The Economic Effects of Brexit – Thoughts from LFGSM Business Leaders

Author: Lake Effects Blog

Tuesday, July 05, 2016

A single word has made its way around the world this week: Brexit. “Britain has voted to exit the European Union” has headlined every major news outlet, and this historic decision has been the topic of discussion for politicians, economists, businessmen, and citizens alike. Everyone seems to have their own opinion of Brexit, but one thing is clear: the economic effects of this decision on Britain, the European Union, and the rest of the world are still unknown.

We have compiled the thoughts and opinions of three of Lake Forest Graduate School of Management’s own Business Leader Faculty®: Robert Gross, Co-Founder and Senior Managing Director of Prairie Capital Advisors, Jeff Anderson, President and CEO of LFGSM, and Remo Picchietti, Partner at The Junto Institute for Entrepreneurial Leadership.

The Cost of Being Unprepared: A Lesson from Brexit – Robert Gross 

For many multinational firms, the recent Brexit referendum will increase their appreciation of the risks of doing business globally as the ‘real world’ delivers another lesson that may be costly to the unprepared.

Multinational firms have learned a lot about the risks that accompany the opportunities generated by global expansion. In our Global Finance course at LFGSM, we call these transaction, translation, and economic risks. Sometimes the lessons these firms have learned have been costly, but gradually over the last decade or two, most have developed a deeper understanding of at least some of the risks they face. Many firms (but certainly not all) begin by recognizing transaction and translation risks, which are directly caused by currency fluctuations. These multinational firms began evaluating various strategies for hedging these risks, and their earnings have benefited from the decreased volatility. That’s a good start, but it’s not the whole picture.

The final category – the more eclectic collection of economic risks – is not usually on the risk planning agenda of many multinational firms. Economic risks include those caused by political, governmental, environmental, social and other economic stimuli, and these risks generally become more pronounced over longer periods of time. They are more difficult and sometimes impossible to predict. But that’s no reason to ignore them. If these risks are not part of a firm’s risk evaluation process, then there likely hasn’t been a dialog about ways to mitigate or manage these potential risks in any sort of a ‘what-if’ sort of situation.

So last week’s Brexit surprise provides an opportunity for prepared firms to implement a plan they have already formulated, while unprepared firms will be starting from scratch. Which would you want to be right now? The business media will probably reveal which is which, and it will be interesting to watch how companies and their investors respond. Regardless of the positioning, all multinational firms should be evaluating (1) the impacts on UK-related expansion initiatives already in place and (2) those that are yet to come.  However, the firms that have robust global risk evaluation functions will also look beyond Brexit; they’ll be including ‘what-ifs’ regarding the long-term impacts of the European Union in the larger sense and interrelationships around the globe.

When we talk about creating Broad Thinkers at LFGSM, this is the sort of dialog that fills our classrooms.

The Benefits of a Decentralized Approach – Jeff Anderson

There’s a lot of talk going on right now about Brexit, but most of it is just that – talk. Rational thought on the topic has been scarce and most of what I have heard is just reflex reactions and political posturing. However, a few things seem clear to me.

Britain’s decision to leave the EU draws attention to the strength of American democracy. It illustrates the wisdom of the founding fathers and serves as an example for why the U.S. Constitution calls for a limited role for the federal government. Brexit is a perfect example of the weakness of large, centralized bureaucracies. They become obsessed with their own survival and detached from those they are serving. How can 28 countries – each with their own cultures, languages, and priorities – benefit from laws and policies that serve the “common good”?

I see Brexit as an opportunity for Britain to shift its focus and resources to its citizens – to create policies and regulations that serve national interests and allow their companies to compete in the global marketplace. I don’t think it will take long to see that the UK is far better off as a sovereign nation, re-affirming the wisdom of Adam Smith in The Wealth of Nations.

Furthermore, Britain will accrue big first mover advantages. While the remaining members of the EU fight over favorable trade regulations, economic jurisdiction, and immigration policies, Britain will be left to dictate the terms of their separation. Free from the burdensome regulations and costs of EU membership, and faced with the opportunity to negotiate favorable trade deals with the rest of the world, Britain is set to reap huge benefits.

Ultimately, sensible trade deals will rise up between Britain and members of the EU, and the weaker members of the EU will finally be forced to confront and deal with their issues. Countries will have to carry their own weight and the EU will be forced to stop relying on the strength of a few countries.

We are at an exciting point in history. There is enormous opportunity for both Britain and the EU to shape policies that benefit citizens, create healthy economic competition, and strengthen foreign relations. I believe that the agile leaders – those who are most able to adapt to change – are the ones who will lead their countries to success.

A Competitive Marketplace: Why Commonalities are Important – Remo Picchietti

At the dawn of my business career, I had a dream job – selling U.S.-made products in Europe.  It was the early 1980’s and although WWII had ended four decades prior, I often felt as if the controlling generation of the time was still fighting the war.  The EU market had been established after the conflict and it wasn’t nearly as integrated as it is today.

I was able to successfully compete in Europe by virtue of the fact that I was non-European (and my product was pretty good, too).  The French, some still fighting the war, would rather buy from the Americans than from the Italians.  So this left the Italians with a limited market.  They couldn’t reach economies of scale in producing their products and thus couldn’t compete with me outside of their borders (and often even within their borders).  The Italians didn’t want to be insular – the market dictated the environment.

Also, the strength and stability of the U.S. dollar was a more attractive currency partner for the Germans and their Deutschmarks, than were the Spaniards and their Peseta.  Businesses had to hedge their bets on more than a dozen currencies in the local marketplace, plus there was still a lot of cross-border tariffs and regulations.  At that time, in fact, there were few financial incentives for Europeans to buy from other Europeans.

However, as the 20th century came to a close, the environment quickly evolved into a much more efficient, competitive marketplace.  The introduction of the Euro as a common currency immediately removed all foreign exchange risk, allowing European companies to rapidly expand – quickly and easily moving products, people and capital across borders. Common regulatory and safety systems were also introduced in Europe, ensuring high quality products. I found myself facing competition not only in Europe, but in other parts of the world as Europe’s global trading partners gained confidence in the Euro.

I’m not a global economist, but I am certain that “back in the day” the U.S. economy grew at such a rapid pace because of 1) a common language, 2) a common currency, and 3) a lack of inter-state trading impediments. The Europeans saw this success and followed suit – creating their own common currency, eliminating inter-country trading barriers, and making English the common language of business.

I believe that the Brits are taking a step back with the Brexit vote. Many of the “world-is-ending” prophesies of tumult and turmoil are over-reactions.  However, the “leave” group is ignoring the past century of economic reality.  Globalization hasn’t been perfect, but the benefits have grossly outweighed the problems. The British “leave” group seems to have conveniently forgotten the very low standards of living through the early 1960’s.  This same group will find themselves soon encumbered by cross-border regulations and red-tape.  And I believe Britain will ultimately be much less competitive in Europe, globally, and even in their home market – just like the Italian’s in the 1980’s.

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