Aaron Johnson: Georgia Must Brace Itself for Brexit
Thursday, July 7th, 2016
On Thursday, June 23rd, the United Kingdom voted to rescind their membership to the European Union. News media has commonly referred to this as Brexit, meaning that the UK will be exiting the EU. Predictably, global markets reacted unfavorably as this act will create uncertainty that will impact the flow of goods and services throughout Europe. However, should Georgia economic officials be concerned?
A cursory review might not be worrisome. Yes, there will be loss of wealth as stock markets among Georgians as they see US stock market volatility erase wealth and cause households to be leery of spending until their fears subside. However, market volatility usually subsides as uncertainty wanes. Within a month or so, Brexit will likely be a distant memory faded from the conscious of many Americans.
On the other hand, Georgia relies more on global commerce than most regions of the US. When accounting for overall trade traffic, Georgia ranks 4th behind only California, Texas, New York and Florida. More importantly, Georgia exports as a percentage of GDP represents 7.7 percent whose exposure is only exceeded by Texas.
That means Georgia is more susceptible to turmoil across the Atlantic than most states in the union. When looking at trade partners, the UK ranks 4th in exports for a total of $1.8 billion. Any disruption to this relationship impacts the overall benefits of international trade and fewer sales.
For instance, a rapidly plunging British Pound will make British goods and services relatively less expensive than those produced in Georgia. That would hurt Georgia exporters as their products and services become more expensive to their global peers. Fewer export sales reduce profits.
Consider a chief executive officer of a Georgia aircraft parts firm. They might have received past orders to replace aircraft parts in the UK. Now with a declining pound, the US dollar is stronger, so now their parts are now less attractive. Maybe their UK clients will choose to not renew their orders and seek cheaper options elsewhere.
Another extraneous effect is the potential distress on the British financial system. If other EU member-nation leaders insist on closing financial services access to the UK then that would result in large capital outflows from the Bank of England and other British financial institutions. For instance, they would lose deposits from French, German, and other European customers, so that means less funding for lending. An additional consequence would lower safety nets to protect against bad loans emerging from a vulnerable European economy.
With the UK being a top 5 trading partner with Georgia, the resulting decline in commercial activity could be felt in multiple sectors across the state. Potential vulnerable sectors include aircraft, auto, energy, and agriculture. If firms are not able to replace the loss of business from Britain, then they will have to resort to reducing their cost structure. Reducing inventory expenses impact local suppliers, while cutting payrolls shrinks wallets of Georgians. Either scenario lowers overall state incomes and curtail consumer spending.
Of course, there is hope that the EU will negotiate favorable terms for a British exit. This outcome is desired by global investors as it would minimize the economic costs of Brexit. British financial institutions would maintain European deposits and stabilize their balance sheets. The pound would likely appreciate and make US exports more affordable.
The obstacle is convincing other EU member nations to agree to a perceived unfair arrangement. While France and Germany must bear the political cost of allowing immigrants to roam freely across their borders, the UK can close their borders and enjoy greater political goodwill of their citizens leery of immigrants. Even if they do acquiesce, how could EU leaders keep others from following UK's lead? Such circumstances would make it challenging for the EU and the Euro to survive.
Such chaos would wreck havoc across the US with Georgia bearing a disproportionate brunt of the damage. Brace yourself now as we enter unchartered waters.