It sent shivers through European
chancelleries, with Ukraine still in an
uneasy military standoff with Russia.
Trump’s anti-Euro rhetoric also has
European bankers and business leaders
unsettled. Still recovering from the
2008 financial crisis and with Brexit to
contend with, a second U.K. election
in June, and a significant election in
Germany due in September, Europe
has enough home-grown problems.
A Trump-like populist swing in France
could have led to the prospect of a
French exit from the eurozone and
maybe even an exit from the EU.
France seems to have avoided that by
electing Emmanuel Macron instead.
Meanwhile, Angela Merkel is fighting
to contain the nationalist and anti-Euro AfD party in Germany, which,
while not threatening to take power,
could alter the coalition balance and
weaken German influence and room
for maneuvering in moderating
potentially toxic Brexit negotiations.
The very fundamentals of the EU
could be at stake and with it the
political and economic stability of
debt-stricken Greece and Italy. It is
early days, of course, and this may be
too doom-laden a scenario. Trump’s
rhetoric may turn out to be just that,
rhetoric. Populism may not actually
take a hold in continental Europe.
The EU economy, which is slowly
recovering, may simply continue its
trend. There may yet be a “soft Brexit.”
Frexit may not happen. But, in the new
world reality, anything is possible.
Forecasting is a difficult process at the
best of times. Few policymakers foresaw
the 2008 financial crisis, although
there were plenty of indications
of overexuberant capital markets.
What is probable is that considerable
uncertainty will continue in Europe for
some time. A major recession may be
avoided, but economic problems will
occur. The roots were already apparent
before Trump’s election. Maybe the
Trump factor will tip the balance.
The implications of the president’s
statements on the U.S. auto industry
and jobs for U.S. workers are indicative.
GM reacted by putting its European
business on the market, resulting in a
proposed sale to PSV Peugeot Citroen.
Excess capacity in its Opel/Vauxhall
business has been a GM headache
for many years, but the Trump effect
has prompted the automaker to exit
from Europe. It is highly likely that
the consequence of the sale is that
GM’s two U.K. plants will close when
their current platforms are due for
change in two years. Brexit makes
their closure the economically and
politically easy option for a part-state-owned French company with
a track record of closing U.K. plants.
This will reverberate down the supply
chain and, by contagion, marginalize
other manufacturers’ U.K. plants.
U.K Winners, Losers
U.K. Prime Minister Theresa May’s
much-hyped proposed U.S./U.K. trade
deal between a global free trade-minded
U.K. and a protectionist-minded
Trump-led U.S. seems a misplaced
political dream, but a commercial hand
grenade for the U.K. British industry
has restructured progressively and
successfully since European Common
Market accession in 1973 to integrate
and trade freely in the EU single market.
It was a slow and lengthy process.
Now it may have to restructure again
to whatever the new arrangements
are. How long will that take?
Trade agreements are a two-way
street. A U.S./U.K. trade deal is more
likely to favor the larger partner. It
could precipitate more business
reorganization and job losses. In a
U.K./global free trade environment,
U.K. lower value-added production
will suffer and jobs will be lost as
the consequences of economies
of scale and lower emerging
market labor costs take effect.
While Brexit is bad for exporters
and, over time, for low-value-added
manufacturing, it is not all bad
news for U.K. business. In time,
British business will adapt, but at
a sunk transition cost never to be
recovered. There will be winners and
losers. Fortunately for restructuring
professionals, if less fortunate for
the U. K. economy, there are likely
to be more losers than winners.
Losers are set to be those with Pan-European business and integrated
supply chains that will be impacted by
customs delays and increased tariffs;
auto, aviation, and manufacturing
engineering are most exposed.
Agriculture will also be affected
by the exit from the Common
Agricultural Policy, but which sectors
of agriculture will suffer most, nobody
knows. Amidst this uncertainty,
agricultural land prices are falling.
Professional services, particularly
financial services and insurance in
Euro-denominated products, are
very vulnerable, and this will have
a trickle-down effect on London
property markets. Brexit means
investment banks are weighing plans
to move some parts of their businesses
out of London. Some estimate the
number of jobs lost in London at up
to 70,000. But adding to the Brexit
effect on banking could be a Trump
move to relax Dodd-Frank financial
services regulation, making New York
more attractive to bankers. London
benefitted at New York’s expense from
the passage of Sarbanes-Oxley in the
early 2000s. That process may now be
about to be reversed, with some U.S.
banks seriously considering returning
to New York instead of moving to
Frankfurt or Paris when they exit
parts of their business from London.
Elsewhere in the British Isles, there
will be significant issues for Irish
businesses on both sides of the Ulster
border if the U.K. leaves the customs
union, as seems likely. Economic
activity has never recognized a
U.K./Republic border since the 1922
separation, and the U.K. is Ireland’s
biggest export market. Ireland may
become the front line between
populist nationalist government and
European integrationist thinking,
with old and deep political wounds
potentially reopened. As Brexit
moves from airy fantasy to messy
reality, only the most deluded think
that the Irish business problem can
reach a realistic compromise across
hard EU/U.K. political red lines.