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Brexit? Will Britain leave the European Union?

by in Trusted Advice

Should Britain stay part of the European Union (the EU) or should it leave and go it alone, commonly referred to as “Brexit”. As of now, Britain is part of the European Union (though not part of the Euro currency).   Britain's $3 Trillion  in gross domestic product (GDP) makes up 17% of the $16 Trillion GDP of the entire European Union.  For perspective the US GDP stands at $18 Trillion.   On June 23, 2016, British citizens will be voting on whether to stay a part of the EU or not. Current polls show by a slim margin that they will stay in the EU. However, polls have not been very reliable lately as predictive tools and consequently there is no certainty as to what the outcome of the vote will be. In this note, we will try to highlight the potential impact of staying in the EU and for a British exit (Brexit) from the EU.

There are certainly advantages afforded to Britain by being a part of the European Union. Amongst the benefits are increased trade, stronger GDP growth, and greater influence over world affairs as a part of a large supranational organization. As a member of the EU, countries enjoy free trade within the Union as well as free movement of individuals between member countries, which is helpful to growth in more mature countries. There is also greater cooperation amongst the Union members on national security, cybercrime and drug trafficking. The downside of being part of the European Union is that Britain has to abide by laws and regulations of the EU, and the fee schedules of that governing body, and the sovereignty of Britain is compromised. Additionally, immigration is harder to control. And while the EU is a sort of trade and migration cooperative, it does not have fiscal or banking powers, nor does it have its own currency (there are EU members that are not in the Euro zone and thus not part of the Euro), so tax and spending discipline is impossible to enforce.

If Britain does leave the EU they would likely be hurt by slower GDP growth almost immediately as they would have to strike up new agreements with countries individually. Beyond a more challenging trade environment, Great Britain is a mature industrial country with low birth rates and consequently benefits from freer movement of people and immigration. They also would avoid what many believe to be unnecessary EU regulations and bureaucracy, as well as the administrative cost of union membership and will not be subject the EU labor directives which have driven up costs for businesses. It would also jeopardize national security by reducing access to common European criminal databases, and result in trade barriers between the UK and the EU. In particular, most argue that leaving the EU would lead to job losses, delays in investment going to the UK and risks to both small and large businesses alike.

In the end an exit by Britain will likely lead to slower growth and possibly weaker currency in exchange for a feeling of autonomy and to feed citizen’s hunger pangs for nationalism. With regard to global stock markets, if the vote by British voters is to stay a part of the EU, markets are likely to view this outcome as a non-event which would have a neutral to perhaps a small positive effect. If however, the vote is for Britain's exit, British and European markets would likely take that as a negative and fall in anticipation of slower GDP growth and disruption. British trade agreements with individual countries would have to negotiated and existing flow of products to and from Britain as well as the flow of people would become uncertain in the short run. This lack of clarity and short-term disruption would also likely hurt the British pound, causing the currency to drop in value. Because of all these factors the impact on U.S. markets is more uncertain.  The decision is still quite fluid, though we might get greater clarity as to its outcome as the June 23rd vote approaches.

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Guest Sunday, 23 February 2020