On June 23 the British voters will decide if they want their country to remain a part of the European Union (EU) or leave to become an independent economic nation once again. This risk of a vote to leave is commonly being referred to as “Brexit”. We have to admit it’s pretty catchy, but what does that really mean for the United Kingdom and what impact could it have on the EU? Would a “Brexit” have any impact on US policy or the US markets? Here are few of the key highlights and possible considerations as to what might happen.
In its simplest form the vote on leaving the EU is either “yes” to leave or “no” to stay. If the vote is “no” then things stay the same. If, however, it is a “yes” vote, then many things become uncertain which will determine how things will turn out: trade relationships would have to be renegotiated, foreign investment into Britain may decline, London’s may lose its role as Europe’s financial center, the currency’s value is already falling, and economic growth would most certainly be hit in the short term.
The EU grew out of post-war efforts to prevent future military conflicts on the European continent by integrating European countries economically. The EU we know today began its formation in 1993 with a vision of creating a sort of “United State of Europe.” The idea was to foster the free flow of products, money, and people within the union and to make it easier for Europe to do business and trade with the rest of the world. To accomplish that, the EU created a unified set of broad rules and regulations that applied to all participating EU countries. The EU also has a budget for its operations and projects to which all member countries contribute in differing amounts. It eventually established a single currency, the Euro, which Britain never adopted. (Member countries, even those using the Euro, maintain independence over banking regulation and, with certain limitations, management of their own budgets and how they are financed.) The EU now includes 28 countries and more than 500 million people, a population larger than that of the United States.
So what is at stake for the UK if it leaves? More than 40% of Britain’s exports go to the EU, making it a very important trading partner. According to Laura Somers Edger, Client Portfolio Manager at Lazard Asset Management, the most important question (assuming the vote is to leave) is whether the United Kingdom can retain access to the European Single Market. Britain would have a 2-year window to renegotiate new trade agreements with the EU, but would the EU be in any hurry (after taking 7 years to negotiate a deal with Canada) or would a British exit throw the EU into chaos? No country has ever left the EU, so there is no precedent.
So why would Britain want to leave? The leave supporters argue that Britain is less dependent for economic growth and development on the rest of Europe and that it would be able to negotiate better trade agreements on its own. While economic issues are certainly important, the topics weighing on the minds of many British voters who want to leave are immigration, budget contributions, and sovereignty. Britain is not alone in reacting with nationalistic, protectionist tones to the flood of immigrants entering Europe from the Middle East. As for the budget, Britain is one of the few members that pay more toward the EU budget than the benefit it receives from the budget. Both of these topics reflect the frustration felt by many Brits (and other Europeans) over their country’s loss of sovereignty. In fact, one fear is that if Britain votes to exit the EU, others will follow, reopening the debate on the sustainability of the EU.
Interestingly, the referendum has no required minimum turnout and the outcome will be based on a simple majority…talk about every vote counting. That is a little unnerving, and this vote has certainly caught the attention of policy makers and investors across the globe. Recent polls in Britain show the vote “too close to call,” but the smart money, literally, is on the UK remaining in the European Union. According to the odds makers (think bookies – the Brits seem to bet on everything), people are putting their money on a vote to stay in the EU. And recent history has shown the odds makers to be very accurate in predicting political outcomes.