Brexit? What is that? It stands for British Exit from the European union. But why? Let’s review and discuss.
Yesterday, British citizens voted on this question, “Should the United Kingdom remain a member of the European Union or leave the European Union?”
The financial markets following the polls had moved up in anticipation of a “stay” vote. In fact the polls were sure of a stay vote and there was a hefty market increase on Thursday. Thus the surprise “leave” vote impacted markets worldwide on the downside.
Why the global nervousness?
Important British trading partners — including India and China — indicated they were worried that an exit would create regulatory and political volatility that could harm the economies of everyone involved.
The U.K.’s Treasury Department reported that its analysis showed the nation “would be permanently poorer” if they left the EU. Productivity and GDP per person would be lower in their opinion. Costs would substantially outweigh any potential benefit of leaving the EU, they said. Then as the overall economy weakened, the British government would see weaker tax receipts and losses would vastly outweigh the benefits of reduced contributions to the EU.
The Bank of England, the International Monetary Fund, and others agreed and warned of the long-term negative effects of a British exit.
Why does it impact us?
Profits for global corporations. The general thinking is that many international corporations, notably those based in the U.S. and China, invest in U.K. operations partly because they can get access to the free-trade corridors the U.K. enjoys with the rest of the European Union. So since the leave camp won, many of those companies could see drastically reduced profits. Free EU trading is over.
Timeframe to reset: The sudden need to reset tons of global investment channels — against the background of the ambiguous and extended period of the U.K.’s exit negotiations — could have a freezing effect on the whole region. It could two years to exit. It has never been done before.
Size Impact: Depending on how you measure it, the EU as a whole ranges from the first to the third largest economy in the world. And in terms of trade, the bloc easily topped the U.S. and China in both imports and exports. So a slowdown there would mean a global slowdown that could last months — if not years.
Why is global?
In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction. If even a small percentage of that is disrupted, it could impact across the globe.Similar concerns apply for Chinese, Indian, Japanese and other international companies and investors.
Impact now:
With all of that uncertainty rushing around, a British exit will likely result in a massive rebalancing of currencies. Look at the deflated pound today and into areas perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar. The euro could also see some weakening if investors are worried about the fate of the EU. Already France, Italy and others have voices raised about leaving the EU.
Now, being a safe haven could be a boon for the U.S. economy. More money and investment. However, such a large and sudden currency swing could have significant negative implications for American multinational corporations. That would drive shareholder value down.
So with all that why did they vote to leave?
First and foremost, the average person simply didn’t care about the multinational corporations or big time investors who would likely bear the immediate losses. Plus the fact that “expert” predictions are increasingly unpersuasive to voters. People are angry at the elite, the direction of their country and its future. Sound familiar?
And for many, concerns about the costs of continued EU membership far outweighed any worries about leaving.They felt they were losing their identity and country. Sound familiar?
And this: One of the major sticking points in the conversation has been immigration concerns, as some citizens worry that the country’s employment market and social services will drown under the weight of too many new residents. There’s also the worry that upper-crust elites and Brussels bureaucrats are pushing for a continental identity that diminishes the U.K.’s own sense of self. Sound familiar again?
Plus the pro exit people argue a different economic outlook. They argued that the EU’s strong regulatory regime and its required contributions actually depress the U.K.’s growth potential.
There you have it. Much like the U.S. election. Change with Trump, or stay the path with Clinton? Close the borders or open them wider? We get our chance to speak in November.