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Established in 1993, the European Union (EU) is a political and economic partnership of 28 European countries. It establishes a common set of policies, laws and regulations on trade, commerce, immigration and public affairs by which member nations must abide. It creates a singular marketplace for the free movement of goods, capital and its citizens.

But on June 23, 2016, the citizens of the United Kingdom (U.K.) shocked political pundits and voted 51.9 percent to 48.1 percent to leave the EU. The U.K. consists of four nations — England, Scotland, Wales and Northern Ireland. The departure has been termed Brexit, which combines the words Britain and exit.

To many in Europe, the EU has become a political and bureaucratic burden, enveloping citizens, workers and businesses under a mountain of frustrating, and sometimes whimsical, EU-imposed regulations. Perhaps the most legendary of mandates were those that governed imperfectly shaped fruits and vegetables.

Under the humorously-coined “bendy banana law”, the EU charged that all bananas be “free of abnormal curvature” and be at least 14 centimeters in length. And to you home gardeners, even the mighty cucumber was not spared from legislative oversight. Per the EU, all Class 1 cucumbers had to be “practically straight” with a gradient curve of no more than 1/10. Fortunately, these laws have since been amended.

Yes, we can poke fun at the excess of political bureaucracy. But for the U.K., the Brexit vote carried a singular message — self-governance and freedom from control of a foreign political body in Brussels, Belgium, the de facto capital of the EU.

The U.K. will formally leave the EU on March 29. Accordingly, all existing treaties with the EU on trade, its borders, the movement of citizens and commerce, among others, become null and void. But the great unknown is if this departure will be a “hard” or “soft” exit.

Under a soft Brexit scenario, the U.K. and EU would negotiate new treaties and covenants on these critical issues prior to the March 29 departure. Also, the U.K. would still retain somewhat close ties with the EU. The goal would be to minimize disruption to national economies, businesses and the free-flow of trade and commerce. A hard Brexit, however, would sever all ties with the EU. Regardless of a hard or soft Brexit, there would be a 21-month transition period to help smooth the path of the U.K. and EU’s future relationship.

Since becoming the U.K. Prime Minister in July 2016 — just weeks after the Brexit vote — Theresa May has failed to find common ground in the U.K. parliament on any proposed deal that structures the terms of departure and future relationship with the EU. The latest attempt was Tuesday, when British lawmakers soundly rejected her proposal by a vote of 432-202. Pro-EU lawmakers rejected it on conviction the U.K. should still remain within the EU. Many pro-Brexit lawmakers contend the deal would still subject the U.K. to EU rules and oversight.

With the U.K.’s inability to formalize the terms of its March 29 exit, odds are increasing a third scenario — a “no-deal Brexit” — will occur. This would truly be the worst case of all scenarios. Under a no-deal Brexit, the U.K. would leave the EU without any framework of replacement treaties and agreements and without any 21-month transition period.

The economic fallout from a no-deal Brexit could be substantial. The combined economy of the 28-nation EU is $19.15 trillion and accounts for almost 22 percent of the world’s economic growth. The U.K. represents $2.81 trillion, or nearly 15 percent, of the EU’s economic output. But on March 29, trade and commerce between the U.K. and EU would immediately turn to a state of flux, including customs and tariffs, business supply chains, access to labor and the flow of currency, among others.

The U.K. and EU are at a perilous crossroad. Economic growth for each significantly declined in 2018, and the projected impact of Brexit casts dire warnings of future economic weakness. For the U.K., it is less than 10 weeks from being an overnight outcast from the security of a multi-nation trading partner and marketplace. For the EU, Brexit may serve as the initial blow of discontent that triggers other nations to leave the EU. Growing political factions and grass-roots campaigns in Greece, Italy, France, Sweden and a host of other nations have also called for an EU departure.

For Americans, our primary concern lies in Brexit’s economic impact reverberating across an already weakening global economy. Yes, the U.K. and EU lie on the other side of the pond. But in today’s world of global commerce, that impact will eventually find its way to the U.S. economy.

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Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.

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