Brexit Angst

by Brad Houle, CFA Executive Vice President

On June 23, voting citizens of the United Kingdom will vote on a referendum to leave or remain in the European Union. This possible departure has been nicknamed “Brexit”, a word that merges “Britain” and the word “exit.” The European Union (EU), an organization formed after World War II, was created to end conflict between European countries by facilitating trade and creating a common market. The current European Union, comprised of 28 countries, allows people to move freely and for goods to be sold tariff-free between member countries.  The principle reasons for a U.K. departure involve strict business rules imposed by the EU and the core EU principle of open country borders. The flood of North African migrants has become a political issue in the U.K. as well as in other countries. The social costs created by the immigrants and wanting a greater control of the U.K.’s borders have been issues on voters’ minds. While large businesses are generally in favor of staying in the EU, smaller businesses see an opportunity to cut regulation red tape. However, the Bank of England, U.K. Treasury and European Commission, as well as most U.K. governing bodies have come out strongly against the measure.

Economists have predicted that the negative economic impact of leaving the EU would be profound. This change would also negatively impact the fragile recovery occurring in Continental Europe as the U.K. is the second largest economy in the EU. With a U.K. departure, the London School of Economics and Political Science predicted a recession in the U.K. with a 2.2 to 9.5 percent drag on consumption per capita. The British pound has weakened considerably during this news of the referendum and there is reduced confidence in foreigners owning assets in the U.K.

According to a Financial Times May 17 poll, 46 percent of voters wish to stay and 40 percent would like to leave the EU. Like Scotland and Quebec before, other governing bodies have a tendency to peer over the edge and ultimately decided to stay. Economic self-interest generally wins out over the political flavor of the moment. The good news about an event like this is that there will be a point of certainty. After June 23 the outcome will be known and markets will adjust to the new perceived reality.

Our Takeaway for the Weeks

  • A Brexit is unlikely to happen
  • Economically, it does not make sense for the U.K. to depart; there are more advantages than disadvantages for being an EU member