Perhaps you're aware there's a big vote going down in the United Kingdom this week. There's going to be a referendum on Thursday to determine if the UK remains in, or withdraws from, the European Union. (Brexit is a short-hand way of referring to a "British exit" of the EU.)
The polls vary widely as to the outcome of the vote, so there's no consensus on whether the good people of the UK will decide to stay or leave. The only consensus I could find is that the financial commentariat is generally horrified by the idea of a Brexit, predicting dire economic consequences for the UK, Europe, and pretty much the entire known world. But I'm getting ahead of myself.
No one knows which way the vote will go, or what the consequences will be either way. So this is more an article for the economically curious than it is a "you need to know this so you can be prepared" warning.
So what's it all about? Here's a primer from MarketWatch (The Brexit vote: Everything you need to know about the referendum) to get you started. The opening sets the stage:
The issue is whether the country should exit the European Union or stay within the bloc. The “leave” camp argue the EU is a very different proposition to the European Economic Community that Britain joined in 1973. Since then, its scope has widened to cultural, judicial and other areas beyond that economic Common Market.
On the other side, the “remain” camp argues that the U.K. gains in economic benefits, security and global influence from being a key member of a large bloc of nations.
Mohamed A. El-Erian, former guru bond-fund manager at PIMCO, weighed in at Bloomberg today with this sunny forecast:
Here's what the world could look like on June 24 if the “Leave” camp won the previous day’s referendum on whether the U.K. should continue to be part of the European Union:
The foreign exchange markets are in turmoil, with the pound falling 7 percent to 10 percent and the euro down about 3 percent to 5 percent. Stocks also are under considerable pressure as investors try to price in greater institutional uncertainties and the coming hit to economic growth....The rest of Europe is stunned, and worried about a domino effect....
And we shouldn't feel reassured even if the U.K. ends up by voting to remain in the EU: Yes that would remove the immediate threat of economic and financial disruptions but, unfortunately, it would do nothing to address with the system's underlying growth defects, which are certain to cause further turmoil.
Here's an assortment of anti-Brexit opinion from MarketWatch that is strongly in favor of the UK staying in the EU:
"In my opinion, it is a terrible deal for the British economy and jobs,” if the majority of Britons supported the country exiting the EU, said J.P. Morgan Chase & Co. CEO Jamie Dimon.
"We believe that a vote in favor of Brexit could lead to a global sell-off in risk assets (stocks, corporate bonds, and commodities) and a rally in perceived safe-haven assets (U.S. Treasury securities, Japanese government bonds, and gold) in a manner similar to that of the China-related market concerns at the start of this year,” Wells Fargo Global Research Analyst Peter Donisanu wrote in a June 17 note.
"France…or Italy might suddenly decide their own domestic internal policies should be favored versus that of a larger EU family,” Janus Capital ‘s Bill Gross told CNBC on June 10. “If ‘Brexit’ wins, then fear gets into the marketplace and positions in terms of expectations for growth — anemic as it is in euroland — become threatened.”
"I worry about the shocks that we don’t control,” Treasury Secretary Lew told CNN’s Fareed Zakaria on June 12. “U.S. growth will not be able to completely offset slow growth or recession in other parts of the world, which is one of the reasons I’ve spent a fair amount of time with my European colleagues—because if Europe grows 1% faster that’ s a good thing for the American economy. It’s our largest export market. When I look at the economic issues I see only plus sides to the United kingdom remaining part of Europe.”
But the pro-Brexit folks have their arguments:
In a report published Thursday, eight British economists said the U.K. economy would be better off outside the EU and could be as much as 2% larger by 2020 if it left--and as much as 4% larger after a decade. The economists likened the EU to a "walled garden" that imposes punitive tariffs and regulatory barriers on goods and services produced outside its 28 member states. Quitting the bloc would allow the U.K. to trade with the rest of the world with tariffs set by the World Trade Organization, they said.
“I am praying that the U.K. will leave the EU,” Swiss investor Faber told MarketWatch on June 10. “If the U.K. leaves the EU, there will be a movement of other countries that also leave the EU. The breakdown will produce wonders for economic growth. Other countries have the idea that this will destabilize the EU,” Faber said. “Nobody can tell me that Europe was worse off before we had the EU and the euro.…The bureaucrats all say it [will be] a disaster; there is no basis that it would be a disaster. Switzerland is not a member of the EU, but is doing fine.”
"Some suggest that the British economy will be more stable if it stays in the EU,” wrote economist Diana Furchtgott-Roth in a June 17 column for MarketWatch. “But the EU itself has massive economic problems, with a growth rate of 1.4%, underfunded public pensions, and bloated welfare obligations. Its lack of control over its borders has resulted in over a million refugees and economic migrants, some of whom are linked with ISIS and are planning terrorist attacks. Under EU law, all have to be housed and fed at EU taxpayer expense. This is no recipe for stability.”
I'll leave the last word for today with Warren Buffett who knows a thing or two about investing. Whether Brexit passes or not: “It wouldn’t change anything I did."