Noble Wealth Partners

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Brexit? Why Yes, I’ll Have Mine with Eggs and Bacon

Background:

In 1994, the Agreement on the European Economic Area (EEA) was created to bring together 31 countries (including the United Kingdom) and foster growth across the region.  Since the United Kingdom (UK) entered this agreement, UK GDP growth has decelerated, wage growth has become anemic, and the residents of Britain have dealt with onerous regulatory requirements placed on the country by the European Union (the “EU”).  Adding to the Britain’s concerns, Europe is faced with a flurry of refugees that cite the UK as their preferred end destination.  In early 2016, Prime Minister David Cameron took a political gamble and announced the date of the EU referendum, which would be held on June 23th, 2016.  In theory (this referendum has no legal merit), this referendum would determine the fate of Britain’s membership in the EU.  If the voters decided to leave the EU, it would mark the end of a 22 year relationship with the European Union.  A British exit from the European Union would later be known as the “Brexit”.

The Facts:

The EEA promotes the free movement of people, capital, goods, and services between EEA member countries.  If “people” was not a key element of the prior statement, the British people may not be in a state of unrest.  But “people” is included and this means the immigrants traveling to Europe to seek refuge can move freely between counties and possibly land in the UK.  This has already been burdensome for the economies of Europe but it also has been associated with residents of the EU feeling unsafe due to the recent increase in crime and terrorism.  Also, firms in the UK have been reluctant to hire residents of the UK due to their higher salary demands.  The EEA allows corporations to hire from other countries in the European Union, countries where the people are willing to work for less.

A unique aspect of the UK is the Pound (or Sterling).  The UK is one of the few members that maintains its own currency rather than adopting the uniform currency known as the Euro.  All countries using the Euro as their currency are collectively known as the Eurozone.    As the Euro depreciated, Eurozone members received the benefit of making their countries’ exports more competitive (i.e. the cost of purchasing goods from the Eurozone decreases to foreign purchasers).  The Pound held its value while the Euro depreciated, at least up until the Brexit, and the UK did not receive this economic benefit.  This has been a factor contributing to slow growth in the UK.

The Issue:

Many of the UK residents were not aware of the implications and facts stated above when they arrived at the polls on June 23rd.  The residents only knew that economic growth in the UK had stalled, their wages were not increasing to meet their living standards, immigrants were creating economic uncertainty, the frequency of terrorist attacks has been increasing, and people were chanting in the streets, “Let’s make Great Britain great again!”  Sound familiar?

When residents were asked about the Brexit (Britain leaving the Eurozone), some responded, “Brexit? Why yes, I had mine earlier this morning with eggs and bacon.”  Ok, that was a bit of a stretch, I doubt the British people confused Brexit with Breakfast.  But still, it does not change the fact that a percentage of the population did not understand what “Brexit” actually meant.  Why couldn’t the British people take the necessary time to understand what the vote actually meant prior to arriving at the polls?  Well, one reason may have been the media firms filtering the information, with a Brexit bias, to the people in the UK.  And why wouldn’t the media companies do this?  If a Brexit occurs, more people will watch the news and the media firms reap the benefits!  Let’s face it, corporations trying to earn a profit is premise behind capitalism.

The result:

On June 24th, 2016, the votes were counted and the “leave” campaign had a slight edge over the “remain camp” with 51.89% of the votes.  This unexpected and shocking result now laid the groundwork for the government to trigger Article 50 of the Treaty of Lisbon… what?!  Yes you read that correctly. Many did not know what Article 50 was prior to 2106, myself included.  Article 50 essentially states, if a member decides to leave it will begin a two year process of negotiations.  That’s it! Nothing more.  I’m assuming the current (at the time) Prime Minister, David Cameron did not want any part of this so he resigned and left the negotiations up to the new Prime Minister, Theresa May.  Congratulations Theresa, enjoy the new position!

Implications:

In the long term, Great Britain can certainly be “Great Again” but this will most likely be a period of uncertainty and pain in the near term.  Until companies in the UK have more clarity about the political environment, the may delay hiring, wage increases, production, and so on.  This will most likely drag down economic growth in the region.

The EU, will want to discourage other members (Portugal, Spain, Italy, France, Greece are likely candidates) from taking this action.  A possible, and likely (in my opinion) scenario would be to implement large tariffs on UK exports into the EU, again slowing UK growth.   The UK may be hoping to receive an attractive deal by the UK, similar to Norway, Iceland and Switzerland, and export to the EU without restrictions.  But the reality (again in my opinion) is, the EU may make this a very painful process for the UK. 

Many people from the UK may have voted to leave the EU to avoid the immigrant problem.  In order to receive a favorable deal, the UK will most likely have to abide by the philosophy of the EU.  The means permitting the “free movement of people” across the continent, and the refugees would still land in the UK… a very ironic ending. 

Conclusion:

Theresa May has already stated that she will not trigger Article 50 until next year.  This may be good news to the people of Great Britain as it will allow the people (and markets) to calm down, and think rationally during the negotiations. 

I will end by pointing out, the biggest argument against democracy is a five minute conversation with the average voter.  Don’t let the Brexit become a precursor of things to come.  Try to avoid the pitfall of sticking with your party, or prior beliefs, on important issues.  Take the necessary time to become informed and educated prior to casting your vote.  These decisions are critical at this juncture.  Capitalism is driving an increasing percentage of the global economy, which is great.  But capitalism is a double edged sword, it can drive economies forward or create income inequality by transferring capital into the hands of the wealthy.