BREXIT: A Wall of Worry?
A referendum will be held on Thursday, June 23rd, to decide whether or not the United Kingdom stays in the European Union. The recent uncertainty in mock polls has left markets volatile, making the world worry what will happen if a BREXIT (aka British Exit) does take place. While we can’t be sure what the result will bring, it is important to know the facts of the situation:
Those in favor of leaving cite two main reasons: sovereignty and immigration. They believe that leaving the Union will make “Britain more British,”and allow them to regain their national identity, which some feel has been lost since joining the EU. On the immigration front, BREXIT supporters believe that leaving the Union will allow them to install stricter immigration policies, so the nation won’t be forced to allow swarms of lower-wage workers from all over Europe to come across their border. Along with these primary concerns, there are also some who believe it is too expensive for Britain to maintain its membership. Last year, England paid a reported net contribution of £8.5 billion to the EU.1
The British contingency in favor of staying includes many large institutions and leaders, including Prime Minister David Cameron. Most businesses and universities are in favor of staying in the EU because of its open trade policies and funding benefits. Without the EU, Britain would be left to renegotiate all of its European trade contracts, which would be a long, strenuous process at best and could potentially (and temporarily) damage businesses that rely on imports/exports.
Economists generally believe that leaving the Union would slow growth for the entire United Kingdom and its domestic economy - at least in the near term. If Britain wereto leave, the fear is that other countries might seek to exit from the EU, adding to instability in an already struggling region that plays a critical role in the world economy.
By the way, if you’re thinking that “BREXIT” sounds a little familiar, you’re not crazy. It was only a year ago when we were talking about GREXIT, as Greece was considering leaving the EU. This is almost becoming a yearly event, a macroeconomic groundhog day, if you will. We suspect that the original “PIIGS” (Portugal, Italy, Ireland, Greece and Spain) along with Britain, may routinely return to the front page going forward. It could get far more entertaining if Germany should ever make “Deutchexit” noise.
We think this is a very long story and something markets will eventually “learn to live with.” It is our expectation that the impact to volatility from such potential EU membership changes will create significant rebalancing opportunity and not permanent loss of wealth.
This conversation may be comparable to the duration and tension around energy price spike/collapse concerns and the long feared “double-dip recession” that dominated much of the last seven years.
You’ve heard it said many times that “the market climbs a wall of worry.” We fully recognize the potential disruptions of a BREXIT but we don’t believe this is a long-term negative if it were to occur. The worst part of this process is the repetition of the headline.
1 https://fullfact.org/europe/our-eu-membership-fee-55-million