The Right Place Inc. President and CEO Birgit Klohs has one word to describe her reaction to the United Kingdom’s decision yesterday to leave the European Union: Disappointment.
In a phone conversation this morning, a very somber Klohs kept coming back to the question of what the long term will hold for Europe, where the German native grew up and spent her formative years, and where many of her family members live.
She said the impact of the vote “today, tomorrow and next week” will clearly bring uncertainty to the global markets, but the long-ranging effects are much more concerning.
“This presages the end of the EU as we know it. There are consequences folks didn’t count on,” Klohs said. “Politically and economically, is this the beginning of the end for the European Union as a political and economic powerhouse that makes decisions together?”
The U.K.’s narrow 52-48 percent vote to leave the European Union sent shockwaves through the global economy, with major indices plummeting because of the uncertainty surrounding the impact of the referendum on one of the world’s largest economies. In the U.S., the Dow Jones Industrial Average fell about 500 points at the opening bell and has been hovering around 3 percent lower than Thursday’s close.
That’s led to paper losses of more than $2.5 billion in market capitalization for public companies based in West Michigan, according to an analysis by MiBiz. Benton Harbor-based global appliance maker Whirlpool Inc. (NYSE: WHR) alone lost more than $1.1 billion in market capitalization as of midday.
For their part, investors fled to the stability of the U.S. dollar, driving its value higher. That could become an issue in West Michigan if the value of the dollar stays elevated, further hampering U.S. export activity, Klohs said.
“A strong dollar will hurt our manufacturers,” she said. “Where it comes home to roost is that a strong dollar is not good for exports.”
The effect of the so-called Brexit vote on foreign direct investment in Michigan remains unclear, but is something that the Michigan Economic Development Corp. will continue to monitor, said CEO Steve Arwood in a statement to MiBiz.
“We’re reviewing the situation in Great Britain and know that these are changes that will occur over a period of years,” he said. “Michigan has a good relationship with our global trade partners and we will strive to continue those relationships as we work through these changes.”
It’s also uncertain how closely West Michigan companies paid attention to the Brexit discussions, according to Klohs, who said she only received a few questions about the potential economic effects in the last couple of days.
“It’s a case where it was far away and there’s emotion, but everyone thought good sense would prevail,” she said.
In the short term, the global economy will continue to wrestle with uncertainty, which could restrict access to capital and cause a slowdown, said Paul Isely, a professor of economics and associate dean of the Seidman College of Business at Grand Valley State University.
Isely was driving from Detroit to Grand Rapids last night listening to BBC Radio when the news outlet called the vote in favor of Brexit.
“I heard that and said, ‘Oh man, it’s going to be a mess tomorrow.’ There’s going to be a lot of people who lose money,” he said.
Still, when asked if the situation in the EU will cause any long-term damage for the U.S. economy, Isely said, “I don’t think so.” West Michigan in particular doesn’t have much exposure to the Europe and U.K. economies, as most of the foreign firms in the region produce goods for North America, not to send back to their home markets.
“Across the world right now, people are worrying about the uncertainty … (and) businesses don’t like uncertainty,” he said. “It could result in a reduction in overall investment worldwide — investment in capital. That could tip us to a worldwide recession real quick. The global economy is not that strong to begin with. If uncertainty stays around for more than a week, (it could start to affect the U.S. economy).”
The situation will depend on signals in the coming days and weeks about how the EU and the U.K. will progress with the separation and what will happen with trade deals and the flow of people, he added.
“If capital flows seize up to make it hard for business to make the transactions they need to make, then all bets are off,” Isely said, “but I don’t think it will happen.”
For her part, Klohs views the U.K. vote as extremely short-sighted, particularly given the decades of work that went into establishing the European Union. She thinks the British voters will be surprised when they see the effects that isolation will have on their economy, especially given the global nature of trade and business these days.
“You can’t hide behind a border,” Klohs said. “This will have long-term implications for our exports in the U.S., West Michigan and how we move forward. Will we have a unified European market that is strong and that will be a market for the U.S. and vice versa?
“My hope is cooler heads prevail at least in the way they go through this separation. I hope they will make good decisions in terms of military, economy and policies. I hope they will get together and see how can we still work together and have a good outcome.”