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29 July 2016

EU Referendum: Brexit's Ramifications in the U.S.

Brexit, Government Affairs

It’s probably fair to say the majority of Americans did not see Brexit coming. Even fewer knew what to expect if it did.

The White House, Treasury Department and Senate Foreign Relations Committee were among the initial voices in Washington that shared statements tactfully acknowledging the right of the British people to leave the EU, yet tepid economic growth, thin corporate profits and a market pullback spurred U.S. officials – chief among them President Obama – to oppose Brexit and warn of its ramifications.

But now, in the weeks following the passage of the referendum which allowed the U.K. to exit the EU, U.S. policymakers, business leaders and central bankers have closely monitored the situation to see what, if any, impact it would have on the US and a still-recovering economy. For example, how the economy would react if Brexit triggers a rising dollar, capital outflows from corporate securities and an overall downturn in overseas export markets.

Just days ago, the Fed issued a statement expressing confidence in the growing US economy, stating that “near-term risks to the economic outlook have diminished,” and suggesting that fears of repercussions from Brexit have passed. It’s led many analysts to infer that while talks of an interest rate hike will be tabled for the short-term, they could be considered as early as September.

Still, despite growing confidence, Brexit raises to the surface a number of issues inside the Beltway and beyond which US officials will keep one eye on as its own political circus takes centre stage this fall:

Economic Impact: The uncertainty in the EU may cause multi-national companies – many of which are U.S. based – to reconsider near-term plans for Europe until the smoke clears. This means less hiring, expansion and investments in innovation. If investors also opt for safety by flocking to the dollar and treasury issuances, the results will include an increase in the cost of capital and reduced exports due to a rising dollar.

Bank Health: Although major U.S. banks have been preparing for all eventualities, the prospect of having to re-think their European strategies and contemplate new, overlapping regulatory regimes is sparking fear. Many major and mid-sized banks have had their European headquarters in London for years. While executives on Wall Street consider their path forward in Europe, regulators in Washington are currently focused on ensuring services and liquidity remain strong during this period.

Campaign Implications: On the campaign trail, Hillary Clinton called for the U.K. to remain in the EU while Donald Trump supported an exit. Trump will likely point to Brexit as validation of his more isolationist vision and aggressive trade policies. If Brexit’s adverse impact looms large heading into the fall, however, Clinton’s knowledge of the financial sector and international experience as Secretary of State will serve her well.

For more information please contact Gurpreet Brar, Managing Director, Public Affairs at gurpreet.brar@edelman.com.

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