You may not have to worry about this for long. But through June 23, investors should devote a share of their attention to the European parlor game known as “Brexit.”
On June 23, British citizens will vote on one basic question: Should the United Kingdom remain in the European Union, or leave? If they vote to stay, global markets will breathe a sigh of relief and go back to business as usual. But if BRits vote to EXIT the EU Brexit, get it? it will trigger a realignment of Europe’s financial sector and cause the kind of uncertainty that makes markets manic.
The European Union is a group of 28 countries that have agreed, over time, to abide by certain rules that supercede each nation’s own rules and laws. This is mainly to facilitate trade and commerce in ways that make each signatory country better off. In principle, the EU supports “four freedoms”—the free flow of goods, services, workers and capital among all 28 countries. There’s no analog in the United States because all of those things can already move unimpeded from state to state.
The EU is different from the euro zone, which is a group of 18 countries that have adopted the euro as their currency, including Germany, France, Spain and Italy. The UK does not use the euro, nor do other EU countries such as Sweden, Poland or Hungary. Nations can still benefit from membership in the EU while retaining their own currencies.
Rising immigration levels
European governance can be arcane, but the main reason for the Brexit vote will be familiar to many Americans: concern about immigration. EU rules allow any citizen of an EU country to live in any other EU country and enjoy most privileges of citizenship, including social services. In recent years, there’s been a sharp jump in the number of people coming to the UK from other EU nations, including newer entrants such as Romania and Bulgaria. Some native Brits feel immigrants are collecting an unfairly large share of welfare payments and child benefit payments, which has become a touchy political issue, much as it has here in the United States.
While running for reelection in 2015, Prime Minister David Cameron vowed to cut the net inflow of people to the UK to less than 100,000 a year. Last year, however, that number hit 330,000. Cameron, who staunchly opposes Brexit, also made a campaign promise to hold a referendum on the matter, which is what is happening on June 23.
Polls suggest the vote will be close, but polls have been wrong before. When Scottish citizens voted on whether to secede from the UK in 2014, many polls forecast a tossup and a few predicted Scottish secession. But Scots ended up voting 55% to 45% to remain part of the UK. Pollsters point out that voters tend to become more conservative, and side with the status quo, as voting on a controversial topic nears.
How will markets react?
If Brits vote to stay in the EU, markets could rally, since they’ve been falling on concern about what sort of turmoil a Brexit vote could unleash. The UK might stil try to renegotiate certain agreements with the EU, but markets would barely care.
The troubling scenario is a vote for the UK to leave the European Union, which would cause all kinds of unpredictable fallout. An actual departure from the EU would take a minimum of two years, with procedures worked out slowly. The impact on the US economy would be minimal, except for financial markets, which could stagger while investors try to sort out the implications. The dollar would probably strengthen as investors bought US securities as a hedge against European turbulence.
Once out of the EU, the UK would no longer benefit from free-trade provisions among EU countries or with other nations governed by EU deals. That means it could either negotiate trade deals one by one with its European neighbors and other countries, including the US, or do without trade deals. That’s what President Obama was talking about when he said Britain would move to the “back of the line” if it left the EU. There would also be strong pressure from some domestic industries, such as steel, to impose tariffs on imports, which would push up prices in the UK and invite other countries to retaliate on imports from the UK. And trade wars rarely make everybody better off.
London is a world hub for finance, and there would be immediate pressure on big European banks to move investment banking, trading operations and other activities out of the UK and into other countries fully integrated with the EU. This might actually benefit financial hubs such as New York, which could gain a competitive edge if Europe’s financial capital splinters into several smaller ones.
Other EU nations, which have their own anti-immigration political factions to contend with, would probably make Brexit painful for the UK. “This will not be an amicable divorce,” Jacob Kirkegaard of the Peterson Institute for International Economic said at a recent conference. “The probability of punitive political actions by the rest of the EU is a very strong base case,” It could become much harder for Brits to work and live legally in other parts of Europe, for instance. Brits who retire in sunny locales like Spain or Cyprus the European equivalents of Florida or Arizona might find they’re no longer able to receive government-provided healthcare in their new locales, a perk of EU membership.
The consequences of Brexit would land a lot harder on the UK than on the rest of the world, however. “I have trouble fully understanding why some of the major economies think this is a systemic risk,” says Adam Posen of the Peterson Institute. Even in the worst-case scenario, banks, multinational companies and government regulators would have plenty of time to adjust. The Federal Reserve and other central banks would be able to intervene, if necessary, to keep markets stable.
If the Scottish vote is any guide, none of that will happen. Even the Greek financial meltdown, caused by profound economic problems, got resolved last year after familiar down-to-the-wire wrangling. So the 2016 Brexit vote may turn out to be nothing more than Europe’s annual scare. Just be ready in case this time, it’s real.
Courtesy : Yahoo