Putting Brexit in Context

June 20, 2016

EU flags flyingIn a week’s time, Britons will go to the polls to determine if the U.K. will remain in the European Union. This referendum has so captured the attention of investors as well as the public that new words have been coined to describe the opposing positions, “Brexit” to leave and “Bremain” to stay. In purely economic terms, exiting the European Union could conceivably push Britain, the world’s fifth largest economy and the EU’s second largest after Germany, into recession.

While estimates of the impact of Brexit vary widely, they are uniformly negative. The U.K. along with the U.S. has been one of the more successful developed economies in recent years. It would be unfortunate for this progress to be reversed. With current polls indicating that a small majority of voters favor Brexit, concerns over sovereignty and populist politics have gained sway over economic analysis.

The details as to how Britain would withdraw from the EU are indeed murky. A protracted negotiation will be required if Brexit is approved. The only nation that has withdrawn from the EU thus far has been Greenland back in 1985 due to a dispute over fishing rights. With a population of just over 50,000, it is understandable that many failed to take note of Greenland’s departure. As London is the preeminent European corporate and banking center, there is clearly a great deal more at stake, although U.K. fishermen may well be pleased by a Brexit. As trading, travel, and immigration agreements would be upended, many companies could well downsize their U.K. operations to relocate on the Continent. Foreign investors would certainly be more reluctant to make commitments and the London real estate market would be another likely casualty.

It is important to remember that the U.K. never adopted the Euro and retained its own currency, the pound, which will limit the disruption. Therefore, worst case scenarios now circulating may well be politically motivated. Nonetheless, it is clear that Brexit will further hinder global growth which is limping along at 3% at best. For the U.S., impact is likely to be contained. The drivers of economic growth here are largely linked to the American consumer and should remain intact. A further slowdown in global growth will force investors as well as the Federal Reserve to continue to recalibrate interest rate forecasts lower. Uncertainty abroad will offer additional encouragement to investors, both foreign and domestic, to focus here in the good, old U.S. of A.

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