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BREXIT? IT BREMAINS TO BE SEEN.

BLOG, MARKETS & ECONOMICS  |  20 Jun 2016

By Jon Aldrich

Brexit

June 23rd is going to be a big day in Britain, and maybe for the rest of the world. This is the day the general population of Britain votes on whether the country will continue to be a member of the European Union (EU)?

Since we have had catchy names for some of the other recent political/economic issues such as “Grexit” (Greece leaving EU), “Taper Tantrum” (worries about the end of QE and interest rates rising in 2013), etc., it only makes sense to label the referendum of whether Britain remains in the EU as the “Brexit”. The concept of Britain staying in the EU even has its own name, “Bremain”. One can have a field day coming up with clever names for all the economic and political events that we face constantly.

What is the referendum in Britain on June 23rd all about? First, let’s discuss what the “European Union” is, and how this differs from the “Euro Zone”.

The European Union (EU) offers a single market for duty free trade and financial services as well as free movement between countries for workers. The EU common market is world’s largest trading block with over 500 million people. It is comprised of 28 countries in Europe that have agreed to abide by certain rules that supersede each member’s nations own rules. This is done primarily to facilitate commerce and trade in ways that are supposed to make each individual country better off than being independently sovereign. It is designed to allow free flow of goods, services, workers and capital among the member countries. This is what the people of Britain are deciding if they should remain a member of.

The Euro Zone (EZ), on the other hand, is different from the EU. The EZ is comprised of 18 countries that utilize the euro as their currency. Countries include Germany, France, Italy, Spain, Greece, etc. Britain is not a member of the EZ as they have chosen to remain on their own sovereign currency, the pound. Thus, Britain remains in control of their own currency, while the countries mentioned above that are part of the EZ do not directly have control of their currency, the euro.

Why do many in Britain want to leave the EU?

Rayhanul Ibrahim, who writes for Yahoo Finance, summed it up nicely recently:

Rayhanul Ibrahim writes

There are other reasons as well. Those who favor leaving claim that things have changed quite a bit since Britain joined the EU back in 1973. There is much more bureaucracy which reduces Britain’s influence as well as its sovereignty and is a drag on its global competitiveness. Back in 1975 a similar referendum was held and 67% voted to remain in the EU, so this is not the first referendum on this topic.

For those in the “Bremain” camp, which includes most elected officials, staying in the EU is necessary, as the island nation needs to continue to be a part of a larger bloc of like-minded countries to have real influence and security in the world. They worry that opting out of the EU will cause their currency to weaken dramatically, cut growth and hurt London, which is Britain’s financial center, because many financial jobs could end up leaving London to relocate in other countries that are still part of the EU.

Will this affect us here in the U.S.? The rest of the world?

Brussels. Where the EU is headquartered, will not make it cheap for Britain to exit the union. One, because there are lots of agreements that would have to be reworked and, two, to discourage other countries from following suit. Other countries such as Greece and Spain have recently shown some desire to leave the EU as well. It would be hard to pinpoint the cost to Britain of leaving, because it would depend on the agreements that get worked out between Britain and the EU, and the process could also be dragged out for years. Thus, Britain would likely remain a member of the EU for several more years. Also, the deal that gets worked out may be very similar to their current membership, even though, technically, they are no longer a member.

Markets have been worried the last couple of weeks, and market participants are worried about possible upheavals in many of the world’s currency and stock markets if the island votes to leave the EU. This could result in some short-term nastiness in not only Europe’s markets, but the rest of the world as well. World markets have been edgier the last couple of weeks, as Brexit polls have fluctuated back and forth. The referendum looks to be close, and is hotly debated in Britain. Recently a parliament member and staunch supporter of staying in the EU, Jo Cox, was assassinated. Ironically, this has caused a recent shift in the polls favoring the Bremain side.

As, Thursday, June 23rd approaches, it appears the vote could go either way, although as of today (Monday), recent polls are showing a better chance of Britain remaining in the EU and stock markets are jumping. And, even if the Brexit vote wins the referendum, and there are some nervous moments in the markets, it will likely be overblown and not be a major concern for those with a long term focus. We survived “Grexit”, “The Taper Tantrum” and other “major” events the last several years and my guess is we will survive this as well.