6:28 AM, Jan 19, 2017 — An orderly exit of Britain from the European Union’s single market could have a supportive effect on US monetary policy decisions and economic growth going forwards, brokerage firm Stifel Nicolaus & Co has predicted.
In an exclusive telephone interview held on Wednesday, Lindsey Piegza, chief economist at Stifel Nicolaus & Co, told MT Newswires that the trickle-back effect of a smooth withdrawal of Britain from the world’s largest trading bloc could be beneficial to the US.
“Should the Brexit be smooth and systematic and the UK economy begin to gain momentum, it’s very likely that the Bank of England would eventually join ranks with the Fed toward a further removal of accommodation which in turn would make it easier for the Fed to also engage in a higher interest rate policy if there are other central banks around the world that are also engaging in that type of activity,” Piegza said. “It would help [to] perpetuate a more positive, more normal monetary policy environment if we did see a steady Brexit lead to a pick-up in UK economic activity.”
Acknowledging that the US currency’s relative strength against the euro has been a competitive disadvantage to the US’ exporting sector of late, Piegza said that a further weakening of the euro could yet occur in the event that financial woes among other EU member states were to escalate.
“The biggest reaction that we’re expecting to see from the euro over the near term even as these [Brexit] negotiations are going on, is [to] any indications or further clarity regarding the underlying health of member countries that potentially could be next in line for an exit strategy; so what’s happening with Greece, what’s happening with Italy, Spain,” she said.
“Regardless of the reason, any further currency weakening, be that of the pound or the euro, certainly will serve to only exacerbate the fact that we cannot compete on a global stage from an export standpoint. And weak exports, [a] strong dollar, [and a] hard-hit manufacturing sector – these are three points that very clearly kept the Fed, or at least helped to keep the Fed, on the sidelines through 2016.”
Greece was rescued from the brink bankruptcy in 2015 with a third bailout, worth approximately 85 billion euros ($90.66 billion at current currency rates) from the International Monetary Fund, European Central Bank and European Commission. Since then, the Greek government has faced the challenging task of implementing a series of harsh austerity measures and economic reforms which were required in return for the three-year loan.
Spain, currently in the midst of an economic recovery and continuously grappling with secessionist movements in regions such as the Basque country and Catalonia, endured almost a year without a proper government following two inconclusive elections in December 2015. Political deadlock was only broken last October with Prime Minister Mariano Rajoy being elected for a second-term. Italy’s banking sector is in a vulnerable state and the nation also faces the prospect of an early election. Paolo Gentiloni was appointed as Italy’s new prime minister by Italian President Sergio Mattarella last December following former premier Matteo Renzi’s resignation after Italians voted against constitutional reform in a nationwide referendum the same month.
In the long-term though, Piegza projected that the euro could rally even following changes to the composition of the EU: “It’s a very real scenario that some of these countries [in the EU] facing extreme fiscal difficulties will have to resort to going back to their own domestic currencies in order to inflate the debt away,” she said.
“Near-term, you could see continued weakening of the euro, but I think longer term, if we did see some of these weaker links actually exit and drop out of the euro area, and we see the stronger economies banding together like France, Germany, the Benelux countries, I think ultimately that would be a net benefit for Europe. And once we see a more stable composition, I think the euro would rally through that longer term.”
On Tuesday, British Prime Minister Theresa May confirmed plans for Britain to leave the single market and pursue a new free trade agreement. In a speech delivered before diplomats more than six months after Britons voted to leave the shared currency union in a nationwide referendum, May outlined objectives for what she described as a “phased approach, delivering a smooth and orderly Brexit”.
“I want to be clear. What I am proposing cannot mean membership of the Single Market,” May said. “We seek a new and equal partnership – between an independent, self-governing, Global Britain and our friends and allies in the EU. Not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out.”
May’s comments triggered a rally in the value of the pound although the nation’s key benchmark index, the FTSE 100 finished the day lower.