June 24, 2016

Brexit: European Disunion

Credit: Supertrooper at FreeDigitalPhotos.net
Yesterday the United Kingdom (UK) held a highly publicized and anticipated referendum on whether Britain should leave or remain in the European Union (EU). After a voter turnout of nearly 72% with over 30 million ballots cast, Britain’s citizens voted to leave the EU. In light of this historic decision, I’d like to share a few thoughts.
  • This change does not happen immediately, and it is not going to be over quickly. Now that the “Brexit” decision to leave the EU has been made, Britain will have to formally notify the European Union that they will be withdrawing. This is done by invoking Article 50 of the Lisbon Treaty which is the constitutional basis of the European Union. Once triggered, Article 50 starts a two-year clock running where the terms of Britain’s exit will be negotiated between Britain and the 27 other member states, all of which have veto power over the conditions. The two-year period can be extended, but if no agreement is reached, the treaties and agreements that govern European Union member states will simply no longer apply to the United Kingdom. Article 50 has never been used, and the specific rules for exit from the EU are few, so this untested process will likely be lengthy and difficult.
  • The future of the EU may be more uncertain than the future of the UK. Despite all of the political, economic, and social uncertainties now facing the United Kingdom, at least they have chosen a path. The European Union has been riddled with one problem after another in recent years such as the European debt crisis with Greece and other member states, the Syrian, Afghani, and Iraqi refugee crisis, the uncertainty of what to do about Russia’s actions and posture in Ukraine, and now one of its very own member states choosing to leave. This has led to disagreements within the EU Parliament, within member states internally, and between member states. Italy, France, Holland, and Denmark are now all considering referendums of their own on whether they should leave or remain in the European Union, so the issue of whether the EU is beginning to disintegrate or whether it can reinvent itself to once again promote political, economic, and social harmony across Europe is the million-dollar question.
  • London may be hit harder economically than the rest of the UK. Many companies that do business with EU member states have major operations or headquarters in London. This is by design for a variety of reasons, but if Britain is no longer a part of the EU, some companies will have to consider if it would be better for their business to relocate those facilities to countries that are still members of the EU. What could be London’s loss could be Berlin’s, Brussels', Dublin’s, or Paris’ gain.
  • Scotland may want a do-over. In 2014 Scotland voted by a narrow margin of around 55% to 45% to remain part of the United Kingdom. Despite the overall UK voting to leave the EU yesterday, voters in Scotland wanted to remain part of the European Union to the tune of almost 62% to 38%. This division with most of the rest of the UK seems to already be feeding the fires for a second independence referendum from the United Kingdom. One has to wonder if Scotland became independent if they would try to rejoin the European Union.

The results of yesterday’s referendum were a surprise in most circles and create a tremendous amount of uncertainty. What will eventually happen to treaties? What will eventually happen to tariffs? What happens to EU member state citizens living and working in the UK? What happens to UK citizens living and working in EU member states? Surprise and uncertainty frequently cause volatility in investment markets, and we could very well be in for some turbulent times as the Brexit unfolds. Still, many international companies are going to keep selling their products in Europe, and people are going to keep needing them and buying them. European companies like Shell and BP are going to keep selling oil, Diamler, Fiat, and BMW are going to keep selling cars, Vodafone is going to keep selling telecommunication services, and Nestle is going to keep selling chocolate and consumer goods. In short, I certainly wouldn’t recommend someone be overly aggressive with European stock exposure at this time, but I also am not too worried about the entire continent sinking because Britain decided to return to complete independence as it had for hundreds of years before it joined the predecessor of the EU in 1973.

The next time you are at an airport, find an international flight coming in from a European Union member state and ask some passengers what they are. I bet you’ll hear things such as “French,” “German,” “Spanish,” and “Italian” as opposed to “A member of the European Union.” Yesterday, the United Kingdom did this very exercise and asked their citizens what they wanted to be. They voted “British.” I respect and understand the motivation behind the European Union and I believe it has done some good things in regards to keeping a lasting peace in Europe and allowing Europe to speak with a louder, collective voice. However, different countries with different cultures with different industries who probably still need different currencies does not necessarily sound like a lasting recipe to me.

Stay tuned.


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