So What’s a Brexit?
The second quarter of 2016 could have been considered fairly meek if the quarter ended just one week earlier. On June 23rd, the United Kingdom held a vote to determine if they wanted to leave the 28 member European Union. We woke up on June 24th learning that the referendum passed and the people of the UK wanted to exit the EU. The realization that “Brexit” was happening came as quite a surprise and the S&P 500 responded with nearly a 5% drop over the next two days. 1
While the union was created to facilitate free trade among the European members, the UK must have felt that the EU bureaucracy was taking away too much power from their country. No doubt, what really fueled voters was the influx of immigrants from other EU members. A net of over 330,000 immigrants entered the UK in 2015 alone. Many of these migrants are viewed as taking jobs that might have gone to UK citizens, while others are living off of the UK’s generous welfare system. 2
How will an exit affect the UK? The process hasn’t officially started yet, but the exit will be a fairly drawn out two year process. The Parliament must pass the laws and form the agreement to withdraw. 3 There is still a large amount of negotiations that need to take place between the UK and the EU governing body, so the future is still a bit unclear. It isn’t a stretch to think that if less people are spending money in the UK as a result of stricter immigration, then this may end up being a net loss for Great Britain.
However, if the country is able to continue trade as it has and reduce the burden on its welfare system, then the long run might turn out fine. Add to that the savings from no longer monetarily contributing to the EU, and you can begin to see how this referendum was able to pass.
The chart below shows how the members of the EU contribute to the overall budget. The United Kingdom is the fourth largest contributor that funds the operations of the EU. This isn’t an easy adjustment for the union to make. You can expect the EU to conduct tough negotiations in such a way that France or Italy won’t want to jump ship any time soon.
Regardless of how this ultimately turns out, we don’t believe this will have a significant impact on our domestic economy. Volatility in our markets will surely persist. After all, we still hear about Greece from time to time and their crisis began in 2009. Just keep in mind, the UK may end up in a recession as a result of the transition, but this country represents less than 5% of the world GDP.4 We need to be cognizant of how the rest of the union continues to thrive with one less member. As long as Brexit does not spread to other healthy EU members, we believe our markets will still have plenty of growth ahead.
1 Thomson Financial
2 CNN, http://shar.es/1l4K38
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