What is “Brexit”?
River Thames. Source: Wikipedia
“Brexit” refers to the potential withdrawal of the UK from the European Union. They’re voting on the possibility on June 23rd of this year. The UK isn’t part of the Euro – the British Pound is still their currency. But it is part of the EU, and has been part of that or its predecessor, the EEC, since 1973. Membership in the EU has certain pluses and minuses. It improves trade, makes investment easier, and reduces the cost of most items. On the other hand, it requires large membership fees, puts the Brussels in charge of many restrictive labor and environmental rules, and has cost some Britons their jobs. The campaigning on this issue has been intense.
Photo: Dean Molyneaux. Source: Wikipedia
If Britain votes to leave the EU, it will be another step in the dissolution of many economic and political deals that have tied the world closer over the years. It would make “Grexit”–the potential exit of Greece from the Euro–more likely. Scotland and Wales might reconsider leaving the UK. The UK would have to renegotiate a host of trade deals with Europe and the US, and the terms would likely be more restrictive. A more risk-averse investment climate would likely drive the US dollar higher and US interest rates lower. This, in turn, could push China to devalue the Yuan. In short, global markets could be quite volatile.
Brexit, Grexit, and the rise of nationalist and nativist tensions in the US and around the world are symptoms of a general unhappiness with the pro-trade and pro-globalization order that has grown since the fall of the Soviet Union. Improvements in global commerce have led to stronger economic growth, but many people’s lives have been disrupted in the process.
The UK has reconsidered ties with Europe several times before. Each time, they have voted overwhelmingly to stay close to the Continent. Let’s hope they do so again.
Douglas R. Tengdin, CFA
Chief Investment Officer