of execution for the EU which may encourage the European Commission to try and bully the UK during the Brexit negotiations.

    Reply

  3. Thomas Clawson March 27, 2017

    Well written and very informative. It is good to know that Larry’s work is in good hands. Thanks Mike.

    Reply

  4. Dean Hamza March 28, 2017

    Thank you Mr. Burnick, This is a very sensitive and crucial article. I appreciate it. Have a great week.

    Reply

  5. SteveH March 28, 2017

    The $62 billion is only the first demand from the embittered spouse’s lawyers.
    Anyone who has dealt with vicious, vindictive ex spouses will know that there is a lot more noise than sense.

    Speaking practically, the Germans run the EU, and they are not willing to lose their biggest export market for cars purely to be obnoxious.

    The British forgave all Germany’s debts in the 1950s to help their economy, so the Germans would look stupid in the eyes of the world if they didn’t come to a reasonable agreement with Great Britain.

    After all, after re-adjustment of their economy the British will do well and Germany will want to keep a good trading relationship with them.

    Reply

  6. al mcnal March 28, 2017

    It’ll be great when the whole fiasco falls. Nothing worse than a socialistic government promising itself pensions and great salaries and building itself magnificent buildings while telling Britain what it can and can’t do as the entire experiment undermines it’s people. Once again proving that socialism doesn’t work. How many times must we see failures of socialistic governments before these fools realize they don’t understand and can control economies for the best interest of it’s society?

    Reply

  7. Steve Nellissen March 28, 2017

    Your final sentence gives no comfort.

    I pay for this newsletter, what is your recommend defensive allocation for “Our” informed investment portfolio?

    Steve N

    Reply

  8. R Rubino April 1, 2017

    I’m so tired of hearing about the GREAT potential to come from BREXIT stories from US sources. A country that really doesn’t allow information to come from abroad. Americans are so ignorant of what is going on in the world thanks to their restricted news sources. It wasn’t like that years ago. BREXIT is about old fashioned British racism…ONLY. They have been printing money like crazy since the financial crisis. Scotland was lied to in their referendum , maybe if Europe was smart they could encourage all euro bond and currency business in London to move to Scotland…..why not . The Scottish will separate now. RBC in Canada, who has the second biggest trading operations in England announced that they will move 12,000 employees out if England. The country will be left with Pubs and sheep. London will lose over 60% of it’s banking sector. The pound will have to fall dramatically and inflation will rise. Bond yields will go up and they will have to copy Japan and print and buy their own debt. All will end beautifully, right? They will still have all the over exaggerated myths about the great Winston Churchill…another great racist. If he wasn’t around to destroy the new, fragile democratic government that formed in Iran in the early 1950s and got America to use the CIA to destroy it in order the protect BP of Iran, the Middle East might not have been such a problem today and millions of people may not have been killed since then. England got a great , special deal from Europe and now they are leaving because old white racists that live in the countryside receiving taking printed money pensions want to stop coloured skinned, non Christians from crossing the English channel. There is nothing to glorify. They think this 1790. Thank God Canada just signed a free trade deal with Europe and decided this week to end the deal with England. I don’t expect Americans to understand the British like Canadians do…or Australians too. Brexit will be much more tough on England. I believe the only big concern over the short term in Europe is the Italian election. If Europe gets past that in fair shape then Brexit will unify the rest of Europe. When Brexit is finally settled. I believe the country to invest in will be the south of Ireland. They will benefit from both entities. By real estate in Dublin during the next US recession which is currently being induced by the FED raising rates until it all cracks. Let’s get the inverted yield curve over with and get ready for the next economic cycle witch will look like the back half of the 1970s: higher inflation and commodities. Buy base metal and food stocks…..forget England and the Bond market. If this happens then buying an ETF on Russia maybe turn out very profitable. Got to get past the next US recession….coming by the end of next year (5 more Fed rate increases should do it). JUST my opinion for what it’s worth.

    Reply