Brexit: Will they stay or go?
It seemed to me there were always three certainties attached to the UK referendum on its membership of the European Union: the polls would close up as we got closer to the event, financial markets would reflect the uncertainty and nervousness, and that we would see an over-reaction in markets on the day, whatever the outcome.
At its most fundamental, the ‘Brexit’ debate is one of deep-seated dissatisfaction amongst the UK voting public about a whole range of issues including the general lack of UK economic progress, stagnant real incomes, lack of job security, trade access, sovereignty and the most emotive of all, immigration.
That dissatisfaction is being focused on the political leadership and their lack of ability to articulate an alternative to the status quo, let alone demonstrate a willingness and/or ability to do anything about these issues. Now the voting public want their say.
The UK is not alone. It is broadly similar issues that led to the Scottish independence referendum, has contributed to the rise of populist, nationalist, anti-integration political movements across continental Europe, as well as the rise of a number of political leaders many would have thought unlikely to be successful not so long ago, including Jeremy Corbyn, Bernie Sanders and the most unlikely of all, Donald Trump.
There are valid arguments on both side of the ‘Brexit’ debate. ‘Exit’ supporters argue that leaving the union will free the UK economy from the stifling Brussels bureaucracy and leave the UK to go its own way in the world and negotiate its own trade agreements. ‘Remain’ proponents argue that in an increasingly integrated world, the UK is better to remain within the trading union that already accounts for 44% of the UK’s exports and work towards a stronger more competitive Europe. I believe ‘remain’ has the more compelling argument and that in the long-term the UK will be better off in, rather than out of, the EU.
While the long term implications of ‘Brexit’ are debatable, the consensus view is it will be bad for the UK in the near-term. Even many ‘exit’ supporters agree. Should the UK vote to leave, we are looking at a prolonged period of uncertainty about the UK’s trade access into Europe and the role of the City of London as a major finance centre. That makes it pretty hard for businesses to plan and make decisions about hiring and investment.
‘Brexit’ will be bad for Europe too. Aside from the obvious boost that a UK exit would give to other separatist movements in Europe, we think the EU economy will be better off with the UK in the union.
One thing we do agree with ‘exit’ supporters on is the EU economy is far from perfect. Major structural weaknesses persist and not just in the periphery. Burdensome bureaucracy and regulation is a major impediment to higher productivity and better living standards. But the UK is influential within the broader EU, and we think them staying makes positive productivity-enhancing changes in the EU more likely.
Finally, a point on the third certainty – financial market reaction. Whatever the outcome of the vote this week, markets are likely to over-react and indeed could already be doing so. The good news for long-term investors is market over-reaction also creates investment opportunities.
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