On June 23rd Britons head to the polls to vote on whether to stay in the European Union or cut loose and go their own way economically. In reality this is just the U.K. deciding on whether or not to stay in a trade organization on steroids but you’d never get that perspective listening to the rhetoric. Depending upon which side you listen to, Brits can expect anything from a home price crash to a plague of locusts. England is right now divided into Stay and Leave camps.
The polls show an electorate that is nearly evenly split on the question. Global markets tanked last week when the Leave camp showed up in polls with a big lead. Markets soared this week when new polls came out showing the Stay camp in the lead. The truth is no one can really tell how the vote is going to go until the votes are counted and that is making world markets nervous.
England Would Not Disappear
The fear of the Brits leaving the EU is certainly overblown in financial markets. People seem to forget that Britain is not going to disappear if it votes to leave the EU. The U.K. would still be the world’s fifth largest economy on the planet. Some people talk like Britain would sink into the sea of suddenly cut off from the EU. That would certainly not be the case. Markets would kick in to assign a value the British pound and its stock market. There would certainly be some turbulence but life would go on.
The reasons some Brits want to leave the European Union are much easier to understand. Probably the most visceral for most Britons is the fact that England pays more into the EU than it gets back. The wealthy country payment schedule is pretty blatant redistribution and it doesn’t sit well with many conservative-leaning Europeans. But what really drove the Brits to the point of the referendum was the EU dictating how many Syrian refugees they had to take. Then the EU courts went one better and told member countries they could be financially liable for immigrants and refugees moved against their will. That’s when the whole Brexit question got real for many Britons.
Markets In Turmoil
Like any big change, just talking about the Brexit vote sent world markets into turmoil. Even the U.S. Federal Reserve held off on an interest rate hike decision until after the Brexit vote.
The reason everyone is so nervous is that the European Union, depending upon who is doing the measuring, is either the largest economy on the planet or a close second behind the United States. The U.K. is one of the larger economies in the EU, going it alone it would still be the fifth largest economy in the world. But the Brexit would hurt the EU more than it would hurt the U.K. There’s also a very reasonable fear that Germany and France would be tempted to similarly go separate ways.
The euro is also one of the world’s reserve currencies. How much faith in the euro would remain if the U.K. leaving the EU triggers other countries to follow them out? If the U.K. left and that was the end of it, the pound sterling would revalue, the U.K. real estate market would revalue and the stock market would likely take a temporary dip but the world would go on. But, if the U.K. leaving stirred up political trouble in Germany, then all of the EU is threatened.
Without the biggest countries in the club, the EU becomes basically a really complicated trade deal with no money, no power and no future. All those euros other central banks would be stuck with would make nice collectibles for the kids but otherwise worthless. After all the hand-wringing, the real fear is that the U.K. would be the first and not the only country to leave the EU.