A synthesis of articles on Brexit in addition to my take. See below:
Oh blimey, the bloody British have done it again! If you have not heard yet, the U.K. citizens voted to exit the European Union today. For background, the European Union ( EU) is a common economic area that allows all European participants to move and trade in other EU countries almost the same as they do in their own. There was a country wide vote yesterday, termed “Brexit”, to vote yes or no on continuing to participate in this agreement.
The primary issue revolves around immigration. Immigrants have migrated to England in droves comprising 25% of the population in some UK towns. In most cases, the locals have lost jobs, while crime has increased. Of course, this angers the average British citizen.
Why Even Have Immigration?
It makes sense especially if you look at the demographics of Europe. They are aging more rapidly than the US, while birthrates have been declining. They need young workers to replace the aging workforce and have babies. If it were not for the Hispanic population in the US, we would be in the same position.
Japan is the poster child of what happens when a country prevents immigration when in this situation. They have been in a recession for the past 25 years! Europe does not want to be Japan, so they loosened immigration laws and decided to let some of the Eastern European countries into the agreement, like Bulgaria and Romania. Economist know in the long-term this will pay off. However, the average Joe, or Brit, is focused on feeding their families and today, not tomorrow. In the long term, we will all be dead. In the short term, the immigrants flow in droves, and take the jobs of the local citizens. In some towns in England, immigrants comprise of 25% of the population!
Nothing immediate happens now. The UK will have to impose Article 50, which basically says the negotiations to leave the EU have a two-year timetable. This has only been done once before when Greenland left the EU in 1982.
After this, there are basically two routes the Brits can go:
- Be like Norway, which is not part of the EU, but part of the European Economic Area (EEA). This still requires a country to pay into the EU budget and allow free movement of people, but gives more flexibility.
- Operate under the WTO rules like America. In this case, no one really knows if Germany and other countries in the EU will accommodate them.
There are really 3 unknowns here: (1) how much will financial assets fall and what effect will this have on spending, (2) will the U.K. maintain the same level of trade and investment with Europe, and (3) will this cause unrest and fragmentation in Europe; Denmark or the Netherlands could be next.
With all that said, let me reiterate; the world is not ending! However, markets will be volatile in the short-term and Britain will surely go into recession which impacts anyone that exports to them, like German manufactures.
KEEP IN MIND, Britain accounts for just 3.9% of global output. The collapsing pound will drive up inflation up, crimping real incomes. Jobs will be lost. Hours worked and wage growth may fall. However, the devaluation in the British pound could spur UK exports, which happened in 1992.
What should an investor do?
Think you know what I will say from here. If you are younger and still working, this is a great opportunity to invest. If you are retired, enjoy the antics from the sidelines and take comfort in the fact you have a significant amount of money in bonds which are up strongly today.